Wednesday, December 31, 2008

Personal Net Worth... What a Crock.

I occasionally check-in on other personal finance blogs and one that I have read a few times is Million Dollar Journey. In the most recent post the author states that his net worth has increased 10% in 2008. The numbers are all there to support his claim, but if you look closely you see that the majority of the net worth is in property, almost half of the $309,000.

It's very dangerous to claim a personal residence as part of your net worth. Your residence is not a liquid asset. If forced to sell there is no guarantee you would recoup your purchase price. In the market we have today you may not even be able to sell your house. If you do happen to sell the house you have to find a place to live. Whether that be another house or a rental you have to put up some money for that.

To illustrate the danger of including a primary residence in one's net worth let's assume that this couple become unemployed in the next few months. They are in no real danger as they have $62,000 in very liquid assets, but with $265,000 in debt plus living expenses that $62,000 could easily be gone in a year.

This same sort of accounting is found on the balance sheets of every publicly traded company. There are thousands of companies that show a positive net worth because of assets that are not liquid. As the debt piles up the net worth seems to keep up as well, but when we hit a recession like we have today we find that those assets are not worth nearly what was reported when the company files chapter 11.

If you really want to have a good view of your personal net worth you need to divide your assets based on liquidity. Cash is obviously on one end and property (primary residence) is on the other. Retirement accounts fit somewhere in between as they are not worth what's on the paper if withdrawn early. Debt should also be divided into short-term and long-term. A 30-year $300,000 mortgage looks much more cumbersome on a balance sheet than $30,000 in credit card debt at 16.5%, but the credit card debt is much less manageable than the mortgage.

The bottom line is don't be fooled into thinking things are fine because your net worth looks good. All those assets aren't going to mean anything if you can't find somebody to take them off your hands, and nothing decreases prices like a fire-sale.

Wednesday, December 24, 2008

Why you should care about Bernard Madoff.

Bernard Madoff was recently arrested for securities fraud after being turned in by his sons. Madoff's fraud is valued around $50 billion. The list of those directly affected by Mr Madoff is extensive, but the majority of Americans don't seem to care because it didn't affect them. The truth is that we are all affected, albeit indirectly, by Mr Madoff's scheme.

Madoff ran the largest Ponzi scheme in the history of the United States and he did it for years. He was described by some of his closest friends as the most honest man in America. He donated millions to various charities. I don't know why he did it and I'm not sure I care, but the fact that he did do it and got away with it for so many years is unacceptable to me.

First of all how did he fly under the radar for so many years? Why didn't the SEC step in and act on the tips that we are now hearing had been coming in for years? We live in a Country where the top government officials make a fraction of what our society deems them worth. The President pulls less than half a million per year and when he leaves office he can make that much in one speaking engagement. The top SEC officials make millions in salary and stock options when they leave their posts for the private sector. Those who leave are protected by those left behind and Mr Madoff seems to have been protected from investigations from time to time.

The Ponzi Scheme in itself is a danger to society. There are many variations, but boiled down to basics the scheme is a form of investment fraud where the original investors are paid with the money from newer investors. The scheme generally continues until the investors try to withdraw their investments and find that there is no investment to withdraw from. Often this coincides with a down turn of the market like we have had recently.

What Bernard Madoff did to me was shake my trust in our financial system. Madoff's scam scares me more than anything that has happened in the past year. We live in a time where wealth is tracked by computers. Million dollar purchases are done through the internet. All of my accounts are held at financial institutions. I don't know the CEO's of these banks. I haven't met with their accounting firms. I have an account showing that I own shares of Nike, but I've never seen any stock certificates. I base my decisions on the information I read in the balance sheets. I trust that the figures are correct. I trust that Nike really is selling that many Lebron Shoes.

Millions of Americans trust others to handle their investments. How do they make the decision on who to choose. To my knowledge Bernard Madoff has always received glowing reviews by his family and friends, some of whom have lost large sums of money as a reslut of Mr Madoff's actions.

Before I was born my grandfather made a stock purchase from a woman in his home town. Shortly thereafter the stock price soared and he stood to make a large profit. He returned to the woman and nullified his purchase. He did not even want to appear to have made an insider deal. He would not have that woman think bad of him. I fear that many today would call what my grandfather did an act of stupidity rather than see it for what it was. My grandfather would not sell his integrity for any amount of money.


My greatest fear is that we as a society no longer operate under principles of morality. Bernard Madoff sold his integrity and in so doing finally gave me something to be afraid of this year.

Wednesday, December 17, 2008

Mistakes of the Past

I have no faith in Ben Bernanke. Let me say that I am not the federal reserve chief. I am not qualified to be the federal reserve chief. I'm not even qualified to criticize the federal reserve chief, but I'm going to anyway.

As I have written before, I blame our current recession on debt. Corporate debt, consumer debt, national debt, take your pick, they are all at fault for our current economic crises. Cheap money over the past 8 years is a huge factor in all that debt. Now that the economy is trying to right itself by dropping down to reasonable levels everybody is getting scared so what does our illustrius chief do? That's right he cuts rates. Did we not learn anything during the Greenspan years? Cheap money does not fix the economy. Free money does not fix the economy. Survival of the fittest fixes the economy. are we really going to allow the big 3 automakers continue their horrible business practices by bailing them out? Is it really wise to make it easier to get loans when the money to pay off those loans is still not there?

Come on America, tighten those belt straps, go to work, pay off your credit cards and if you have a job help out your neighbor who doesn't, but don't reward bad companies with poor economic policies. We've got to stop perpetuating the problem.

Tuesday, December 9, 2008

Nike

I set up a limit order to purchase Nike at $53 per share today and just before close the price of Nike dipped down below $53. Unfortunately Apple and Microsoft didn't get down to the levels where I had set my limit orders.

Yearly earnings per share for Nike since 99 (ending in May of each year) have been as follows:
0.78
1.04
1.08
1.23
1.38
1.75
2.24
2.64
2.93
3.74

While Nike's earnings have grown 500% the stock price has barely doubled in that time. Nike carries long term debt in the amount of $441 million while last year alone their net income was $1.8 billion. This is important because if the company were to face some lean years in sales and their earnings were to take a hit they would be in a very good position to pay off their debt and avoid the pitfalls we are now seeing with the big 3 automakers. Apple and Microsoft carry no long term debt, but their current liabilities are through the roof.

Nike is currently trading at 15 times earnings which is right where I like to purchase most stocks. I tend to pay more for technology companies, but not very often.

The numbers tell the story, but I don't like to buy stocks based solely on numbers. I want a company that is going to be around tomorrow and going to produce consistent returns in the future. Nike isn't going anywhere. It will definitely keep growing because it sells a product that people keep using. Even if production costs increase the Nike brand enables the company to increase prices to offset any increased expenditures. Shoes keep going up in price and people keep buying them.

Now if Lebron will just go to the Knicks....

Monday, December 8, 2008

Bad Timing

I spent much of the weekend researching certain companies with full intentions of making some significant purchases this week. By the end of the weekend I was pretty certain I would be buying shares of Nike, Microsoft, and Apple. I wasn't too high on Coke, but it was on my radar. I even went so far as to place saved orders for the 3 mentioned stocks (but not so far as to put in limit orders). As it turns out those three stocks are each up over 5% today. I'm incredibly disappointed at the rebound in these companies today as they just aren't as appealing as they were on Friday afternoon. I think I'll put in some limit orders to buy if they should drop to near Friday levels again.

Tuesday, December 2, 2008

How to Read a Finance Magazine

Most people out there are not like me. They don't thumb through the magazines at the doctor's office hoping against hope to find a copy of Forbes or Fortune. They don't look forward with anticipation for the day that the monthly Money (magazine not check) will arrive in the mail. With that in mind I have put together some thoughts on how most people could read a financial magazine.

The first thing you need to do is to open the magazine to the table of contents. Read through the titles and the one liner for each article or feature and cross out the articles that are of no use to you. If you have never owned a foreign stock and don't plan to own a foreign stock anytime in the near future cross out all articles with the words, foreign, overseas, China, Japan, Emerging Market, and exchange rate. The only time you may actually read an article on foreign investing is when the title is something like "Investing overseas for first timers", otherwise don't touch it.

There are a lot of articles about credit card and other consumer debt. If you pay off your credit cards every month do not waste your time here (unless you want to feel good about yourself). If you don't have kids stay away from any article about saving for children's college. Sure you may have kids in the future, but the tax/finance landscape will change and your time can be much better spent now.

Now after you have eliminated the useless articles start thumbing through the magazine. When you reach an article that may be of interest to you flip to the end to see how long it is. My general rule is that if the article is over 4 pages it has to be something I am very interested in (Warren Buffet for example). Anything that takes more than 4 pages to explain is not worth my time.

After starting into an article don't be afraid to trash it. If the tone of the article turns from what you thought it was and you are getting bored stop reading. On the other hand if the article is intriguing but difficult to understand don't be afraid to read it again or save it for later.

I like to tear up my magazines. I usually don't find more than 2 or 3 articles in an issue that change the way I think, but I will want to return to those 2 or 3 articles at some point in the future so I tear them out of the magazine and throw the rest in the trash. I've found that I can never find what I'm looking for if I save entire magazines, but if I save just the articles that stick out to me I can easily find them (so long as my filing system is in good order).

It's not a cut and dry system but it works for me.

Saturday, November 29, 2008

Where do you get your financial news?

I a believer that unless you have a financial planner who you trust (or a spouse who is good with the finances and investments) you need to keep up to date on financial news. The internet is a great source for financial information, but like everything else on the internet there is so much out there that it can be quite overwhelming. If you have a certain site that you like and you check it regularly then keep doing it. The minor variances between different news sites are not important enough to make a difference in your investment strategy.

The gold standard for financial information has always been, and continues to be, the Wall Street Journal. There was a time that I subscribed to the WSJ and I read each day,s paper cover to cover. After my subscription ran out I made it a point to read the journal in the school library each day. It is very time consuming to read the Journal each day and too expensive to only browse the headlines. I don't see myself subscribing to the Journal again anytime soon (maybe when my 80 hour weeks turn into 40 hour weeks).

It is not imperative to have a daily dose of financial news to be investment savy. Sometimes it is almost counterproductive as the daily reminder of bad news leads many to abandon their investment strategy and sell at the bottom of a market, while a daily reminder of good news encourages investors to increase their investment spending at the market peak. Both of these actions lead to poor returns.

With no time to read the Journal many people turn to the finance section of the local newspaper. That just doesn't do it for me. It is a rare occurrence that I find a worthwhile finance article in a "normal" newspaper.

So what are we left with? A Finance magazine is the way to go. In the past I have subscribed to Money as well as SmartMoney. Recently I decided to subscribe to trial offers from the major finance magazines to decide which is the best for me, and hence the best for everyone else right? I received issues of Smart Money, Money, Forbes, and Fortune. What follows is my analysis of each magazine and my pick for the best.

Fortune - First of all this is a weekly magazine. That's a bad thing. I have the fortitude to read Sport's Illustrated on a weekly basis, but not Forbes. The pendulum like views of the various finance writers is just too much to tackle on a weekly basis. Overall Fortune spends too much time dealing with issues that apply to the upper echelon of wage earners. They recently had a story on how hard Obama's plan will hit the many families in the $200,000+ income tax bracket. Of the 4 families in the story the lowest gross income was $350,000. The story talks about HENRYs (high income earners not rich yet). It's an interesting article, but it is way out of touch with what I want in a financial magazine. The target audience of Fortune is a few tax brackets above most of us.

Forbes - The articles in Forbes are of no use to me. Forbes runs a very good website that I check frequently, but the magazine is just a printed version of that website. The articles deal with things like how to fix the economy and what can be done about trade with China. Sure this is what is in the news, but how is that going to help my bottom line? It's nice to think about what can be done to help the economy recover, but what I need to know now is how I can take advantage of the market today not how to change it tomorrow. Forbes is filled with stories of gloom and doom during the bear market and rainbows and sunshine during when the bull shows up. That's just plain useless.

Smart Money - Smart Money is the monthly magazine put out by the Wall Street Journal. When the magazine first started the editor was Peter Lynch (think Fidelity Magellan during the good years). Back then it was a great magazine. The articles were useful. There were enough different opinions to cover any investment philosophy. In the past few years the editor has changed and the content of the magazine has gone down. There are fewer and fewer investment articles and more and more consumer purchase articles. I don't care what wine is the best buy of the month. If I wanted to know what $60,000+ sports car is the best buy I would subscribe to Car and Driver or even Consumer Reports, but not my monthly Financial.

Money - Far and away the best choice. I love Money. The articles are short and easy to read so I don't have to set aside 30 minutes each time I want to open the cover. A look at the titles of this months stories shows why I like it.
"Four ways to tame your fear of this Market"
"Right on your Money" (analysis of free websites to track saving, spending and investments)
"Kids and Money"
"The Mole" (why you should be buying stocks now)
"What would Warren Do" Any reference to Warren Buffet is a good one.

I think it's clear which way I went with my trial subscriptions. It also didn't hurt that my first year with Money is free (I can't remember where I found that deal), but I would have gladly paid for it.

The next step is how to read a financial magazine, but that is a topic for another post.

Wednesday, November 19, 2008

Rolling with the recession

As the stock market continues to fall my fears for the future are not only not growing they are getting smaller. As I have stated in the past I think this correction is going to be very difficult for the short term, but in the long run our economy definitely needs a correction to bring us back down to reality. Just like last week I still feel that many stocks are trading at a great bargain at the present time.

Currently I am somewhat cash poor, but if the market continues at the present course I will be diving into stocks when the new year comes and my cash flow improves. You can bet at that time I will be posting frequently about my various purchases and the reasoning behind them.

Ten years from now we are going to see a lot of people who did very well because they had the foresight to buy when the sky was falling. I plan to be one of those people.

Wednesday, November 12, 2008

Money to be Made

The stock market continues to drop, but I am extremely optimistic. I'm not sure we are at the end of the downfall, but for the first time in months I feel the market is no longer overvalued. What that means is that it is a great time to start putting money into the market.

I don't think this a time for willy-nilly investing, but for someone willing to put in the time to research mutual funds and individual companies it could prove to be a very good time to buy. At the moment I would continue to avoid the financial sector as well as airlines and automakers. As always I remain bullish on Berkshire Hathaway. Obviously I don't have the money to purchase any Berkshire A shares, but the B shares are trading below $3500, something that hasn't happened since September of 06. The drop in the price is a reflection of the market as a whole which has beaten down many stocks that continue to have very good balance sheets.

Nike is another company that has been beaten down. Nike currently trades at 12.5 times earnings. This is still higher than the industry PE of 11, but Nike carries a lot more goodwill than every other shoe manufacturer. Nike will probably suffer with sales in the near future, but the longterm outlook is still great. Other footwear companies come and go, but Nike is always around and it's cheap as a result of the recession.

There are some people who are looking to put money into green energy companies. I don't recommend it. A lot of these companies are like the internet companies of the late 90's. Some of them are going to get the big break and make a lot of people very rich, but a lot of them will never make any real money. Picking the next Microsoft or Wal Mart is easier done in Vegas than on Wall Street, but getting in on a good company after you've seen that they can make some money is still pretty lucrative especially if you can avoid investing in Kozmo.com thinking it will challenge Amazon because it has some flashy commercials. My advice; wait a few years to see where energy is going before putting any money there.

Thursday, November 6, 2008

President Obama

It's no secret for anyone who has been reading this blog which way I was leaning in the presidential election and as it turned out I voted for Obama. This election has been horrendous, but now that it is over I am excited for the future. I'm not sure Obama will be able to keep any of his promises, but I'm hopeful he can. I don't think he can solve our economic crisis because I think the debt in this country needs to run it's course. I do think he will do something about the healthcare crisis and whether or not it works out it does excite me.

Wednesday, October 29, 2008

Our economy needs more Mormons

If you think this is going to be a post about Mitt Romney you are wrong. I am actually writing about an article on economist.com detailing the relatively healthy economy in Utah, and how that is in large part due to the Mormon way of thinking. I encourage you to read it, but if not I'll at least share with you the last paragraph that I find very amusing.

"Mormons do not come to work nursing hangovers, and they are inclined to stay put in the promised land rather than pursue better-paying jobs elsewhere. Matthew Donthnier, who is hiring for a new Procter & Gamble plant, has only one complaint about the local workforce: it can be a little difficult to persuade people to toil on Sundays."

The idea of working in the "Promised Land" when one could make so much more money elsewhere is strange indeed. What kind of crazy person would feel that way?

Tuesday, October 28, 2008

Vote for the man or the party?

The conflict continues. I've already written about why I like Obama's plans over McCain's but I still struggle.

Something needs to be done about healthcare coverage and while McCain will give help for people to buy their own insurance I do not think many in America will buy health insurance unless forced to do so. I'm still in the Obama camp on that one.

History shows me that the Democratic policy of raising taxes is not a very good one. Hoover's wonderful plan to increase the top income tax rate from 25% to 63% in 1932 sure proved to be a great solution to the depression that started 3 years earlier. Massive inflation in the 70's only came to a halt when Reagan put a stop to many of the Carter policies.

So do I vote for the specific policy I believe is better or do I go with the party that I believe has done a better job with the economy historically? The Bush administration has not done too well by me with the economy. The devaluation of the dollar during the past 8 years is not what I call good business. I don't know that a McCain administration will do any better.

In the end maybe a vote for Obama is a win/win situation. If his plans work then things are great. If they don't maybe Romney will have a better shot in 2012.

Of course there are other topics of concern to me and my views are much more inline with the democratic party when it comes to the education of my children (I throw this in here in hopes that my mother won't disown me if I vote for a democrat in a presidential election).

What to do?

Sunday, October 26, 2008

Who deserves my vote?

Never have I struggled with a presidential election like I am this year. I'm going to put aside my moral disagreements with the democratic party (sorry but abortion rights doesn't really play out in presidential politics) and discuss the two things that have the most relevance to me in this election namely; taxes and healthcare (didn't see that one coming did you?).

Healthcare:

I do not like Obama's healthcare plan because I don't believe healthcare is a right. I don't believe it is the government's job to make sure everyone is covered by paying for their healthcare, and I don't believe that I should have to pay taxes to support an expensive government plan.

I like McCain's plan but I don't think it will work. McCain claims that by taxing healthcare dollars and giving healthcare credits to American's everybody will be able to afford health insurance. If the healthy in the country use that money for catastrophic insurance because that's really all they need then the cost of full coverage will necessarily go up because only those who need it will be paying the premiums. This is a horrible idea.

In the end I do believe it is irresponsible for anyone to go without health insurance and if the government has to step in to make sure everyone get's covered then the government needs to step in. As I don't think McCain's plan will work I have to go with Obama on this one.

Taxes/Economy:

Anyone who knows me knows that I hate Robin Hood economics. I disagree completely with any plan that increases taxes in the higher tax brackets while increasing credits for lower wage earners. I also do not like the way the current administration has given so many credits to the executives and stock owners in this country. It truly is a shame that the very richest people in the country pay a lower percentage in taxes than the middle class because of capital gains and dividend tax rates.

Obama's plan will result in an increase in taxes for those making over $250,000 while giving all kinds of credits as the income goes down. He will also repeal the current capital gains and dividend tax rates and replace them with much higher rates.

McCain will decrease taxes across the board, but moreso for the higher wage earners. McCain will keep the capital gains and dividend taxes at the low rates they currently are at. Once again I like the McCain tax plan, but just like his healthcare plan I don't see how it will work. McCain's plan will not support the other plans he proposes. Whether or not you agree with the war the one thing that is certain is that it will definitely continue under a McCain presidency and it is not cheap to do so.

If I were to propose a plan it would include more taxes for capital gains and dividends as opposed to salary taxes. I would increase taxes on luxury items such as expensive cars, luxury hotel rooms, and chartered jet flights. There are obviously many more things that fit into the luxury purchase category, but by taxing these items the democrats get to tax the higher wage earners while not punishing those who are trying to save for the future. As I've said I don't like the uneven tax code, but if a person or company can afford to travel from the airport in a limo or a helicopter they can certainly pay a premium in taxes for that luxury. Of course this would mess up the whole tax system because many of these luxury items are bought by businesses and are actually used as tax write-offs. Tell me that isn't a little bit backwards?

In the end I don't think McCain's plan is wise and while I don't agree with Obama's plan in principle I don't think it will kill the economy. On a personal level I don't plan to be making $250,000 in salary anytime in the near (or distant) future. My investing approach involves buying individual stocks for the long term (no capital gains) without worrying about a fixed income at the present time (few dividends). My only mutual funds are held in my 401k (tax deferred). Obama's plan actually puts more money back into my pocket. As much as I hate it I have to go with Obama again on this one.

I don't consider myself a dyed-in-the-wool republican, but I have always voted along party lines. Should I feel bad that I am seriously considering voting for the senator from Illinois?

Sunday, October 19, 2008

Finance 101

I'm frustrated with the presidential campaign. I don't think either candidate has an effective plan for the future. I don't believe either of them will actually be able to lower taxes as they both promise and you know how I stand on the plans anyway. I don't want to dwell on it tonight so I'm going to post about the first lesson I'm going to teach in my future finance class.

Any finance class has to have some semblance of order, but before that there has to be a bit of excitement. Finance is nothing if not exciting so my first lesson will be about the future value of an investment, more specifically, the Future Value equation.

FV = PV*(1+i)^t

Big deal right? This equation is learned in Algebra class in middle school or high school and the wow factor lasts about 15 minutes. What happens when we apply the equation to a real life scenario regarding automobile purchases?

Let's take the example of a $15000 car bought with a loan at 6.6% over 5 years. That comes to a monthly payment of $295. The resultant cost of the car is $17700. Now let's say that instead of a $15000 car we decide to buy a $10000 car resulting in a monthly payment of 195. The resultant cost of the car is $11700. $1000 savings over 5 years in interest payments big deal, but if the $100 per month is invested in a mutual fund with an average gain of 10% per year the resultant sum after 5 years is $8000. In either scenario the car is paid off in 5 years and the layout in cash is $17700.

I'm going to say that the person buying this car is 22 years old so when the car is paid off the purchaser is now 27. Let's say that the $8000 was invested in an IRA and no further additions are made to the balance following the initial 5 year layout. At age 59 the balance is just shy of $200,000. If, however, the $100 monthly payment is continued to age 59 the balance becomes a not too shaby $472,187.

Just to take it one step further let's say that Joe Plumber continues to buy a new car every five years. He continues to pay $295 in monthly payments and his cars get progressively more expensive as he is able to place some money down from the sale of the previous car. At age 62 (used for calculation purposes) Joe Plumber has a pretty nice car free and clear.

Joe's brother Nate decides to eliminate his debt and at the end of 5 years he uses the sale of his car plus the $8000 saved to buy his next car with cash. At this point he places the whole of his monthly $295 into investments. At the end of 5 years his investment balance is $22843. He then takes $15000 to buy a new car with cash, but continues the payments to his investment account. After 5 more years the balance is $35748. Increasing the price of the new car purchase by $5000 every 5 years still yields a balance of $245,000 at age 62. If the price of the new car purchase is capped at $20,000 the investment account grows to an amount of $319,000 at age 62. Finally if the car purchase is pushed to 7 years instead of 5 the amount at age 62 grows to $481,786.

So that's half a million dollars saved just by buying slightly less expensive cars with cash as opposed to buying them on credit all thanks to the future value of money.

Now we get a little crazy, but to illustrate the equation we must continue.

Next we have Joe's other brother Tyson, who decides to bike to work and borrow Joe's car when he goes out of town. He places all of his monthly $295 into investments from the beginning. At age 59 Tyson decides to buy a $300,000 Ferrari 599 and be happy with the left over 1.1 million dollars still in his account.

Tyson's wife Cheryl doesn't have quite as much discretionary income as her husband so she only has $100 per month to invest. Having been born in Omaha, Nebraska she is a fan of Warren Buffet and decides to put her money into Berkshire Hathaway giving her an annual return of 21.1% (average annual gain from 1965 to 2007). She's not interested in cars, but has her eye on a 6.5 million dollar villa on the coast so she buys it with half of her $13 million at age 59. If only she had gotten Tyson to put his money into Berkshire he could be sitting on a ferrari 599 and $39 million. Oh yeah, none of those gains are taxed until sold because Berkshire doesn't give a dividend.

Finally we have Jonny who took the $8000 from our original example and put it all in Berkshire. Jonny didn't invest another penny his whole life yet 32 years later his 21.1% interest turned that 8 grand into $6.5 million.

I'm probably going to get some calls from angry parents after this lecture, but it will still be fun.

Friday, October 10, 2008

Optimism in Recession.

Since September 26 the Dow has lost 25%. This week the Dow dropped 17%. The S&P hasn't been this low since April 2003 and that was following the correction from the Internet bubble. Previous to that bubble we have to go back to May of 1997 to see the S&P this low. Eleven years of gains have been wiped out just like that and yet I find myself incredibly positive about the situation.

I began reading and learning about finance and the market shortly after returning from my mission in 1998. Since that time I have been of the belief that the market was overvalued. I read over and over again the statements by the bulls on wallstreet saying that the markets had changed and historical valuations no longer applied in our current market. I didn't believe it then and I don't believe it now. I thought the recovery from the internet bubble was too much too soon.

Today I feel like the market is finally properly valued. Does that mean I think we have hit the bottom, not necessarily. I do believe it is a wise time to start putting money into the market. Stocks may continue to fall, but many great companies are falling along with the rest of the market making them great buys now. I'm seeing P/E ratios under 10 for companies that have increased their earnings.

If you are worried about getting back into the market too early I would suggest investing through ING direct with a sharebuilder account. The great thing about sharebuilder accounts is that you have the option to create an investment plan that automatically buys a certain amount of your specified stocks or funds the the Tuesday of your choice (or every Tuesday should you choose to do so). The plan takes the impulsiveness out of investing, and while dollar cost averaging is not the most lucrative investment strategy it is a tried and true way of building wealth.

Wednesday, October 8, 2008

Politics and Money

I watched the Presidential debate last night. I wasn't particularly impressed with either candidate, though I was slightly more disgusted by Obama's rhetoric. I have come to the conclusion that Republicans and Democrats alike are idiots when it comes to fixing the economy.

Democrats think the best way to bolster the country is to steal from the rich and give to the poor (Robin Hoodenomics). Could somebody explain to me how this is a good idea. There is a lot of privilege and a lot of poverty in this country that is a result of where, when and to whom one is born, but there are also a lot of people who work their way up and down in society and the Democratic views of leveling the playing field will never work when they are taking dirt from the winning side of the field.

Republicans think that giving money to the wealthy is the way to go. Trickle down economics was all the rage in the 80s. The theory goes that these people invest their time and money into business, leading to more jobs across the board and thus more production and money. Those who are not working don't necessarily benefit, but who cares, they don't really deserve anything anyway right? That's not the only drawback to the theory. There is also the problem of unethical behavior at the top. Wow, isn't that what's happening right now Jake? Ding, Ding, Ding.

So if neither political party is right what do we need? What we need is something that the American public will never accept. We need to be held accountable. The poor in the country need to stop depending on handouts, and the rich in the country need to take care of those who cannot take care of themselves without being forced to do so. Politicians need to stop catering to the wants of the nation and realize that as a collective group we are idiots (as opposed to the politicians who are geniuses).

When the average American citizen spends more than he makes in a year we've got a problem and Washington needs to stop blowing smoke you know where and tell it like it is. If the senator from Alaska can neglect to report $250 grand in gifts, while, at the same time, telling pharmceutical companies that they can no longer provide pens to physicians, then that same senator can tell the American public to stop spending money they don't have even though the government does this as the sun rises in the morning.

I disagree with Senator Obama when he says reform needs to start in Washington. As the country goes Washington will go also. It is not the other way around.

One final thought; why is finance not taught in schools? I think a basic finance class should be required of every high school student in the nation. I find finance much more important in my day to day life than many of the other classes I was required to take. I had to take 6 terms of art for heaven's sake. Now don't get me wrong I use those Acapella skills every week in church and I do enjoy looking at the beautiful pot I made in ceramics, but seriously a year and a half of art? Wouldn't high school seniors be a little better prepared to handle all the credit they are offered (or were offered a month ago) when they turn 18 if they had just a little bit of financial education?*


*My not-so-secret dream is that I can convince the school district in Cedar to allow me to teach a finance class at Cedar High School. I don't want to go back to school to get a secondary education degree, but you never know what will happen in the next 20 years.

Monday, October 6, 2008

Financial Freedom

What is financial freedom? The pop culture definition of financial freedom seems to be one of freedom to do whatever one wants without financial repercussion. That definition is variable based on what one wants to do. I like things to be a little more concrete so I have come up with my own definition. For me, financial freedom is the accumulation of enough wealth to satisfy all my needs from today until the day I die. This definition certainly will not fit everyone, but it makes sense to me.

As you might assume I also have a plan to achieve financial freedom that has evolved over the years. Rather than bore you with the details of the plan up to this point in my life I will share the details of the plan from this point on (I'll bore you with the details of the plan up to this point at a future date).

The wealth necessary to satisfy my needs (when I say my needs, I include the needs of my wife and kids of course) for the next 50+ years isn't going to appear in the next month, the next year, or even the next decade, so I have set up some long term rules for what to do with my income. Here are those rules:

1. Be generous with charitable contributions.

2. Contribute the max to my work retirement plan.

3. Budget to live below my means. I'm a believer in strict budgeting (before redbox came along the video rental category was $4.04 per month because that's how much it cost to rent one video from Hollywood Video).

4. Make purchases and pay bills with rewards credit cards.
4a. Keep credit card purchases within budget.
4b. Pay off full credit card balance each month.
(exception to rule 4: If purchases or bills charge a fee to use a credit card then use checks)

5. Don't carry cash

6. Buy used cars.
6a. Pay cash for used cars.

7. Invest wisely
7a. If you can't devote at least a few hours a month to investment research then it is imperative to hire a financial advisor.

8. Hire a good tax accountant.

9. Purchase adequate insurance.

10. Avoid impulse decisions when dealing with money.

11. Track all money movement with financial software.
11a Review monthly and yearly reports.

Obviously most of my rules have some detail within them (budget for example) and I may post on them individually in more detail at a future (that's fodder for 11 future posts right there).

Feel free to add any of your own rules, but know that if I don't agree with them I will probably tell you why (maybe even in another post).

Sunday, October 5, 2008

Do we need universal healthcare? part 2

Disclaimer: I just reread this post after a night of sleep and I've got to say this is quite possibly the worst post I have ever made. The grammar is difficult to read. The arguments are not really arguments at all. There is no flow to the post. I may try to improve on my views at some point in the future, but that time is not now. So, read at your own peril.

Anyone who thinks government healthcare is a slam dunk needs spend a little more time looking at medicare and medicaid (that means you Hillary). Why are there so many doctors in this country that don't accept medicare patients? Many physicians who do see medicare patients stop accepting new medicare patients when they build their practice up to a satisfactory level. The rules and regulations required by medicare are as bad as the tax code and the reimbursement is laughable at times.

Like it or not America is a country of capitalism (though we'll see what happens when President Obama is calling the shots), and health insurance is big business. There's no way the government can scrap the current system. Shareholders of these giant companies wouldn't allow it. If it were to somehow come to pass the problems with a government run system are not limited to the exorbitant cost to the American taxpayer. Government run healthcare is like anything else that is run by the government; slow, inefficient, and costly.

The truth is that America currently has the best healthcare system in the world. Can it be improved? Sure. Are there too many uninsured people in this country? Absolutely. Is that the government's problem? I don't know. When did personal accountability become a thing of the past? I don't recall reading about the founding fathers speaking of the unalienable rights of life, liberty, and the pursuit of happiness as long as the government can provide healthcare for all citizens.

I think the healthcare system in America could be restructured to make it more affordable for everyone, but I'm not sure we can come together to make the necessary changes. The truth is that lawmakers can affect the cost of healthcare. Tort reform can cut down on malpractice costs, which affect more than the physicians paying for malpractice insurance. Our president could have pushed to give medicare the right to negotiate with pharmaceutical companies for medications the way they are allowed to negotiate with physicians for everything else (reimburse amounts are more of a decree than a negotiation). Medicare could revamp the current reimbursement system using some system of order that makes sense rather than the current system where new procedures are billed based on whatever the physician decides he should be paid.

If you can tell me why physician reimbursement for an emergency appendectomy by medicare at about $600, while the cost to an uninsured patient is closer to 3 grand you are well on your way to understanding the problems with medicare. On the note of reimbursement, I have yet to find anyone who understands why that emergency procedure only nets the physician $600 while a spinal surgeon can fuse a few vertebra and bill several thousand dollars. Sure some of that is the increased malpractice for neurosurgeons, but seriously.

I think we need a better system and while I don't have a solution but I do have some ideas. I think there should be a significant healthcare tax placed on cigarettes. The amount of medical conditions that are caused by smoking is astounding. I think gym memberships should be medicare-tax deductible. I think adults should be required by law to have catastrophic health insurance much like they are required to have auto insurance. I think that if the insurance industry and the government decide to pay physicians and hospitals based on the success of their interventions (pay for performance) they should also charge the insured if they fail to adhere to the medical plan agreed to by the patient and the healthcare team. I think the general public needs to be informed of the cost of keeping a loved one alive on life support at the end of life, and insurance companies need to do a better job of covering the grief support for those people who are making the decisions at the end of life.

I've got other thoughts that will most likely be shared in a future post but I've rambled on too long tonight (and the Dodgers just won game 3 so I'm going to bed now).

Wednesday, October 1, 2008

$7500 Tax Credit

As a first time home buyer I was looking at the mortgage rescue bill signed by President Bush in August and I came across the $7500 tax credit. I had heard about this $7500 government loan, but I didn't really understand it until now. Like all tax code it is somewhat tricky and could lead to some pitfalls.

Here's what it entails. A first time home buyer who closes on a home between April 9, 2008 and July 1, 2009 is eligible for a tax "credit" of 10% of the purchase price up to a maximum of $7500. The catch is that the credit is not applied at the time of the purchase, it is claimed when your taxes are filed, therefore not helping with closing costs or a down payment as was the intent. The other caveat is that this isn't a $7500 credit at all. In actuality it is an interest free loan that the borrower will begin repaying 2 years after the original claim in the form of $500 in income taxes for the next 15 years. The loan is to be repaid in full upon sale of the house if any capital gain is realized. If you do not realize a profit on the sale of your house the loan is forgiven (forgiven on death as well).

In the end I am looking forward to getting this massive tax return this year as it has no downside for us as long as it is managed correctly. We will most likely take the $7500, sock it into an interest bearing account and leave it be for the next 3 years until we sell our house. At which time we will pay back whatever is left on the loan (assuming we make a profit on the sale of our house).

As always I feel a need to point out the pitfalls of the bill. First, just like anything else in tax code the loan is reduced for higher wage earners and disappears altogether at $95000 for singles and $170000 for married (have I written about how much I love Robin Hoodenomics?). The real problem lies in the way the loan is packaged. I think the majority of Americans who are eligible for this benefit will take it and they will find themselves with an extra $7500 in their tax return. The money will be spent without reading the fine print and the individuals will then be stuck with an extra $500 bill on their taxes for the next 15 years.

Once again the greatest beneficiary of this bill is the tax accountant. Maybe I should take a sabatical and let Melissa go back to work.

Tuesday, September 30, 2008

More on the bailout

Writing about Healthcare now is akin to reporting about the NBA during the fall, and I'm not JA Adande. Part 2 of my universal healthcare will have to wait.

As you know the bailout failed to get the votes needed to pass congress on Monday. My opinion about the bailout has not changed and I am pleased it didn't pass in it's current form.

As pointed out in a previous post I believe it was irresponsibility that led us to this point. The blame is being placed on a select few because it's easy to point the finger at the rich greedy investment banks, but they are just a scapegoat for western society as a whole. We live in a giant debt bubble. Debt got us here and I'm just not too happy that the best solution to the problem is for the government to conjure $700 billion in credit to purchase beaten down securities. I have never traded on margin and I don't plan to (I don't feel comfortable with the thought of buying securities with borrowed money, more on that in a future post), yet this is exactly what the President, and half of congress wants us to do.

Unlike many out there I believe stocks are overvalued. The correction following the internet bubble lasted just long enough for us to enter the real estate bubble. A lot of people lost their shirts when so many useless internet companies went under because they made poor financial decisions.

The next little while is going to be difficult for many without a bailout, but for the sake of the future it just can't happen. The institutions that granted so many poor loans will not change for the betterment of society should they receive a bailout. The mortgage holders will not learn from their mistakes if it turns out that the mistakes actually benefited them.

There are good banks out there and they won't be receiving any government aid. The failure of a few giant firms will have drastic consequences but the void will be filled with better alternatives.

In the end I fear the bill will pass and when President Obama takes office he will raise taxes for those in the higher tax brackets to pay for the purchase. Ironically this will not have much affect on many of those who are defaulting on their mortgages because they either don't earn enough to be affected by a tax on the wealthy or they make their money flipping houses meaning most of their income is taxed as capital gains leaving them under the highest tax brackets.

At least the accountants of the world can rejoice in their increased job security.

As always I welcome your comments should you agree or disagree with me on this topic.

Monday, September 29, 2008

Do we need universal healthcare? Part 1

My views concerning a national healthcare system have changed over the past 7 years. I am neither for or against a national healthcare system as I have spent some time pondering over the pros and cons of the system. Obviously my views are not without bias because while I, like any other American, want and need health insurance for myself and my family I am also a physician and my bottom line stands to be drastically affected by and change in the healthcare reimbursement system.

There are too many people in America without health insurance. There was a time when I held it against these people for not having health insurance. I thought it was irresponsible for anyone not to have insurance for their family. Those who didn't qualify for government funded programs should find a way to put it in their budget to get their own policies. Part of me still feels that way, but I also know that health insurance for a family is not cheap and gets more expensive with each passing day.

The burden of the unisured is felt by all. My insurance premiums go up each year, in part, because of the millions of healthcare visits by the uninsured that are written off by all the hospitals and clinics in the country. Each time an unisured citizen gets a CT scan there is a bill to be paid and more often than not that bill is written off as a bad debt. Unlike the government, hospitals and clinics cannot opperate with a deficit so somebody has to make up the difference. Prices go up to offset the bad debt and insurance companies pass that price increase on to the insured in the form of increasing premiums.

Universal healthcare will solve the problem of the unisured. The argument goes that the cost to the nation will be offset by the benefit to the healthcare system as a whole. Everyone will get the care they need. Preventative medicine will actually take place and help us to avoid many of the expensive hospitalizations and procedures that occur because of lack of preventative medicine. Physicians will not lose money because they will have a much higher percentage of paying patients.

Doesn't everybody win with Universal Healthcare?

Thursday, September 25, 2008

Do you agree with the bailout?

The following is a poll on CNNMoney.com. At the present time there have been 83626 participants in the poll.

1. What's your view about granting taxpayers stock in any company taking part in the proposed $700 billion bailout?
It's needed to approve the plan 43%
The plan should be approved with no conditions 7%
No bailout in any form 50%

I understand that the people who read CNNMoney.com are hardly a good representation of the country as a whole. Still, why do so many of these people think the bailout is such a bad idea. Is it because they hate the President (I think for some that may be the only reason)? I don't know why so many people oppose the bailout, but I do know why I voted for no bailout. I'm just starting my career. I have a lot of investing years in front of me and a market correction at the beginning of my earning years would be very good financially for me. That said many of those I care for are nearing the end of their earning years and a correction would not be so beneficial to them.

I just don't think flushing more money into the system is a good idea. I'm not one for nationwide suffering, but if the government bails out the banking institutions for making bad loans and those loans are written off giving all those businesses and individuals a free lunch what keeps them from making the same decisions next year? If it turns out good this time why not next time as well? At some point in time bad financial decisions need to run their course.










Wednesday, September 24, 2008

Why our economy stinks

We've all heard about how everybody in the nation is losing their homes because of the mortgage crisis. That led to the government to put a freeze on foreclosures. So we have mortgages not getting paid this lead us to banks with bad debt at risk of failure which could theoretically ruin our entire economy. In steps the government to bail out the banks with close to a trillion dollars that appears out of thin air. This leads to drastic inflation as the dollar plummets. Japan and China then buy massive amounts of US stock and the idea of buying American joins the ranks of other long last dreams such as honest politician, and affordable gasoline.

How did we get here? I'll tell you how we got here, we stopped heeding the warnings of those people who lived through the depression. Those words are no longer heard because most of those people are dead. The generation that suffered through the depression learned first hand what it meant to work for a living. They were so afraid of hitting hard times again that they spent the rest of their lives preparing for that possibility. They didn't accumulate debt for a new flashy car or plasma screen TV. They didn't spend 50% of their income on a mortgage payment. They also didn't spend a couple grand on power tools after graduating from school but before receiving a paycheck from their first real job.

I don't have a solution to the current financial crisis, but I certainly don't think that a $700 billion band aid is going to fix things. Maybe we are destined to have another depression if for no other reason than to burst the debt bubble that is Western Society.