Perry Glasser

Posts Tagged ‘Money Management’

DEFLATION, OIL PANIC, AND THE SKIDS #1

In Business, Economics, Economy, EDUCATION, Finance on January 7, 2015 at 12:59 pm

Ever aware that Dollar$ primary mission is to educate and only occasionally pontificate, let’s talk about prosperity, gloom, and deflation.

Economic activity is based on expectations. You buy your new car because you expect you will need it before the old jalopy breaks down completely; you buy health insurance because you expect you will someday, somehow, need it; you buy baseball tickets in January because you expect to go to  the game in April.

Balance means stable prices.

Balance means stable prices.

Prosperity

Shared expectations influence supply and demand, and therefore influence prices. If International Widget (IW) expects to sell many widgets in the forthcoming year, it will hasten to make more widgets, perhaps borrowing money to increase productivity. Under the expectation of prosperity, IW may hire more workers, and if long-term expectations are high, IW may even build a brand new, more efficient widget plant.  If widget demand increases even beyond IW’s ability to create supply, the widget shortage will drive the price of widgets higher. IW will respond by increasing volume and price, reap profits, pay dividends, employ yet more people, give key employees wage increases, and the Buccaneers who direct IW may pay themselves  bonuses that look like telephone numbers, including area codes. They will buy Caribbean islands or condos in Manhattan.  The spiral upward is called an inflationary spiral; rising prices are not terrifying if wages and employment keep pace.

Gloom

saupload_The-Deflationary-SpiralBut suppose IW’s best leadership expects the market for widgets is spiraling downward. Perhaps there are insurmountable problems in the supply chain. Perhaps bankers are unwilling to part with loan money for fear of never getting paid back. Rather than pay people for playing pinochle while their widget machines stand idle, 10 percent of the IW workforce is fired. The Manhattan condo market freezes, and the IW private jet makes fewer flights to the Caribbean. The price of widgets will plunge because the people who use widgets know that to meet the slowdown, IW will cut prices and hope to make up in volume what they are losing in price. The spiral down is called deflation; falling prices are not terrifying if they are gradual and do not continue for any great length of time.

The gloom and prosperity scenarios are the ordinary stuff of economic life, but Dollar$ readers only need to bear in mind that in both cases today’s economic decisions are made based on expectations of tomorrow’s conditions.

The Past

The general tone of American economic life for more than 20 years has been cautious optimism because the range of change in economic life has been modest, sure, and steady. Sure, there have been bubbles and crashes, but there is a reason that in 20 years the Dow Jones Industrial Average has risen 400 percent, from roughly 4,000 to today’s levels well above 16,000. Call it the Goldilocks Economy—it’s neither too hot nor too cold, but is just right.

Home invader and thief, but she knows what she likes.

Home invader and thief, but she knows what she likes.

But America has suffered an extended deflationary spiral, a decade’s worth in the 1930s called The Great Depression. Despite interest rates at virtual zero for most of a decade, from 1992 to 2000, Japan has been in a deflationary spiral.

Playing the expectations game, in an inflationary spiral you spend or invest your money as fast as you can. After all, everything will probably be more expensive tomorrow. It’s best to buy your house, car, 100 shares of IW, or personal jet today.

But in a deflationary spiral, the expectations game makes cash King. What fool would spend a dollar today when the cost of the item tomorrow will be $.90?  But wait… suppose it will drop to $.75? Or $.60?

Where’s my Magic 8-Ball when I need it?eight_ball

What Now?

Does the slide in the price of oil herald of worldwide deflation?

Dollar$ will weigh in soon.

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FINANCE FOR THE CLUELESS: INVESTING –THE EIGHT DO’s

In Business, Economics, EDUCATION, Finance, FINANCE FOR THE CLUELESS, Personal Finance, Wall Street on April 23, 2014 at 12:17 pm

If you are unsure you should dip your trembling toe into investment waters, reread FINANCE FOR THE CLUELESS: INVESTING – THE DON’TS right here at Dollar$.

 CAUTION TO THE HARDHEADED 

If you are persuaded that the game is rigged and that age hates youth, deliberately having made money management and life-planning a cruel losing joke, consider that the bad guys will someday kick the bucket.  When they do, will you be among ageing schmucks still claiming injustice or do you want to position yourself to take your place as a leader?

The choice is yours.

If you are a twenty-something ready to grow up, or a thirty-something ready to take your share of the American Dream, you have  come to the right place.

Dollar$ will not equivocate. Here is what you must do to GET RICH SLOWLY.

Should you discover you need to get rich quickly, Dollar$ urges you to bet on race horses. At any racetrack, you will breathe fresh air, find friendly company, free parking, and can probably purchase a half-decent meal. You will quickly go broke, of course, but during the 1:12 it takes for a decent thoroughbred to run 6 furlongs you can scream yourself silly and dream of riches. Quarter horse racing is even faster!

OPEN AN ACCOUNT

Choose a brokerage like Schwab or Ameritrade, any organization that fits your digital lifestyle. Investigate apps or web sites; choose the brokerage that seems most navigable to you for research, purchasing, and tracking your holdings. You will want more as you learn more, but you need to be comfortable with an interface.

The Internet has leveled the cost of doing business, about $7.95 for any online stock trade, so in terms of costs brokerage firms are interchangeable.  At issue for you is service and minimums.

Most brokerages require a minimum amount to open an account: as this is written, Schwab is asking for a measly $500—perfect for the Clueless.

FEATURES

  1. Options. If you can get approved for Options trading, get it.  You will not use this until you have considerable wealth, but it costs nothing to check a box.
  2.  Margin.  Again, check it off and leave it the hell alone until you know what the hell you are doing, and even then think very, very, carefully about borrowing money from your broker to make an asset purchase—which is what Margin trading is about. Remember, your broker is not your partner. Your gains are your gains alone (W00t W00t!), but your losses are your losses alone. If you owe a margin debt, you will owe what you owe no matter what happens.
Margin accounts may have uses, but can be dangerous.

Margin accounts may have uses, but can be dangerous.

You know Tony down at the docks? The guy who lends money to people with no collateral? He is happiest when you pay him, but he does not care if your team lost, the deal went south, or your honey made off with your boodle—he only wants his money and interest back. When he does not get it, he becomes surly. He makes you sell your car, cash in in your kid’s college fund, and if necessary persuade you to these measures by realigning your knee caps with a baseball bat he keeps handy for just that purpose.

Think of your Margin account as Tony. Don’t let anyone get medieval on you.

3. Check Writing. Take it.  Add a measure of liquidity to your assets. You can write an emergency check if you need to—which you should not, but shit happens.

4. Reinvest Dividends. Absolutely. Dividends are how companies share profits with shareholders. Dividends are not interest, but in effect, reinvesting dividends is how your account will draw compound interest.

“He who understands compound interest , earns it ... he who doesn't ... pays it.” Einstein

“He who understands compound interest , earns it … he who doesn’t … pays it.”
Einstein

 

THE EIGHT DO’S AND WHY

1. Buy stock in at least 3 companies traded on either the New York Stock exchange or the OTC (Over the Counter) markets. Be sure these companies are in very different economic sectors. In other words, do not buy 3 media companies, or 3 retail companies, or 3 technology companies, but perhaps buy 1 of each.

You require a measure of diversity. You can buy diversity in a mutual fund, of course, a basket of stocks managed by professionals, but then you pay fees for professional management. Dollar$ cautions the clueless, who by definition are starting small, that the fees will bleed you white. Why start your financial life with a tapeworm?

Diversity is insurance against misfortune. While one sector of the economy may take a hit from unexpected circumstances—such as a change in a government regulatory posture or a political event in a faraway country— the only circumstance that will affect all 3 of your sectors are changes in the overall economic picture, such as a change in interest rates.  For the investor who wants to GET RICH SLOWLY, those dips can be shrugged off because unlike you and me, companies that sell goods and services can within limits raise their prices to recoup what was lost. The price of lumber goes up, the furniture business takes a hit, but next year the price of furniture rises. It’s not as though people will start sitting on the floor.

What constitutes a sector is very subjective. Is Walt Disney a service company or a media company?  Different online research will yield different sector guides. Here is one website that will allow you to bore down to Market Cap leaders by sector.

The final arbiter of what is what is you, Binky, so give special considerations to companies that are conglomerates. General Electric, the oldest company in the Dow Jones Industrial Average, founded by Thomas Edison, makes washing machines, jet engines, and runs an insurance business.  What sector is that?

2. Buy stock in companies that are at least 20 years old.

Ten-year-old companies have a modest track record of survival; twenty-year-olds are even better.

Yes, Dollar$ is aware that young companies are set to grow quickly, but they frequently are headed by untried management and are closer to going broke. Most corporations live little more than a person’s lifetime though the exceptions are remarkablebecause they embrace a culture of change and innovation. 3M Corporation was founded in 1902 to make sandpaper; now they make Post-It notes and Scotch Tape.

Young companies will also gather imitators, which mean ever-increasing competition will drive revenues, but not costs, downward. Someone is bound to improve on the original idea.  If the good Lord in 1985 had whispered in your ear, “Computers,” you may have chuckled at the Divine Wisdom that loaded your portfolio with Kaypro, Atari, Commodore, and Wang. Like last winter’s snow, those companies are now gone.

Avoid the bleeding edge.

3. Buy stock in at least two companies that are multinationals.

DSC_0230Doing business in places where general economic growth is not dependent on the value of US currency is simply prudent. Dollar$ would never bet against the financial muscle of the United States, but Dollar$ is aware that infrastructure build-out in the 3rd world is inevitably followed by consumer demand for a higher standard of living. You do not have to buy stock in a Chinese company to participate in the Chinese economy; you do not need to need to buy stock in a Chilean company to participate in the Chilean economy.  Logos and trademarks Americans see every day are all over the world: UPS, Disney, Starbucks, Pizza Hut… the list is endless.

If you have qualms about such things and think they are imperialistic, ask the folks in Red Square how they like burgers at McDonald’s, or ask Chinese citizens if the prefer iPhones to ‘Droids.

4. Buy stock in companies that pay dividends or, even better, have a history of raising regularly dividends.

Many companies do not share their profits with shareholders via dividends because managers hoard cash for future business investment. While Dollar$ respects the managerial strategy, Dollar$ notes such companies do not suit a strategy to get rich slowly. The Clueless want an opportunity to have their dividends accrue ever more stock.

Better yet, companies that pay dividends suffer less in a downturn because their dividends offer investors a yield, a cushion against losses.

5. Buy and Hold—even if it means going white-knuckled.

On September 16, 2008 the general stock market as measured by the Dow Jones Industrial Average crashed 10 percent in a single day. The Buccaneers who ran major financial institutions were competing to take greater risks for greater profits than any responsible bank should, fudging on what “banking” meant. On Sept 12, 2008 the DJIA was at 11,421.99.  By November 21, it was down to 8046.42 a breathtaking loss of 29 percent in 6 weeks.

Iceland went broke, Lehman Brothers went out of business, and for the first time ever, US citizens heard the phrase, “Too big to fail.”

Anyone who sold to defend his or her assets for fear of total ruin took themselves out of the game. They may have felt safer, but by doing so, they gave up any chance of recovery.

As Dollar$ writes, the DJIA stands above 16,000—which means sellers in 2008 have missed 100 percent gains measured from then, only six years. By selling into a panic, they gave up every opportunity to gain back all they lost and more.

True, if you owned stock in Lehman Brothers you took it in the neck, but if you had a diversified portfolio, over all, you survived and may have even made money.

A wise man once said, “You can’t go broke on a small profit.”

6. Buy shares and add to your portfolio regularly.

Ideally, you may be able to invest with a check-off system from your salary, an arrangement that will allow even those of us lacking personal discipline to take advantage of the maxim: Pay Yourself First.

Regular investing will allow you to take advantage of “dollar-cost averaging.” When stocks are up, you’ll buy fewer shares: when stocks are down, you’ll buy more shares. On average your cost will be somewhere in between. Free yourself from trying to guess if today or tomorrow are better days to buy; let time be your friend.

If your companies thrive and move steadily upwards, your average cost will always be below their current price level.  Over the long haul, stocks historically have gained 7-9 percent annually. Never try to time the market—just be a steady buyer and Get Rich Slowly.

7. Buy Mid and Large Cap companies.

“Cap” refers to capitalization, the sum total of the value of all the shares issued by a company.  Every company issues a different number of shares, so a company floating a million shares priced at $100 per share is worth $100 million dollars, but a company with 5 million shares priced at $50 per share is worth $250 million.  That’s right, the company trading at the lower price is worth more.

Large Cap companies are slow as battleships, but not likely to sink quickly; Mid Cap companies are more nimble and want nothing more than to grow to be Large Cap. They will take more risk, but have a record for taking risks and winning because they really were once Small Caps.

There are plenty of Small Cap companies, and investing in them is a respectable strategy, but Dollar$ does not recommend that to the Clueless: one needs a larger portfolio to overcome the inevitable losses small companies encounter. While a few Small Caps will experience spectacular growth, more will fail or stay stagnant. On average, an investor might do well, but only if the investor has a sufficiently diverse portfolio, unavailable to the Clueless without professional management—which must be paid for.

8. Sell when the reasons you bought a company change or the fundamentals of the business change.

You selected  XYZ company for your portfolio for reasons. Maybe you personally liked the product or the service; maybe liked the company’s competitive position; maybe you liked the company’s record for paying dividends; maybe you read and were persuaded by  the company’s strategic plans; ideally, you liked some combination of all of those.

But if those any of those change, why are you still holding the company? Never fall in love with a stock; review your portfolio regularly, at least every 3 years. Save your loyalty for a lover.

NOW WHAT

Discovering companies that fit the Dollar$ profile from the universe of thousands of companies is, in fact, easy.  You chose your broker because it offered digital tools for Research. Try the “screening” or “filtering” system—pick an economic sector, indicate your requirements in terms of dividends, choose from Large Cap or Mid Cap, etc.

  • Read about the company’s businesses. If you do not understand what they do, go no further. Invest only in what you understand.
  • Invest only in companies that sell services or products you would buy whether you were a business or a consumer.
  • Buy shares in companies that are ranked first or second in their industries.  
  • Be disciplined. Avoid trendy and hot stock tips, whether from your Uncle Fred or a TV pundit who is obliged to scream “news” at an audience every evening. Near term, they may be right: let someone else make that money while you sleep soundly.
  • Invest and relax—let your money work while you sleep and pay no attention to daily, monthly, or even annual trends. You are going for the long haul, and the long haul is steadily upward and has been for hundreds of years.

FINANCE FOR THE CLUELESS: INVESTING – THE DON’TS

In Economics, Economy, EDUCATION, Finance, FINANCE FOR THE CLUELESS on April 5, 2014 at 12:24 pm

OK, Binky, let’s check.

  • You have:
  • Paid off your consumer debt;
  • Are paying off your leveraged debt, such as student loans;
  • Measured and understand risk tolerance as a function of age and psychology;
  • Have wrestled the Beast of Consumer-Celebrity Culture to a stand-off and so are able to resist its psychological hold on you to impulse-buy consumer goods you neither want nor need,
  • Have for emergencies banked at least 3 months of expenses in a purely liquid account (6 months is better);
  • Insured against catastrophe—possibly through your employer; and
  • A reliable flow of revenue.
  • Accepted the Dollars$ plan to GET RICH SLOWLY.

Should you lack any of the above, Dollar$ wishes you well, but advises you to take control of your financial life before attempting to aggregate wealth by investing.

SHOULD NEVER HAVE SET SAIL

SHOULD NEVER HAVE SET SAIL

You do not want to attempt to sail across a stormy ocean in a vessel that leaks. If you are sailing with a partner, you may also risk thinking you need to jettison the love of your life—but that won’t plug the leaks in your boat.

Dollar$ is well aware of the gazillion investment gurus offering all manner of “free” advice designed to give the Clueless investor an illusion of control by suggesting investment strategies that invite Wizards into their lives. Wizards cast arcane spells that universally reduce to one spell.

Binky, since you are too stupid to be a Wizard, give us your money and for a modest fee we will take care of your investments for you.

Dollar$ maintains that  the basics of money management are simple enough for a carrot; he is also certain that Wizards blow smoke the better to separate the Clueless from their money. Further, he does not doubt for a moment that their pals, the Weasels, elected officials, structure American education so that Citizens remain ignorant of how they are getting screwed by Buccaneers.

Dollar$ fights the Power.

Expensive Necromancy

Wizards who take what seems like a pittance: 1.5 percent each year for money management are parasites sucking your lifeblood.

But they are not stupid. If they bleed you to death, they will require a new host. It is far better from the Wizard’s perspective to keep you walking around in a weakened state. That way, they feast forever.  They have this philosophy in common with tapeworms.

If the stock market goes up 7 percent in a year, but a Wizard takes 1.5 percent of that, the Wizard is skimming more than 20 percent of your gains. By the way, if the stock market goes down, the Wizard will mumble apologies, and still take his percentage, accelerating your losses. Your Wizard partner wins even when you lose.

Avoid Wizardry!

It’s your LIFE we are talking about!  If you are unwilling to take control of it, someone surely will!

DON’T hand your money over to someone or some institution, not even a mutual fund manager. If the benchmark of a mutual fund performance is, say, the S&P 500, or the Dow Jones Industrial Average, it stands to reason that managed funds MUST do worse almost every year because no manager is taking a percentage. In fact, 70 percent of all managed mutual funds under-perform their unmanaged benchmarks.

The Exceptions

Nothing beats an employer-sponsored retirement plan—a 401k for example. 401ks have rules that require professional money-management, so accept that.

Nothing beats an enforced, pre-tax investment vehicle for wealth accrual. Pony-up every dime you can up to the employer sponsored maximum. Tattoo on your leg the Dollar$ maxim: LEAVE NO MONEY ON THE TABLE. If your employer is matching even as little as $.25 on the dollar, why would you leave it in your employer’s pocket?

Even better, since a 401k is pre-tax money, it reduces your Federal taxes. Look, Binky, if you are in a 20 percent tax bracket, you have no other investment that pays a guaranteed 20 percent the moment you make the investment.

So let professional money management manage your 401k. If you are young, this is no time to be timid. Create a mix of aggressive mutual funds. When you get to 45-ish, you can become more defensive. But there will only be one time in your life when you can sustain and endure bad luck–NOW.

The other exception to resisting professional Wizard management is after you accrue $100,000 in investable money. Dollar$ would then reconsider your portfolio, as life will get complicated and you do not want to be worrying about finance while you are sipping rum drinks from coconuts on your vacation.

Then again, if you accrued $100,000, you are no longer among Clueless, are you?

DON’Ts

DON’T shake with envy over someone making a killing on a hot stock—your goal is to get rich slowly. Congratulate them; take solace in your slower but surer path to a comfortable old age or to aggregating the down payment for that first house.

DON’T pay attention to TV personalities who nightly scream about investments: they are under compulsion to say something new 5 nights each week. Surely, the investment landscape does not change so radically every 24 hours that yesterday’s strategy should be thrown out today.

DON’T pay attention to annual columns in magazines, online, or newspapers in which a bevy of Wizards name their top 3 or top 5 picks for the coming year. How is it that no two Wizards name the same list? Are they throwing darts or do they have a strategy? Could it be the publications want to annually run a second column about how they offer great advice because one of their professional touts will pick winners?

DON’T churn your portfolio. Make strategic plans and review them every 3 years. Markets will go up and down. Hold for the long haul.

DON’T sell in a sharp downturn: they call such moments “Panic” for a reason. Once you sell, you cannot recover. Investors who panicked in 2008 when the markets dropped and the Dow Jones Industrial Average left investors gasping after a plunge from above 14,000 to about 6,500 saw losses of 55 percent! Aaaagh!  Barf!  Rats! If they sold to defend what was left, they missed the subsequent rise that a mere 6 years later has the DJIA over 16,000.  What might have happened if they’d stayed the course and at deep discounts bought more?

If you are among the Clueless but setting out in a secure rowboat, pull at the oars and do not let the occasional storm swamp you.

There will be storms.

You will survive them.

 Coming Soon: The Dollar$ The Dos!

PERSONAL FINANCE FOR THE CLUELESS: INVESTING, THE CAPITAL MARKETS

In Business, Economics, EDUCATION, Finance, FINANCE FOR THE CLUELESS, Personal Finance, Wall Street on March 26, 2014 at 12:27 pm

Dollar$ is well aware of the gazillion resources online where some union of Wizards and Buccaneers blow rhetorical fog that is an alleged explanation of stocks and bonds.

Dollar$ submits that these explanations are deliberately arcane, part of the investment community’s strategy to hunt and bag the Clueless. After making what is simple appear complicated, up pops a talentless sales goon who for a small fee offers to manage your money.

 

WHERE WIZARD HIDE

WHERE WIZARDS LURK

Dollar$ seeks to dispel the fog.

When the Clueless understand what anyone can see, the Clueless are no longer clueless. No situation terrifies Buccaneers and Wizards more.

These are the same stalwarts that over a generation persuaded America that job training is a cost to be borne by the trainee and that education and job training are synonyms. An entire generation has accrued so much debt that they are indentured servants.

It is time to turn the table on the bastards.

Leap beyond the jargon of P/E ratios, large cap, small cap, technical analysis, book value and all the rest, grasp the basics, get started, refine your wisdom as you accrue wealth, seek financial and emotional independence.

A Fantasy

Suppose you are downloading 3 seasons of the Walking Dead because you are far too cool to watch broadcast TV at scheduled times, planning a long weekend of beer, pizza, a fluffy blanket, and a lover watching monsters eat brains. What could be more romantic?

Suddenly, as if in a vision, you imagine a way to supply the world with a new and better widget. Your lover shows up, you describe your plan, and your lover enthusiastically says, “We’ll need some money to get started, but eventually we will make wheelbarrows of dough.”

Hot damn!

Nothing comes easy, but after two years of running the business on a shoestring at 16 hours per day, you’ve proven the concept. You can make and deliver a quality widget for less. You need now to expand enough to get out of the basement. You want to hire some old-school experts in widgetry, and you need 10 employees. You are figuring with the profits that are forthcoming, eventually you will have 10,000 employees. The sky is the limit.

Scariest start-up ever

Scariest start-up ever

Do not laugh. This is how Amazon.com started, with Jeff Bezos sitting on the floor wrapping packages. This is how Facebook started, with Mark Zuckerberg gathering a cadre of code-writing geeks in a Harvard dorm. This is how Hewlett-Packard began—in a garage in Palo Alto. Maybe the scariest start-up in recent history was Fedex: on the first day in business in April 17, 1973, Fedex required 14 jets and 389 employees to deliver 186 packages to 25 cities. The idea was to compete with the US Post Office by charging MORE.

What lunatic would invest in that????

Ideas turn into goods and services that make our lives rich and our wallets fat. This is the miracle of America capitalism.

Capital Markets – Access the Money!

Participation in the public capital markets are the only way for Citizens to partake in that miracle.

Businesses go to the Bond Markets to borrow money. When a Citizen participates in the bond market, the Citizen becomes a lender. Lenders are guaranteed income determined by the face value of the bond, interest based on the rate of return, and an eventual return of principal at a predetermined date. Since part of the investor’s risk is the bankruptcy of the issuing organization, the rate of return (interest) is determined by how solid the issuing organization is.

Note that the investor does not participate in the growth of the issuing organization.

Note, too, that some organizations are not businesses promising interest based on future profits, but are municipalities promising interest payments based on future tax revenues.

Dollar$ hastens to point out that bonds are appropriate for investors with low risk tolerance—the aged and the nervous.

 

Citizen

Citizen

Dollar$ also points out that no investment is without risk. Ask Citizens who held bonds issued by the City of Detroit. Mostly, those bonds are held by large organizations such as labor union pensions funds, but when the fog lifts, those are Citizens. Instead of interest and eventual payment of principal, investors in Detroit’s bonds hope to get twenty cents on the dollar.

Businesses go to the Stock Market to sell shares in the company to willing investors who expect or hope that the good idea will make the value of the shares rise with the good fortune of the company. At some point, if the shares of stock are traded, the investor makes a gain or, if the value of shares goes down, incurs a loss.

For citizens to participate in the stock market requires only that the citizen have a broker, a clear idea of the advantages and disadvantages of different stock investment vehicles, and an investment strategy.

Dollar$ will be writing more soon.

FINANCE FOR THE CLUELESS: INVESTING #2 – BURN YOUR PILLOW CASE

In Economics, Economy, EDUCATION, FINANCE FOR THE CLUELESS, Personal Finance, Wall Street on March 19, 2014 at 12:30 pm

“OK, Dollar$, I have a few bucks in the bank, I have no significant consumer debt, and I have steady cash flow from a secure job. I have measured my risk tolerance in terms of my age and psychology, and I am persuaded that I want to get rich slowly to meet specific long term goals, such as buying a house, putting as yet unborn children through college, preparing for my own old age.”

Congratulations, Bunky! You are a grown-up! Its time to take your money out of a pillowcase.

photo-92-e1319326132194Tell your broke-ass friends who insist that the rich own the system and that they know they cannot get ahead that you have decided to join the Dark Side. Dollar$ adored Occupy Wall Street for its goals–who can argue with Justice? but Dollar$ sadly notes the “movement” lasted less than a year. So why not become one of those degenerate rich? While your friends bitch and moan, lusting for the next video game unit, having succumbed to the Consumer Culture that pollutes the mind by implanting false needs, you have decided to take control, take responsibility ad will rise above that.

You will never spend money frivolously or self-indulgently—that’s what children do—but you have goals, you have ambitions, and like it or not, all of us live in the sea of financial life.

You can choose to drown, float, or construct a ship to set sail.

Dollar$ wants you to set sail.

First, you’ll need to build a ship.

Save or Invest?

If you meet the Dollar$ profile, it will be plain that simply saving will have you sink not far from the dock. You work hard, so should your money.

Money in the bank is not working hard; however, it is totally liquid. You need to have some there for ordinary bills and expenses.

Dollar$ Recommendation: a balance of at least 3 months for the young (under 40), and as much as 6 months for the not very young. The Book of Ecclesaistes tells us:

I returned, and saw under the sun, that the race is not to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favour to men of skill; but time and chance happeneth to them all.

Or, as Dollar$ interprets The Good Book: Shit happens.

So DO Insure and save against the ay you will have bad luck. Everyone does. Do not let time and chance happenth on your watch.

Say you are minding your own business at a stop light when you get your leg crushed by a cement truck with failed brakes. If you have a disability policy or disability rider on your auto policy that kicks in after 6 months, it is a LOT less expensive than a policy that kicks in after 6 weeks. No sweat for you if you have some liquid assets in the bank, but a disaster if you are living check to check.

If you believe you are trapped, read Dollar$ on how to save more.

The Name of the Game is Averages

If someone offer you Magic Beans and a quick rich scheme, run. But the simple fact is that stocks show an average return of near 10 percent per year over the long term.  In this chart, the red lines are averages: notice, however, that some years are awful, and others are terrific.

Now you know what AVERAGE means.

avg-mkt-rtns-1926-2008-600x409

Some years are dogs; some are stellar.

Compare that average to current bank account returns, which as Dollar$ writes are less than 1 percent. Taking on some risk to average 10 percent seems mandatory instead of accepting a pittance.

Since you are following the Dollars motto, Get Rich Slowly, year-to-year gains and losses are of mildly passing interest. If losses of 10, 20 or even 40 percent trouble you—reset your gauge of Risk Tolerance.

The Marathon

We do not quit running after 2 miles because of a leg cramp. Shooting for an AVERAGE of 8 percent each year is realistic, possible, and will make you rich—slowly.

Think not?

This chart from JP Morgan shows three investors compounding their investments over time. One of them, Susan, starts at 25 and quits at 35.  She still winds up with a mere $850,000, enough dough to rent a tennis pro or two.

Growth over time

 

Dollar$ RecommendationWHAT ARE YOU WATING FOR????

Reassuring the Nervous

Suppose you are 25 years old and are able to invest $2,000 each year, maybe in an IRA, maybe in stocks–just keep it out of that pillowcase.  And after five years, you look with pride at your tidy pot of money. You are now 30, but just then the stock market crashes. They are leaping out of buildings on Wall Street. It’s as bad as the Great Depression—maybe worse.  The Depression lasted 12 years; it was 15 years of investor misery.  What happens to your Dollar$ plan?

Well you are all of 45 years old, a good 20 years from a youngish retirement.  If you’ve maintained investor discipline, you’ve accrued 15 years of investments at bargain basement prices. When the stock market recovers–and it will, since the United States is not going bankrupt any time soon– you may be lucky enough to enjoy a year like 2013, a whopping 32 percent gain in a single year.

All those cheap investments you made for 15 years are paying off! Buy cheap; sell dear! as log as you are dedicated to Get Rich Slowly, down markets are a buying opportunity, Bunky!

The sissie who bailed in 2008-09 go screwed. Those were bad years, and those investors with short term vision took it in the neck. They ran for the exits and took permanent losses because they took the short term view.

Now before someone tells Dollar$ that they were protecting themselves and, perhaps, were too close to retirement, Dollar$ will remind readers that being 65 these days is not old. Folks who are retired should prepare for at least 20 years more of life and so accept judicious risk. Any investor was over 70 in 2008 and had a significant pot of cash at risk….why? What are you? Invulnerable?

For the Dollar$ reader, the Clueless who are not H0peless, the lesson is plain:  Buy and hold, and do not let the vagaries of the markets year to year bother you.

Take a lesson from Monty Python.

Never bury what ain’t dead yet.

Convinced?

Watch for Finance for the Clueless: Investing #3 – Nuts and Bolts

PERSONAL FINANCE FOR THE CLUELESS–INSURING

In Business, Economics, EDUCATION, Finance, FINANCE FOR THE CLUELESS, Personal Finance on March 12, 2014 at 2:32 pm

 

WIZARD OF FINANCE

WIZARD OF FINANCE

 

Four Financial Functions

Of the four personal financial functions, Saving, Insuring, Spending, and Investing, Insuring may be the least well understood.

Dollar$ broods on the why this is so. Insurance is not hard to understand, but Wizards who specialize in selling financial products lie awake at night dreaming up complicated products to befuddle the Clueless, which products more efficiently separate the Clueless from their dough.And so we come to the First Dollar$ Law for the Clueless.

NEVER BLEND FINANCIAL PURPOSES IN A SINGLE VEHICLE

Someday you will meet an Insurance Broker Wizard who will tell you that the best way to save for your retirement is with a life insurance policy. You may also meet his cousin, the Real Estate Broker Wizard, who tells you to purchase a house you cannot afford because it is an investment; you will meet another Credit Card Wizard who will happily point out that with this wonderful card that costs next to nothing, whenever you incur debt, you buy free airline miles, nights in a hotel, or tickets to see Bruce Springsteen while enjoying a free trip to the Poor House!

Do not work with these Wizards. They are sharpies presenting proposition bets, but as Marlon Brando explained to Frank Sinatra, do not take a proposition bet. Ever. You willhave a wet ear.

 

Wizards charge fees for a service, to which they are entitled, but a Wizard who sells additional services will want to collect MUST do so for a higher fee than you might pay for buying each of those products separately.

Over the life of a policy, which can be decades, even small fees mount up.  You are ALWAYS better off paying for pure products.

Rather than plagiarize, Dollar$ is happy to refer you to a short, lucid explanation from CNN talking about Universal vs. Term Life. CNN concludes, “The lesson: If you need life insurance, get term insurance. If you want to invest for retirement, invest in IRAs, 401(k)s or similar retirement plans.”

Smart folks at CNN.

The Industry

To understand what you should or should not personally do, you first have to understand the industry.

Dollar$ swears the explanation will be short.

Let’s say we live on a nice, tree-lined street. Beyond ordinary town services, our neighbors agree it is to everyone’s benefit to preserve the neighborhood’s good looks, so we form The Dollar$ Neighborhood Association. Everyone throws in a few bucks every year as a matter of civic duty. From time to time, you sponsor a block party, and the DNA buys a keg of beer.

One terrible day, a storm comes through town, and three of those trees are torn up. Luckily, no one is hurt, no homes are damaged. Town workers haul the downed trees away.

The DNA checks its accounts. If we skip the beer this year, we can afford to replace the 3 downed trees.

Property values are preserved. Our lives remain lovely.

  • The DNA is a very small scale mutual insurance company.
  • The stockholders are the people of the neighborhood.
  • The beer is the annual dividend paid to shareholders.

For Profit

A for-profit insurance company works the same way, but they charge larger fees, invest all the money they get, and need millions of clients to spread the risk.  After all, a tornado could wipe out the whole neighborhood. Better to make our community at least statewide.

Whatever a for-profit does not have to pay out, is profit that they keep.

Actuaries, skilled mathematicians, calculate rates by studying masses of data and crunching numbers. Do you know what percentage of women between the ages of 11 and 40 will break a leg next year?  Neither does Dollar$, but there are actuaries who do. They also know how much it takes to fix a busted leg, and they build all those data into health insurance rates for women between 11 and 40.

For-profits may pay dividends to shareholders (who may not be policyholders). It won’t be beer.

If a for-profit does not invest well, it may go bankrupt. Consider what might have happened to the DNA if 10 trees were destroyed. What happens if a hurricane hits New Jersey, the Mississippi overflows it banks, or an earthquake hits Manhattan? Lesson: Buy life insurance only from a well-established company that has been doing business at least 75 years. Anything else is an upstart liable to go belly-up the day you need them.

Action Items

Insurance protects the purchaser from man-made or natural accidents that have financial repercussions.

Dos and Don’ts for the Clueless

Insurance is not:

  • A guarantee that a loved one will live forever;
  • A bet that should things go wrong your heirs will become rich;
  • An investment;
  • It is never a gamble you win by losing. “Great news! I died and now my family is rich!’

The more people swim in the risk pool, the less expensive insurance is for everyone. The more neighbor in the DNP, the more trees can be replaced. The more low risk people buy health insurance, the happier Democrats will be because they will be paying in, but not taking as much out. If that sounds like a scam to you, you are probably younger than 35 and have never been sick.

Do not worry: you will be sick someday.

  • Never insure your children’s lives, unless your kid is Shirley Temple and so provides a revenue stream.
  • Term life insurance is a pure insurance product. In the event of disaster, it pays big bucks. At the end of the term, it pays bubkis. Buy it.
  • Take the difference saved by buying inexpensive insurance and invest or save it to provide wealth or revenue later.
  • Buy term life for as long as dependents will need to replace any income lost to death. That’s usually 20 years after the birth of the last newborn child in a family.
  • Buy enough life insurance so that survivors can continue their lives uninterrupted—do not underestimate this. If a spouse will need to pay for childcare, insure the spouse is cared for.
  • If you have no dependents or heirs, you need no life insurance; but you should consider disability insurance.
  • Disability insurance is more crucial than life insurance. It does not have to be your fault, but if your neck breaks in a car accident, you might survive for decades and need financial resources for all that time. Social Security will no pay what you want or need.
  • Mortgage insurance does NOT protect you: it protects the mortgage holder, not your heirs. You kick the bucket, the bank collects.
  • In America, health insurance has become mandatory. This is controversial, but is no different from mandatory auto insurance about which no one complains. Dollar$ suspects the Weasel mindset is at work here.
  • Insure revenue-producing property from fire and theft. Your auto provides you with  the means of getting to and from a job. Be sure your auto insurancee will be for a renter if you lose your car temporarily.
  • Insure your house from fire and flood. Flood insurance is tricky and varies from state to state. Do your homework.
  • Insure your possessions that would need to be replaced, and insure for replacement value. If your house burns down with a 10-year-ol refrigerator in it, will you be buying a 10-year old refrigerator, or will you need a new one?
  • Liability insurance makes sense if you own assets someone else can attach in the event of your negligence. Someone trips over your rug, takes a header down the stairs, and sues for financial assistance for a lifetime in a wheelchair. Will they go after your kid’s college savings account?  (Yes.) Will you want insurance against that personal liability (Double Yes). Should you put assets in places they cannot be attached? (Maybe—now you need an attorney, but if you have that much dough, why are you reading “For the Clueless?”)
  •  NEVER buy a warranty extension on an appliance. A defective product can be returned. If it breaks too late to be returned, take the money you saved buy not buying extended warranty protection and apply it toward the purchase of a new product.
    Carry as little personal liability on your car insurance as you can. Brokers are going to disagree, but in a world where health insurance is now a legal responsibility of every Citizen, why are you paying for someone else’s health insurance?

PERSONAL FINANCE FOR THE CLUELESS– SAVINGS #2: INCOME

In Business, Economics, Economy, EDUCATION, Finance, FINANCE FOR THE CLUELESS, Personal Finance on March 10, 2014 at 7:04 pm

My two Gen Y friends, call them John and Mary were out with me celebrating Mary’s return to the workforce after five months of unemployment.

John and Mary are chronically broke. Ordinary car repairs are a disaster. Every month, they juggle creditors. Who to pay, who to delay?

Mary, a college grad, now has a job she enjoys, though it does not pay much. John works at two hourly wage jobs, about 60 to 70 hours each week. While we eat sushi, his eyes drift half closed through most of dinner. John and Mary live in a less desirable part of town in a decent enough place owned by a relative willing to subsidize their lives by accepting about 75 percent of market rates in rent.

I asked John why he did not attend college. Maybe two years at the local community college? He looked startled. I felt I had offended him.

“Can’t afford it. Got to pay the bills.”

“Why not borrow for school?”

“Loans are too expensive.”

Think Out of the Box

John thinks he is trapped. From time to time, he  gripes about the system, whatever that means.

GEN Y LIFE

GEN Y LIFE

Is there any way out? He is already working more hours than anyone should.

But he is in his 20s.

How will he manage when he is in his 30s? His 40s?

John and Mary’s lives cannot go on like this forever. A tire blowout should not constitute a financial challenge. The only alternative to getting older is death, not a great alternative. John and Mary are going to get older, Dollar$ hopes. Everyone should live forever, but to make that a good thing requires financial management.

What Should John Do?

No  amount of thrift will help John and Mary. They need income. Since being an entrepreneur requires capital they do not have, John needs to go school. It’s his only way out.

John needs to pursue a career, not a job.

Dollar$ recommends, QUIT A JOB BEFORE IT IS TOO LATE!

This is a no-brainer. John needs to quit  the job that pays no benefits.  He is squandering two wasting assets:

  • Youth
  • Energy

They are wasting because as time passes, they diminish in value. He needs to quit before those assets are exhausted.

What can he do with the free hours he will create by reducing himself to working only 40 hours/week?

BORROW. GO TO SCHOOL. STOP KIDDING AROUND. THIS IS YOUR LIFE. AND YOUR LIFE IS YOURS TO CONTROL. NEVER ACCEPT VICTIMIZATION!

 The Cruel Science

Economics and Finance are unforgiving. In the U.S., a non-college grad can expect to earn $25,000 less EACH YEAR. In a working lifetime, that’s well over a half million dollars lost.

Wouldn’t you borrow $30K now for a half million dollars later? Why accept a life of used cars, inferior healthcare, crappy neighborhoods, lots and lots of old clothes, and fights about money, the cause of most divorces in the US.

John might say,“We are not into the system,” but, sorry John and others who would Occupy Wall Street, the last ‘60s communes are long gone. Hippies discovered that farming was back-breaking work.

Suck it up and face reality.

Good or Bad Credit?

John is not a lazy guy. He is as good as they get. But he may be confusing the two kinds of credit

CEO of MasterCard and Visa, c. 1400.

CEO of MasterCard and Visa, c. 1400.

Consumer credit is poison. Borrowing money to pay for something you consume or own is the American financial disease. You bought some bit of crap and now what? The road to Hell is paved with credit cards. Visa and MasterCard charge rates that a thousand year ago would have had them burned for usury.  Banks lust for chuckleheads who never pay off on time.

Do you want to be the bank’s best friend?

Use a credit card only for food and gasoline. Better yet, use cash. You remember cash? Green coupons with the presidents’ pictures on them? Dump your debit card. It exposes you to losses a credit card does not and offers you no float. The second you spend it, the second you lose it. At least a credit card delays payment by 3 – 4 weeks: the float.

Leveraged credit is the stuff of investment.  Borrow money when its purpose is to increase revenue at a superior rate to what you pay for the loan.

Let’s see: A student loan these days—which can be partly used to pay for John and Mary’s living expenses—may run 8 percent per year.

Hmmmm… Eight percent of $30,000 borrowed to pay tuition is about $2,400 per year. Throw in some principle—say the loan costs $3,000 each and every year until it is paid off, maybe 15 years or so, with no payments until the education is finished.

That $3K per year to buy entry to a world where salaries are $25K per year more! That might net John as much as $22,000 each and every year.

Leverage those assets! Get out of the Box!

Youth and energy have market value, but not if you allow them to lie waste away!

 

PERSONAL FINANCE FOR THE CLUELESS– SAVING #1 TAKE CONTROL

In Economics, Economy, EDUCATION, Finance, Personal Finance on March 9, 2014 at 12:23 pm

motherDozens of professional advice-givers advise on how to aggregate wealth. Dollar$ will tell you that other than being born to rich parents, there is no secret.

It is not your fault you are clueless. Financial and Corporate America WANT you to think this is complicated. How else can they justify fees?  Why do you think your high school does not have a required course in Personal Finance?

Dollar$ is please to fill the gap. Here is the secret:

Spend less than you earn.

Dollar$ has nothing but sympathy for the legions of the Clueless who find that advice hard. If you are victim to the consumer society and believe spending money you do not have is an act of patriotism, your contribution to an economy that needs all the help you can give it, join the revolution.

Perhaps you sail through the mall sustaining a life on plastic as a form of self-help therapy, a feel-good exercise superior to alcohol and easier to accomplish than satisfactory sex.

Perhaps you have no financial goals and live from day to day, free and easy, above it all not un like a monkey swinging from tree to tree in the canopy above a rain forest.

Yes, there is some psychological value to living in the moment, but in the world of finance such people have a technical label.

Typical Consumers

Typical Consumers

They are called poor.

Sometimes they are also known as marks and pigeons.

It pains Dollar$ to give you the news, but more than a few Buccaneers, Weasels, and Wizards have made it their life’s work to separate you from your money.

If when you sit down to pay your bills you feel like Mother Hubbard, start by tracking your spending. Record every dollar you spend, especially those impulse buys that have a way of evacuating your wallet. A gazillion apps will help you do this. If you want to see a larger picture on a single screen, Microsoft has a free template that is comprehensive.

Take Control

Get ruthless. Tracking your spending is not the same as controlling it.  This is your life we are talking about.

Track for three months, and run a triage on your expenditures. Identify necessities, nice stuff, and luxuries.

Necessities

Food.

Eating is not a political statement. If you are paying more to eat local or are depleting your wallet for organic food at Whole Paycheck, be certain you are so dedicated to the cause you are willing to impoverish yourself.

One less $4.30 grande latte at Starbucks each day is $30 per week, $1,500 per year—enough to fund your IRA and start preparing for a better old age if you are in your 20s.

If you live in the USA or most of Europe—but not Mexico– that stuff flowing out of your faucet is potable water. Potable water need not be contained in $1 worth of clear plastic.

For heaven’s sake, if you are dining out or bringing food in, limit that shit. Try cooking your weekly meals on the weekend, freeze them, and defrost your own cooking instead of defrosting prepared foods you bought in the freezer aisle. If you can boil water, you can make your own soup, and it will not only have less salt, be more nourishing, and taste better, it makes the whole house smell good.

Clothing.

Dress decently, but do not be a slave to fashion. Do you need a new wardrobe every season?

For work, look neat and look professional, but remember a woman with more than ten pairs of shoes is not buying footwear, but is engaged in therapy. Gentlemen, you need about 10 days of shirts and shorts to get to laundry day. If you aren’t doing laundry…ewwwww!

Shelter.

This is the hard one. Rent the best you can manage without incurring debt. Consider its proximity to places you need to go, such as school or work. Consider your sense of safety: if you lie awake nights fearful of strange noises outside your door, you will need to either get used to it, or move. Live with a roommate to afford a better place, if you must.

Trade sweat equity for rent: can you paint the place? Repair the roof?   Do work for other tenants?

Pay your rent on time. Every time you haul ass to escape a landlord, unless you are living out of a shopping cart, it will cost you, and eventually your credit rating will be gone.

Nice stuff.

Divide your nice stuff into two piles—the stuff you could not live without and the stuff you are going to hurl out the door. That is, divide this pile into Necessities and Luxuries.

  • Do you need to pay for Cable TV if you are streaming most TV shows from Netflicks at 10 percent of the cost of cable?
  • Is your sense of personal identity tied to your X-Box?
  • Do you really need to upgrade your phone every 18 months? Do you need a smart phone at all? Sure, it is hip and cool, but that sucker can cost you. How about a landline and an answering machine? So what if you are not in touch 24/7?

    dead-1

    It might be time for a new car. Maybe.

  • If you own a car, assuming you need one, drive it into the ground and it turns wheels up. Change the oil every 5,000 miles. If he does not work for a dealer, treasure your mechanic. If he works for a dealer, change mechanics.
  • Never trade a used car for another used car: you already own one! Fix it.

Luxuries

  • You don’t need them. That’s why they are called luxuries. Throw them out and do not replenish.
  • The only exception is decent chocolate.

Reject American consumerism. If you need to feel good, join a library group, volunteer at a geriatric facility, take your kids to the park, fall in love, read a book. Just do not spend money on goods or services you do not need. AND YOU NEED LESS THAN YOU THINK.

Coming to Dollar$ soon:

  • PERSONAL FINANCE FOR THE CLUELESS– SPENDING
  • PERSONAL FINANCE FOR THE CLUELESS– INVESTING

A Case of the Shorts

In Business, Economics, Personal Finance, Wall Street on September 24, 2008 at 11:50 am

 

Short selling is much in the news these days, but a lot of non-Wizards find the idea of selling something they do not own hard to grasp.

Actually, it is easy, and, before the Wizards changed the rules, made great sense. 

The Cat Food Story

Suppose you live in the middle of a street and both of your neighbors, East and West, own cats. The East family asks you to feed their cat, Iolanthe, while they are out of town for a week. Being a good neighbor, you accept. They leave you with seven cans of cat food.

A week after they are gone, the Easts call your from O’Hare Airport with an urgent request. Their return home is being delayed (This is O’Hare—if this is January, they will be lucky to get out of Chicago at all). They’ll need you to feed Iolanthe an eighth day, and they ask you to pick up some cat food, for which they will happily reimburse you.

Pressed for time, as you leave for work, you stop at the Wests and ask to buy a can of cat food from them. They happily oblige. The can is plainly marked $1.29; all they ask is that you replace the can soon.

You feed Iolanthe, leave the price-marked empty can at the East home to show the cat food price, dash off to work, and you stop at the pet store on the way home. Lo! Cat food is on sale for $.79!

You buy one can. You return it to the Wests.

The next day, the Easts return home. They write you a check for $1.29—the price of the empty can of food.

You just made $.50, and you did it by selling a borrowed asset that you sold before you purchased a replacement asset at a lower market price.

  • You borrowed an asset from the Wests.
  • You sold the assets to the Easts for $1.29.
  • You went to the market to purchase the asset for $.79.
  • You restored the assets to the Wests.

Look! You just made money by selling before you bought anything!

Hedging

Selling short is a time-honored financial strategy that the modern Wizards have made dangerous by ever so slightly changing the rules while they did their work behind the curtain. The purpose of short-selling is to hedge.

Hedging is a fancy word that translates to: KEEP THY FINANCIAL ASS COVERED!!

Suppose you were sitting on a pile of assets you believed over the short term were going to diminish in value. Rather than sell and re-purchase later, for a fraction of the cost of a sale and repurchase, you could short part or all of your position and lessen the pain of the loss. When you borrow your own shares to sell, while maintaining ownership to collect benefits of ownership such as voting rights or dividends, the strategy is called “short against the box.”

Short against the box is very, very conservative, a tactic not designed to make bundles of cash, but to cut losses…to hedge.

Enter the Wizards.

Naked Shorts

 

Despite the name, which sounds like a product from Victoria’s Secret, naked shorts are a bit of wizardry designed to make what was conservative the play of a buccaneer.

These are your pros at work, the financial managers in $1,000 suits who humbly accept responsibility for our money,and once they get supervision of a trillion here and a trillion there, management of our financial system

Unlike cat food, Wizards are aware that most transactions do not call for the transfer of any underlying  real asset, but only a bookkeeping entry, with the blessing of government supervisory agencies, the Wizards created the naked short.

In the cat story, they have cut out the Wests. No cat food, in fact.  No need to borrow cans anymore, just make the ledger entry. Conceivably, we could put in more short-selling orders than there are cans of cat food in all the world…

Now substitute for the phrase “cans of cat food” the phrase, “shares of financial stocks” and you’ll see why the US Financial system is not worth a bucket of kitty litter.