Biological Kids Are Better Than Adopted Ones, Aren’t They?

November 23, 2012

 

 

Mommy’s favorites

 

Congratulations to the San Francisco Giants, world champions for the 2nd time in 3 years. However, this year’s title comes with an asterisk. The Giants won 94 games during the regular season. Breaking it down by pitchers:

  • 46 of those wins came from guys originally signed by the Giants (Matt Cain, Madison Bumgarner, Tim Lincecum, Sergio Romo.)
  • 24 came from free agents (Barry Zito, Santiago Casilla, Jeremy Affeldt, Shane Loux).
  • 18 from guys who started with the Giants, went to other teams, and eventually returned to San Francisco after being released elsewhere (Ryan Vogelsong, Clay Hensley)
  • 5 from pitchers the Giants traded for (Javier Lopez, George Kontos)
  • and 1 from a guy claimed off waivers (Jose Mijares).

So really, the Giants earned only 46 wins of those wins via their drafting and scouting prowess, 64 if you count the guys who left and came back. Either way, those are hardly playoff-caliber numbers.

What kind of an imbecile are you? Who gives a flying one how the Giants acquired the pitchers, as long as they won those games while wearing Giant uniforms? God, this site is awful. And it used to be good, too.

So you’re saying wins commingle.

Of course.

Money does too, but fewer people seem to grasp that.

One of the dumbest things you can do, not that it stops most people, is mentally segregate funds by their origin. Money from the stuff I sell on eBay goes toward paying down my credit card balances. The Christmas bonus, that always goes toward the kids’ college funds. (See what a responsible parent I am?) The tax refund comes in April or May, depending on when I file: there are no holidays around then, so that’s “fun money”.* And if I win on my first hand of blackjack, then I’m playing on the house’s dime.

Dollars are dollars. It doesn’t matter where they originate from. Understanding this is fundamental to getting out of the wrong mindset, the one that leads to making atrocious decisions.

Let’s assume that you’ve reached the level of awareness where you’re not submerged in credit card debt, but you still think there’s some difference between money you sweated for and money that fell in your lap. This is how the poor and unambitious think.

It’s fine to earmark funds, of course. Doing so is the very purpose of budgeting, and budgeting is the primary way you save for and eventually purchase things that you can’t immediately pay for out of discretionary income. But you earmark money contingent on where it’s going, not where it came from.

Each dollar is an opportunity, or at least that’s how rich and self-determined people seem to think. Every trite rags-to-riches story about the poor European kid coming to America with a $10 bill in one pocket and an onion in the other (to ward off evil spirits, and to eat) has something in common: every stroke of fortune played off the previous ones in the series. Andrew Carnegie spent the first 13 years of his life dirt-poor in Scotland. 5 years later, Carnegie’s mother took out a 2nd mortgage on the family home because his boss at the Pennsylvania Railroad recommended an investment opportunity. Once it paid off Carnegie had a choice, conditional on his mindset about the origins of money:

  • Fly to Vegas and rent a penthouse suite at the Palms, or maybe that one suite that has a basketball court. After all, this was found money, beyond what he was earning as a division superintendent.
  • Reinvest the proceeds, and/or look for the next investment.

Say Carnegie believed that salaries are for investing, and “found money” is for other outlays. He’d have worked until death, going to church every Sunday, and maybe left a few dollars for his kids. Instead he became not just one of the richest men who ever lived, but one of history’s greatest philanthropists, too. This is at least partially because he understood that if he had to wait for his salary to enable him to make investments, he’d still be waiting. By the way, he’d be 176 years old today.

Less insightful people routinely fall into the trap of believing that money differs depending on where it came from. Don’t be like them. Treat the Christmas bonus for what it is. It isn’t $4000 that fell from the sky. It’s $4000 that your boss held onto all year long, enjoying interest payments on (not to mention the similar interest payments he enjoyed from all your co-workers’ bonuses.) What if you’d received the bonus in 26 equal payments throughout the year, added seamlessly to each of your paychecks, increasing the difference between your revenue and expenses and giving you more to invest with, all the more quickly?

If you’re like most people, you’d complain that your miserly boss didn’t give you a bonus this year.

*You should never get a tax refund. See Chapter IX for the reasons.

 

 

Filed Under: Bad Examples, Economics, Making Smart Choices Tagged With: , ,

Feudalism Is Dead

November 16, 2012

Some metaphors are subtle. And then there’s this one.

Flashback. One of our rare first-person anecdotes, but one general enough that you can apply it to your own situation.

While studying in college (mathematics, not some useless liberal art), your humble blogger worked at the front desk at a boutique hotel in downtown Toronto. The midnight shift change approached, and in walked the night audit manager. An immigrant from India, he had a background in finance. Or at least enough aptitude to be charged with balancing the day’s books while remaining affable enough to meet with guests.

Somehow, the conversation turned to the topic of the college kid lamenting his own financial situation. Not drowning in credit card debt nor student loans, but making just enough to cover rent, food, and little else. Not getting ahead. I mentioned to the night audit guy – let’s call him Rajiv – that I was puzzled as to how people, especially my young and (I thought) equally impoverished contemporaries, could afford houses and cars. Building wealth was as baffling a concept as interplanetary travel.

Rajiv, who was 40 or so, rattled off a list of his own financial obligations. Kids to feed, family members back home to remit money to, and (thus, according to him) a VISA bill with a balance in the high 4 digits. With the tactlessness of an early 20-something I exclaimed that that must be awful. He shrugged his shoulders and said, “That’s life. How else are you supposed to do it?”

Years later, that remains one of the most depressing conversations about money that any 2 people have ever had. Rajiv was a guy who, at least on the surface, had none of the trappings of self-induced poverty. He wasn’t unemployable, overly self-indulgent, irresponsible or unduly risky with his money. He was educated and hardworking, with a steady if unspectacular white-collar job, a home in the suburbs and a wife and family. Yet he’d resigned himself to having a negative net worth, then dying.

 

Admit it. At least some part of Rajiv’s story resonates with you. Rajiv was a smart guy, at least smart enough to understand causes and effects. Could he have done anything to fix his situation?

Of course. He could have temporarily downsized his living arrangements. Cut more fat out of his budget. Taken a second job, assuming diurnal sleep wasn’t all that important to him. Pleaded with his bosses for more money, which is what most of us would have attempted.

All of which would have made incrementally small differences and still kept him struggling to make up ground.

Or he could have changed his mindset. May Control Your Cash never enter the depths of the category of repetitive and unctuous self-help sites, but here goes. The best way to plan your escape from financial inertia is to think that you’re worthy and capable of doing so.

Many of the details of Rajiv’s case have been lost with the passage of time, but there’s always something you can do to increase your value at work. Tony Robbins (oh God, we’re quoting Tony Robbins. And only one paragraph after claiming we wanted nothing to do with self-help sites) once said that you should make yourself 15 times more valuable to your employer, a recommendation both numerically precise and somewhat ambitious.

The hospitality career eventually ran its course. Your humble blogger later worked in advertising, an “industry” that attracts people disenfranchised by other, more regimented lines of work. That’s a nice way of saying that along with the free spirits and the extremely casual dressers, advertising attracts drug addicts, alcoholics, and the exceedingly lazy who excuse their inconsistent work ethic as tortured brilliance.

 

Opportunity!

Nowhere is it easier to get ahead than in a place where diligence is rare. Your humble blogger managed to complete the work assigned to him and insist on more. Not so much because doing so looked good, but because there were 8 plodding hours in a workday. Filling them up with as many tasks as possible made the time go faster. And yes, it’s hard not to get noticed when you’re picking up your coworkers’ slack and then some.

It helps to be good at and not hate whatever it is you do for a living. It also helps to quantify everything. When contract time comes up, it’s easy to point at the pile of work you’re accomplishing and compare it to the inferior molehills assembled by your coworkers. Pay equity? (We think they mean “equality”.) Heck and no. Just because employees A, B and C have identical job descriptions doesn’t mean they’re entitled to equal paychecks.

Rajiv could have done this; found opportunities to fill his shift with as much high-value use as possible. Hopefully he did. After that, he might have ordered his family to live on rice and pigeon until that credit card debt was wiped out. Again, intense and brief pain beats dull and enduring pain every day of the week.

Once you get out of the red, and not a moment before, you can start leveraging. That means investing. Refinancing. Buying assets and selling liabilities. Taking the necessary steps to remove you from a situation in which a lifetime of debt is inevitable. Because it isn’t.

You don’t need inherent smarts for this, just a little common sense. And God knows you don’t need a college degree. Rather, to start off you need a decent job, the appropriate attitude, and the belief that while you might not get rich you don’t have to be poor. Oh, and $13 or so.

Filed Under: Bad Examples, Consumer Debt, Credit Cards, Making Smart Choices Tagged With: , , , , ,

Everyone Lies

November 9, 2012

 

Don’t count your chickens before they come home to roost, or something

 

Because there just aren’t enough stories about Apple as an investment, we’re adding our own. Why not? Apple is to personal finance as Tim Tebow is to ESPN First Take. Even if nothing of note is happening with the subject at hand, we still need to not only talk about it, but do so until the readers/viewers weep and beg us to discuss any other topic.

You’re going to have to wait a couple more days. In the last few months Apple has gone from in danger of passing ExxonMobil to become the biggest corporation on Earth, to passing ExxonMobil, to Apple’s stock price setting an acme, to it losing 10% off that high and therefore still being a topic of concern. You know, because no stock in the history of the world has ever reached its lifetime peak and then fallen 10%. Only Apple. Groundbreaking as usual.

A couple of weeks ago USA Today used an effective gimmick for a) attracting readers and b) continuing to give Apple undue attention: the misleading headline. Even better, USA Today posed the headline as a question so that no one could accuse them of sensationalism.

Do too many people own too much Apple stock?

Which not only has less zing than

Too many own too much Apple stock

But isn’t even news. Heck, it isn’t even research. The writer, Matt Krantz (subject of a recent post), starts with a conclusion and works his way back to the premises. Which is what journalists all too often do.

Sparing you from Mr. Krantz’s breezy introduction, we get to the meat of his “argument” a few paragraphs in. (This isn’t an inverted pyramid, it’s a pyramid that’s been ransacked and left to rubble.)

(I)nvestors have found that zeroing in on this one company is their ticket to a big Wall Street score. The stock has been a winner despite its recent decline, which briefly pushed it into a 10% correction. At its close of $635.85 Tuesday, it’s still up more than 50% this year, which compared with the 15% gain in the broad Standard & Poor’s 500 index makes it a runaway winner.

Get rich from a single stock? Without having bought it before everyone else did? Sure, sounds at least as solid a strategy as playing blackjack is. Diversity is overrated, anyway. Here’s the next fanciful line:

“I don’t want to diversify that much when I have one stock doing just fine,” says Matt Loud, a 28-year-old security worker in Bellingham, Wash., who has upwards of 38% of his retirement accounts in Apple.

We were going to track down Mr. Loud and ask him if what he said is true. Failing that, we’d find Mr. Krantz and ask him how he just slipped that into his story without asking Mr. Loud how hard a surface the delivering doctor dropped his head on. Fortunately, Twitter did the work for us.

Here’s a Tweet from @MatLoud to @MattKrantz dated October 2 (before the story ran, but whatever):

@mattkrantz apple plays a key role in my investments but I don’t have a substantial amount of outright shares.

So what does the USA Today quote even mean? How can you have 38% of your retirement savings in a company’s stock but “(not) have a substantial amount of (its) outright shares”?

Using Aristotelian logic, the only possibility is that Mr. Loud was referring to Apple stock in absolute terms, rather than relative ones, in the tweet. A standard lot of Apple stock is 100 shares, which would be worth $63,585. That’s 38% of $167,328, which would be a snappy nest egg for a 28-year-old unskilled worker with a disjointed Twitter account.

The other possibility is that Mr. Loud made the numbers up and/or doesn’t know what he’s talking about, and a journalist with a deadline and a conclusion needed something to flesh out his story.

Loud is part of a crowd of investors who have become infatuated owners of Apple — and richly rewarded as a result.

Then why wouldn’t you tell us how much he bought his stock for? Sounds like an important point, doesn’t it? Is he dollar-cost averaging? Did someone will him the stock? Did he buy it at its 2002 bottom? No, none of this is important.

Personal finance is useless unless you quantify. It’s not “I feel pretty good about my 401(k) balance.” It’s “I’ve got $145,342.99 in there, split between Vanguard’s Admiral Treasury Money Market Fund and its 500 Index Admiral Shares Fund. I contribute $1,950 monthly and my employer matches it.” If you don’t quantify, you don’t have any business investing.

Imagine Al Michaels telling us, “It seems like it’s been a lot of games since Drew Brees didn’t throw a touchdown pass.” Or Paul Ryan saying, “Our national deficit sure is big.”

It gets much worse. The author interviews a 35-year-old San Francisco housewife who claims she first bought Apple in 2007 (it ranged from $85 to $200 that year) and now holds ¾ of her portfolio in it. This is assuming she’s telling the truth. Later in the story she says she doesn’t like the new 9-pin connector, and what that has to do with investing, rather than consuming, we’re not sure.

The same housewife “worries…how much higher can it go”, then contradicts that worry by claiming that if it hits $750, she’ll sell. And will then have at least 78% of her portfolio in cash, assuming her other investments stay constant.

There’s a similarly depressing story about a retired soldier who has “nearly 40%” of his portfolio in Apple.

At Control Your Cash, we treat journalists with slightly less disdain than we do pederastic college football coaches. Check your sources? Not when there’s popular folklore to reinforce. We don’t believe that any of the interview subjects indeed have the listed percentages of their retirement savings in Apple, because we doubt the interview subjects even know what buttons on the calculator to press to divide their Apple holdings by their total holdings, let alone know how much Apple they hold.

The lies don’t stop there, either:

Nearly 17% of all individual investors own Apple shares

According to SigFig, a site Mr. Krantz contacted for his story.
Really? Every 6th individual investor in the country holds AAPL?

From Apple’s latest 10-K, and if you don’t know what a 10-K is, just buy our book already:

As of October 14, 2011, there were 28,543 shareholders of record.

Which would mean that there are only about 168,000 individual investors in the country. Also from the 10-K,

929,409,000 shares of Common Stock Issued and Outstanding as of October 14, 2011

Okay, now we’re the ones playing with facts. There are more than 28,543 individuals who own Apple. It’s just that most people own their shares via brokerage accounts. As far as Apple knows, your shares are under the name “Morgan Stanley” or “Charles Schwab”, not “Jane Doe”. As are your neighbors. It’s impossible to tell exactly how many people own Apple at a given time.

But we can estimate, and we can start by comparing apples to apples. Microsoft has 128,992 shareholders of record.  Alcoa has 319,000. Exxon Mobil has 486,416. Apple isn’t America’s most widely held stock, or anything close to that.

We could pick apart more of this story, but that’s not the point. The point is –
Alright, one more folkloric quote:

Apple investors, on average, have nearly 17% of their portfolios riding on that one stock.

That’s either impossible, or it includes the Apple directors and officers who have enough of the stock that they’ll be rich no matter what. (We’re guessing SigFig didn’t interview them.) Commonplace, you-and-me investors don’t have anywhere near 17% of their holdings in Apple. And if they did, the examples cited in the story wouldn’t be remarkable.

Alright, we’re back. The point is that if you read the financial news, even from a trusted outlet, even from the nation’s biggest newspaper, be skeptical. Nowhere near 1/6 of individual investors have a piece of Apple. No one who has ¾ of her money in Apple knows anything about anything, especially if she’s a dilettante with no coherent investing strategy.

And to answer the author’s rhetorical query? No, not too many people own too much Apple stock. Not even close. After 3 decades, the stock finally started paying a dividend, which will reduce liquidity. It’s trading at less than 15 times earnings, which is not only less than the S&P 500 average but hardly indicative of a bubble that’s reached maximum surface tension.

Would we buy it? No, because the $63,585 initial investment is a little too much for us to commit to when there are other investments available. Doesn’t mean you shouldn’t bite, though. Nor does it mean you shouldn’t invest in a mutual fund that prominently features Apple. Like PowerShares QQQ Trust, which is comprised 20% of Apple and is up 19% this year.

Question everything. Think about whether a quantitative claim makes any sense. And don’t take investment advice from 20-something security guards, impulsive housewives, nor the journalists who indulge them.

Filed Under: Bad Examples, Finance, Investments Tagged With: , , ,
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