Thursday, July 31, 2014

Is Technical Training Undervalued?

Two days ago, a representative of a local technical college explained to me the abundance of jobs available to qualified tradesman in our region.  While there have been reports that half of the four year college graduates since 2001 are underemployed or unemployed, it has also been said there is a shortage of workers with certain technical capabilities and training. And the time and financial investment at an Aiken Tech or Augusta Tech are quite manageable, especially when compared to four year colleges.

Then this morning I listened to an NPR report about “volunteer tourism” and its apparent explosive growth during the past several years.  It turns out young people, often four year college graduates unable to find their preferred work opportunities, choose to go on these volunteer tours, helping charities along the way.  This provides meaningful experiences and another item for resumes.  The NPR reporter cited the difficult job market as the most important factor for the increase in volunteer tourism.

I am certainly in favor of ALL types of education.  Vocational, bachelor, and more advanced degrees are all useful.  But like “Dirty Jobs” host Mike Rowe (see interview below) has said (paraphrased), “people are deluded if they believe a four year degree is a golden ticket that can substitute for hard work.”  And I think technical training is currently undervalued compared to the higher degrees.  A quote from Earl Knightingale used in Keenan Mann’s recent post on this site comes to mind:  ““Whatever the great majority is doing, in any circumstance, if you do the exact opposite, you’ll probably never make a mistake as long as you live.”   So young people with technical interests can take advantage of a ripe opportunity to do the exact opposite of what the majority is doing, and probably not make a mistake.

Financing College the Smart Way .... Local Community Colleges Definitely Fit in the Common Sense 'Value for Money' Decision Based Mix

Student loans outstanding are more than $1 trillion, higher than credit card debt, and delinquencies and defaults on those student loans are rising.

On the other hand, college tuition and other related costs continue to outpace inflation while the economy remains soft, and good full time jobs remain scarce, especially for the young, including college graduates.

So what's a self reliant society of American families to do? --- take control and use good judgment and  common sense, of course. And that's just what more and more of us are doing. College is no longer viewed as a necessary blank check investment with lots of loans attached to the degree. More and more people are beginning to insist on value for money expended and borrowed, and that's a very good thing.

But unfortunately, not every new trend on college spending represents good news. Too many families are financing college costs in part by breaking into the parents' 401(k) savings and retirement plans and robbing from their future well being and financial security. When that happens, they also are  paying needless and financially painful penalties to get the money.

That's definitely a bad thing, since the vast majority of us already aren't setting nearly enough money aside for retirement anyway. So what's the solution?

Well, for one we need a stronger economy. That's for sure. But we also need better personal financial habits with respect to spending, demanding value for money, borrowing decisions, and saving and investing.

And that starts when we're young by staying away from loans and indebtedness that don't provide value for money and won't lead to better days down the road.

But let's look at some 'glass half full' promising news on all this now. Families Borrow Less for College has the story:

"American families are relying more on their income and savings—and less on loans—to pay for college, according to an annual study by education lender Sallie Mae, formally known as SLM Corp.

In the 2013-14 academic year just ended, the typical family paid 22% of total college costs by borrowing, down from 27% in each of the preceding two school years.

These families paid 42% of college costs by using income or savings from the parents and/or student, vs. 38% the year before and 40% in 2011-12 ....

The average cost of college, $20,882, was relatively stable for the third year in a row after peaking at $24,097 in the 2009-10 year. These figures don't take into account any grants, scholarships or other nonloan aid students may receive.

Cost-conscious families "are not going to write a blank check" for college, Ms. Ducich said. "They are making a lot of decisions to control the cost."

For one thing, more students attended a two-year public college, and many such students live at home. The 34% of students using two-year public schools was the highest in the seven years the study has been conducted.

"You can save an enormous amount of money" at a two-year school, said Christopher Russo, 22, of Bridgewater, N.J., who received an associate degree in May from nearby Raritan Valley Community College.

Because of medical and financial issues, his family was unable to contribute to college costs. Still, Mr. Russo is debt-free, with summer earnings combined with grants and scholarships having covered Raritan Valley's full cost—$4,600 in 2013-14 for local-county residents taking 15 credits a semester.
Mr. Russo will incur a limited amount of debt when he continues his education this fall at Rutgers, the State University of New Jersey. While some of his friends attending private colleges will end up with huge debt burdens, he said, "I'll be out of debt incredibly fast," probably a few years after graduation, thanks to his in-state tuition at Rutgers and spending the first two years at a community college. . . .

Fifteen percent of all families tapped money in state-sponsored 529 college-savings plans to pay college expenses, with those families withdrawing an average of $9,233.

In a development Ms. Ducich flagged as worrisome, 7% of families withdrew money from retirement savings to pay college bills, taking out an average of $8,870. The percentage and dollar amount were higher than in the past few years.

"It is so much harder to catch up [on retirement savings] once you've done that," she said. Also, the withdrawals generally are taxable, and such income can hurt families in financial-aid calculations, she added.

Among other findings in the Sallie Mae study, almost one-fifth of families said they paid for college without any borrowing, grants or scholarships, and in 31% of families, the parents didn't contribute any financial resources or borrow money."

Summing Up 

College costs are definitely out of control, except when parents and students are in control.

There are many ways for parents and students to get a bigger and better bang for their bucks, and borrowing from the government to attend college isn't one of those ways. Neither is tapping prematurely into the parents' retirement savings programs.

That's because what's borrowed today must be repaid tomorrow --- with interest.

There's developing evidence that people are beginning to take seriously the concept of getting value for money spent, borrowed or otherwise, and that's a good thing --- a very good thing.

So let's spread the word about college, its costs and getting value for money spent.

Let's encourage the youngsters to get the education but not to get all that debt that too often goes along for the ride. Because in the end, the family and the student will be paying for that ride, whether now or later.

And besides, paying or borrowing money for things today, including college, can't be spent for other things tomorrow, such as cars, homes, vacations, savings, investments and properly preparing for our oldster years. That's the plain and simple truth.

And that's my take.

Thanks. Bob.

Tuesday, July 29, 2014

Dear __________,: A letter to a hoops dreamer

I watched a documentary on Netflix with my son called “Doin’ It in the Park:  Pick-Up Basketball, New York City”.  The title pretty aptly describes the content of the one hour and twenty-two minute film.  But, for those in whom the title doesn’t conjure up any images at all, I’ll say it was a very entertaining look at the origins and evolution of pick-up basketball in The Big Apple. 

Along with lots of footage of street ball games from the old days and the new days, the film also contains interviews with some of the more famous players to grace the blacktops, as the outdoor courts are called, over the last fifty years or so.  Some of the more well-known names include Wilt Chamberlain and Julius Erving, who both went on to fame and fortune in the NBA.  But in addition to the NBA legends, there are various mentions of, and even a few very interesting interviews with, some of the more famous street ball legends.  James “Fly” Williams and Pee Wee Kirkland, number two and number four respectively on the 100 All Time Greatest Street Ballers list, as compiled by the Street Basketball Association (yes there is apparently such a list and such an organization), both featured prominently over the course of the film.  Separately, each waxed on about himself and The Game.  Lots of what they said was pure entertainment – I mean hilarious stuff.  For instance, the sixty-one year old Fly Williams, in an apparent response to the interviewer, who is off camera, asking about his notoriety, pointed his finger at his chin and said, “look at this face, I don’t have to tell you who I am, everybody knows The Fly.”  Pee Wee Kirkland, who is around the same age as Fly (I think), at one point says, in a completely serious tone, "if you’ve never left the court crying or went home bleeding, then you don’t know about basketball".

Not all of what they said was comedy.  Some of it was quite informative.  Both Fly and Pee Wee went to college on basketball scholarships.  Pee Wee went to Norfolk State and Fly to Austin Peay.  During his time at Austin Peay, Fly’s fans would chant “The Fly is open, let’s go Peay!”.  The ‘let’s go Peay!’ part of the chant is still used at games to this day.  But the real claim to fame for both was what they did on the blacktops of NYC.  And that’s what really struck me upon immediate reflection.  Both of their interviews were fraught with the phrase, or at least sentiment, “I was…”.  It’s seems that basketball was as good as it ever got for them and many like them.

That notion led me to write the following letter:

Dear ___________,

I was in the gym the other day watching you play.  As a former player myself, I’ve got to tell you, I’m not easily impressed by what I see on the basketball court these days, but I was very impressed with your game.  The jump-shot (mid-range and long), the handles, the hops, the footwork – all tight.  You’re very talented.  But I’m sure you’ve heard all that before from people considerably more talented and important than I, so take it for what it’s worth.

While I’ve got your attention though, I’d like to tell you a few things you may not have heard yet.  First, you’re probably not going to the NBA.  There are about 360 active roster spots in the NBA at any point in time and there are about a million times that many people living in the US alone.  You don’t have to be very good at math, although I hope you are, to understand that a million to one odds are not a very good bet.  And that’s before you add in all the people from all the other countries who have the same idea in their head.  After you add them in, your chances of making it to the NBA all but disappear, practically speaking.  Keep dreaming though, because there’s nothing wrong with that.  But please work on more than just your game.

Second, you probably won’t get a scholarship to play D1 basketball since only one third of one percent of high school players achieve that distinction.  As a point of reference, there are roughly 17,800 boy’s high school basketball teams in the country (there are about as many girls teams by the way).  Assuming there are twelve players to a team, that means out of roughly 213,000 boys, 700 will get a scholarship.  Good luck with that, but please keep in mind that scholars can get scholarships too.

Third, if you do somehow manage to get a D1 scholarship, you probably won’t graduate.  Okay, maybe you will, since 66% of all student athletes graduate in 6 years (55% of black student athletes), but just because you have a degree doesn’t mean you have an education that will be of any use to you.  So be careful what you major in and how seriously you take your studies and remember that your coach may care more about what you do in the next four years than he does about what you do in the next forty. 
(By the way, I got a BA and an MBA in six years and there are people who do it in less time than that, so don’t set your goals too low)

Oh, I almost forgot, pull your damn pants up when you’re wearing street clothes, stop posting all the stupid and vulgar stuff on Facebook, Twitter and Instagram, and stop with the tattoos and ridiculous hairdos.  There’s absolutely nothing original or individualistic about looking like, acting like, or doing like everyone else around you.  In fact, if you want a piece of really good advice, take this from Earl Nightingale, “Whatever the great majority is doing, in any circumstance, if you do the exact opposite, you’ll probably never make a mistake as long as you live”

Now, I hope you’re not too mad at me.  If you are, you can take all of what I said and use it as motivation to get your D1 scholarship and your NBA contract, if you’d like.  I’d be happy to see you achieve both and would not mind at all you thumbing your nose at me when you cross the finish line.  I’d much rather say “congratulations” than “I told you so”.  But please know my purpose in writing you this letter was not to kill your dreams, rather it was to perhaps change your thinking in some small way.  Because, as it was once said, “If your way of thinking changes, your actions change.  If your actions change, your habits change.  If your habits change, your personality changes, and if your personality changes, your self changes.  And once your self is changed, your whole life is different.”

___________, I’d much rather interview you for the documentary I tentatively plan on doing in 10 or 15 years and have you repeatedly say “I am” rather than “I was”.  Your best years should always be ahead of you.

Study hard, play hard, and take care.


Monday, July 28, 2014

The Rock Star Math Teacher

Yesterday’s post was triggered by reading an article about math. Today's comes to mind after reading another. "Why Americans Stink at Math" describes a Japanese math teacher who achieved “rock star” status in his home country (giving lectures before 1000+ observers) using American teaching methods only to be disappointed in later discovering we Americans cannot replicate in our own classrooms the methods adopted in Japan.

The teaching methods in Japan obviously differ from those here.  But I found Akihiko Takahashi’s profile even more striking.  He either teaches math or thinks about teaching math.  After teaching his class during the day he visits other class rooms during the evening.  He is regarded as one of the top math teachers in the country, and “when he starts talking about math, everything changes.”

The culture that creates these kinds of teachers is a different culture than ours.  Here entrepreneurs, computer programmers, executives, athletes, and others work hard and enjoy recognition.  Our math teachers may explore their craft with the “fire in the belly” of Takahashi.  But maybe not.  If they don’t, it seems to me to be very much worth the effort of building such a culture in our own area. Maybe along with (or instead of) hosting a Fall basketball league, we should host a "math league (or chess league ?)," complete with rock star coaches and players, all-stars, and champions. I better start working on my "new math" skills!

Note: The article is long but worth the read. I plan to revisit it with observations about Georgia's project of teaching Math 1, 2, 3, and 4.

Sunday, July 27, 2014

Back to School Time is Approaching .... Purdue is Tackling the Excessive Costs of College .... Government and College Induced Pervasive, Extremely High and Growing Levels of Indebtedness and Why It All Must Change

On average people who graduate from college earn substantially more money during their lifetimes than those who don't graduate.

But on average the cost of attending college, although always expensive, has become even more so over the years.

Yet college is still perceived as worth all the costs charged, however high they may be, and therefore as an 'automatic and not to be questioned' great investment for individuals and their families to make.

As a result, "blank check" thinking and fatalistic acceptance of the excessive costs to be incurred has become the established norm and the "price to pay to play" for too many soon to be heavily indebted attendees and their already financially stretched families.

But it doesn't have to be that way. College doesn't have to be so expensive and it doesn't need to take so long to graduate. In other words, it can and should be a much better "investment" than it is.

The plain fact is that government actions at all levels cause college to be vastly more expensive than necessary by subsidizing college administrators with direct government grants and student loans.Yes, student loans cause high college costs.

That's simply because the money "freely" granted and loaned by government is then used to pay too high tuition and other non-market based charges by colleges, and backed up by taxpayers.

No cost containment has never been and certainly isn't currently a hot topic in the vast majority of faculty lounges or administrative offices. But that's not the case at Purdue today.

Purdue is attempting to right the many wrongs that continue to be the custom and practice at most institutions of higher learning whose administrators and government accomplices aren't genuinely interested in giving students or taxpayers great values, aka the biggest bang for their bucks, borrowed or otherwise.

At Purdue, a Case Study in Cost Cuts provides We the People with a good lesson, and at no cost, to begin the upcoming school year's learning process:

"WEST LAFAYETTE, Ind.—Three months into his tenure as president of Purdue University, Mitch Daniels leaned over a table covered with financial statements and pointed to items labeled "cash" sprinkled throughout the pages.

"That's part of the endowment, right?" Mr. Daniels asked the school's treasurer. "Nope," the treasurer said, "that's cash."

Mr. Daniels suggested the rainy-day funds, which totaled "somewhere in the mid-nine figures" and were kept by a host of academic departments for operating expenses, be moved out of low-interest-bearing accounts and put to better use.

It was the first of many steps Mr. Daniels has taken as he seeks to reorganize Purdue's sometimes-antiquated systems. A year and a half into his tenure, Mr. Daniels has frozen tuition (for the first time in 36 years), cut the cost of student food by 10% and introduced volume purchasing to take advantage of economies of scale.

In May, he rolled out the first results from a Gallup poll of 30,000 college graduates from hundreds of schools aimed at discerning what value a university education adds to a person's success and well-being.

The results have shed new light on a question that has moved to center stage in higher education: What is the real return on investment for a college degree? . . .

And by freezing tuition, he is forcing his own school to modernize its 19th-century business model with a combination of systemic cuts, organizational realignments and cash incentives. . . .

Jamie Merisotis, president of the Lumina Foundation, a nonprofit focused on increasing postsecondary credentials in the U.S. that teamed with Purdue to produce the Gallup survey, lauded Mr. Daniels's efforts. "He understands that higher education has to evolve to serve the nation's needs," he said. . . .

J. Paul Robinson, a former president of the faculty senate, said Mr. Daniels's worth as a leader will be tied to his ability to prune that administrative bloat. "Let me put it this way," Mr. Robinson said: "A blind man on a galloping horse at midnight with sunglasses on can see the problem. The question is, What can he do about it?"

Mr. Daniels says he is consolidating administrative jobs where prudent and leaving jobs unfilled where the duplication of effort makes that possible. He has jettisoned 10 university cars, consolidated hundreds of thousands of feet of off-campus rental storage and introduced a higher-deductible health-care plan.

He has also created two, half-million-dollar prizes for the first department that devises a three-year degree or a degree based on what a student already knows, not the number of hours he or she sits in a class. This summer, the school offered 200 more classes than last year in an effort to speed time to degree and generate more income for the school. . . .

Meanwhile, the Gallup poll has already begun to reframe the national debate about what gives colleges value at a time when many people, including Mr. Daniels, foresee a shakeout in higher education after years of higher costs."

Summing Up

The revolution in organizing work made possible by advances in information technology has changed the way individuals work in private sector companies and industries in profound and productive ways.

That revolution has yet to come to our 19th century business model of higher education {K-12 as well, but that's another story}.

Butts in the seat and boring sweaty classroom lectures delivered in the same way year after year is still the norm.

The necessary and long overdue customer focused productivity and value enhancing business-model disruption is coming even though it is and will be heavily resisted, as is all progress.

The resistance will be led, as it always is, by those deeply committed to and invested in the status quo.

But change will come as the financial resources to maintain the status quo are drying up quickly and borrowings have become excessive as indebtedness has ballooned for our federal, state and local governments, aka the taxpayers, aka We the People.

And now that debt balloon, in the form of record high student loans, stands at extraordinarily high record levels for individual students and their families.


And the only appropriate proper question to ask ourselves is this: When are We the People going to do something about it?

Has the time finally come for We the People to insist on vouchers (means tested, of course) for everyone?

For both K-12 and beyond?

That's my take.

Thanks. Bob.

First Hand Evidence that Math is Fun and Useful!

Jordan Ellenburg, the author of "Don't Teach Math, Coach It," got me pretty excited about math.  I guess that is what is great about knowledgeable and passionate teachers.  He writes of observing his eight year old son having so much fun playing baseball, and deciding to make math challenges and games fun for his children.  And he mentions the mathematical benefits of childhood classics like chess and monopoly.  I suppose there can be few better complements to a game than to find out that these games are useful for more than just fun!

Although I never thought of myself as a math wiz, I do suppose I can make my way around numbers just fine.  Maybe my childhood of keeping up with my favorite Chicago Cubs players' batting averages and adjusting them mentally after each at bat didn't hurt.  And mentally calculating my shooting percentage after each 100 jump shots in high school (anywhere between 60-70% was acceptable) was another example of my informal math training.

But after teaching my sons how to play chess, I only hold a .500 winning percentage against them in our first several games.  Our monopoly battles have gone similarly.  I better start practicing!

Saturday, July 26, 2014

Comparing Stock Valuations: an example

Yesterday I wrote about my confidence in MCD's long term business prospects.  I compared the fast food giant’s brand and public perception to the fast growing, hip Chipotle.  I received feedback suggesting I consider the difference in the companies’ valuations.  The fact that MCD’s PE (15) is much lower than CMG’s (57) is of course very logical given CMG’s current growth rate and the potential for significant long term growth.

The notion that CMG is “expensive” brings to mind a recent analysis I’ve heard regarding another rapidly growing company, Facebook (FB).  Everybody’s favorite social network is growing 60% annually.  Analyses assuming companies like CMG and FB will continue to grow at such rapid clips certainly justify the higher PE’s.  On paper.

But as I glance up at CNBC’s list of “losers” from Thursday (Staples, SPLS; Amazon, AMZN), I am reminded of the reason I usually decide to pass on mega-growth stocks with very high multiples.  Companies that are priced for near perfect results can trade solely on market sentiment.  In these stocks, the fundamentals of the business are often ignored after the company fails to meet the street’s high expectations.  That is why I believe AAPL could be purchased for 9 times earnings in not too long ago.  Despite its dominant position and great prospects, investors dumped the stock because of Steve Jobs’ death, or a lack of “new” products, or some other reason.

Buying shares of great companies at bargain valuations and having an “I don’t buy the pricey stuff” rule makes sense to me.

Friday, July 25, 2014

Investing for the Long Haul ... Start Early and Don't Waver

Investing can be simple. The same goes for saving. And getting a solid education  as well.

First we need some money. That usually starts with a job.

Second, the higher paying job we have, the more money we make. That usually results from a solid education.

Third, we need to develop a habit of saving and investing for the long haul. That starts with acquiring financial literacy and internalizing early such things as avoiding unnecessary debt and benefiting from the rule of 72, aka the power of compound interest.

Thus, starting early and knowing that the only two prices that matter in the end are the price at which we buy (hopefully low) and the price at which we sell (hopefully high) will contribute to our financial health and well being in our oldster years.

Life 101 is all about the powerful effects of showing up and acting right. Let's see how it works with respect to accumulating enough money along life's way in order that we may live our oldster years without an abundance of financial worries --- learning and then applying the lessons of financial self reliance, in other words.

Why a Soaring Stock Market Is Wasted on the Young demonstrates the power of the above simple common sense based ideas with several playful examples:

"The news media typically covers stock markets using one exceedingly simple frame: Market goes up, good! Market goes down, bad!

And this much is true: If you’re in a stage of life when you are pulling money out of the market, like a retiree living off accumulated savings, a higher stock market is indeed great news. But some simple experiments with four hypothetical people show why that calculus is a lot more complicated for younger people. The key lesson: The dramatic runup in the American stock market over the last five years is actually bad news for many young adults who are just embarking on saving for retirement.

When you invest in some broad index of the stock market, such as any of numerous vehicles that let you buy into the Standard & Poor’s 500 stocks, you are in effect buying a claim on the future profits of all major listed companies. When the stock market goes up, you have to pay more for that future stream of profits; when it goes down, you are paying less.

But as it turns out, it matters a great deal for most people when a rise in the stock market occurs.

Plutocrat Pete Doesn’t Care When the Market Rises

A hypothetical person receives $300,000 from a rich uncle. Over 30 years of saving, he makes the same amount if his rate of return is constant at 7 percent or if the gains are exclusively at the start or at the end of the time period (50 percent return in each of the first five years or last five years). He winds up with $2.28 million in all three scenarios.

Value of Pete’s hypothetical portfolio by year invested

Scenario 2
Scenario 1

Scenario 3

But not for our first hypothetical saver, Plutocrat Pete. Pete has a rich uncle who gives him $300,000 when he turns 30, which he earmarks for savings and won’t touch until he’s 60. Now consider three scenarios. In one, the stock market returns precisely 7 percent a year each of the 30 years. In the second, the market returns 50 percent a year for the first five years, and then zero return for the ensuing 25 years. And the third scenario is the reverse, returning zero for 25 years and then 50 percent a year for the last five years.

These possibilities each have the same compound annual growth rate over the 30-year period. So Pete is in equally good shape no matter which one materializes. In all three of those scenarios, when Pete turns 60, his original $300,000 from his uncle has turned into $2.28 million.

Most of us, alas, aren’t Plutocrat Pete. Most of us have to save for retirement ourselves, not with one giant chunk of cash we obtain when we’re young but by squirreling a little away each year.

Most of us, in other words, are more like Steady Eddie, who puts $10,000 a year in his retirement account starting when he turns 30, and stops at 60. In other words, the total amount he invests is the same as the $300,000 that Pete had, except Eddie saves it over time rather than having the money upfront.

In Steady Eddie’s case, the stock market returns 7 percent each year. It works out fine for Eddie. With steady contributions and steady returns, the $300,000 he puts in over 30 years has turned to $1.01 million by the time he is looking to spend it. Not bad!

But he’s not doing nearly as well as Lucky Laura. She puts the same $10,000 a year into her retirement account, but the pattern of returns over her career just happens to be backloaded — it is the scenario described above of zero return for 25 years followed by five years of 50 percent returns.

As a result, by the time those big returns are occurring, Laura has built a great stockpile of savings.

So in the end, she does nearly as well as Plutocrat Pete did. Her $300,000 invested has turned into $2.01 million. Nice!

But what if the reverse had happened, with all of the returns frontloaded into the first five years, followed by 25 years of zero returns? Alas, that is the world that Unlucky Umberto encountered. And even though he saved just as diligently as Eddie and Laura, he suffered because of bad timing.       

For Most Savers, It Matters When Returns Occur

All three of these hypothetical savers socked away $10,000 a year for 30 years. But their results vary significantly depending on whether returns were highest at the start of their career, steady throughout, or concentrated near the end.

Hypothetical portfolio value, by year
Steady Eddie
Lucky Laura
Unlucky Umberto

While Umberto might have been thrilled with the returns in his first few years of investing, they came at a time when he had very little invested. Because of lower (actually zero) future returns, he lost out, big-time.

Umberto ended up with only $448,200 in his retirement account after 30 years, fully 79 percent less than Lucky Laura, even though they both socked away the same $10,000 a year. . . .

We can’t all be Plutocrat Pete or Lucky Laura. Today’s younger adults need to continue to save for the future, but they should cross their fingers that they’re not actually Unlucky Umberto."

Summing Up

No, we can't all be like Pete or Laura.

But we can be like Steady Eddie.

And we sure don't have to be like Umberto.

When getting an education, Life 101 is actually a simple, necessary and relatively easy course for the young to take and "Ace." Showing up and acting right is all that's required.

Buy low and sell high. Start early and save and invest consistently.

But first, get that solid education, learn the basics of personal finance, get a good job, work hard, always show up and act right, save early and consistently, own stocks for the long haul and take the time to enjoy life.

And never forget the power of compounding while keeping a Steady Eddie mindset and following the rule of 72.

That's my take.

Thanks. Bob.

Thursday, July 24, 2014

Buffettology and How Its Magic Applies or Doesn't Apply to Us Mere Mortals .... How the World of Personal Finance and Investing Really Works and Why It Is Important to Each of Us

Studying, and then, if possible, replicating Warren Buffett's winning investing formula would obviously be a good way for each of us to approach the do's and don'ts of personal investing over time.

So let's take a few minutes and consider just how the "formula" really works and whether we should even try to do the same thing with our own investments. And if not, what we can learn from the way the "Oracle of Omaha" does things.

You can't be Warren Buffett, but you can be a better investor is subtitled '7 market myths that make investors poorer:'
"Financial markets are complex dynamic systems, populated by irrational and biased participants. Because of this, we have a tendency not only to misunderstand how the financial markets function, but we tend to buy into myths that often harm our financial well-being....                                       

Here’s what investors need to watch out for:

1. You can’t be Warren Buffett

Over the past 30 years, the world’s greatest investor has come to be idolized. But the way Warren Buffett has amassed enormous wealth is often misunderstood. . . .
Make no mistake — Buffett is not a simple value-stock picker. What he has built is far more complex and resembles something that few retail investors can even come close to replicating.

Berkshire Hathaway, Buffett’s firm, essentially acts as a multi-strategy hedge fund. Berkshire engages in sophisticated insurance underwriting, complex fixed-income strategies, multi-strategy equity approaches and tactics that more resemble a private equity firm than a value-based brokerage account. Replicating this isn’t just difficult — it might well be impossible.

2. You get what you pay for

Few things are more detrimental to portfolio performance than fees. Most mutual funds underperform a highly correlated index, yet they charge 0.8% more in fees on average than a highly correlated index. That might not seem like much, but when you compound this at 7% over 30 years, your total return gets reduced by 23%. At that rate of return, an investor who buys $100,000 of a closet index fund and one who buys a highly correlated, low-fee index will amass, respectively, $590,000 and $740,000 over that 30-year period. Millions of investors are stuck in mutual funds that don’t outperform a benchmark index.

In finance, more expensive doesn’t necessarily mean better.

3. You should focus either on fundamentals or technical analysis

A great battle rages in financial circles between fundamental analysis and technical analysis. Fundamentalists believe you need to understand corporate fundamentals to predict how an asset might perform; technicians believe an asset’s past performance is the key to its future.

But this debate is like trying to determine whether it’s better to drive looking through the windshield or also utilizing the rear-view mirror. The truth is somewhere in-between . . . .

4. The myth of ‘passive’ investing

There’s no such thing as a “passive” investor. No one can realistically replicate the performance of a truly passive index over the long-term. Accordingly, we’re all active portfolio managers in some sense, whether it’s establishing a lump-sum portfolio at initiation, rebalancing, reinvesting, reallocating, and the like. We need to be aware of how these actions can be positive or negative.

It’s important to reduce fees and frictions, but not at the risk of oversimplifying the portfolio to the point where it’s counterproductive. The concept of passive investing is built on useful and sound principles, but often overlooks the fact that portfolio management is a process, not a passive undertaking.

5. The stock market will make you rich

Most market participants tend to think of their financial situation in nominal terms. But when you are looking at your portfolio performance, it’s imperative to think in real terms. . . . That means backing out inflation, taxes, fees and other frictions that reduce nominal return. . . . 

The stock market can protect your wealth and help you maintain purchasing power, but it’s not the place where most of us are likely to make our fortunes.                                         

6. You have to beat the market

It’s hard to avoid the allure of trying to beat the market — to outperform on a consistent basis by simply picking stocks. In truth, most of us are not going to strike it rich in the stock market and most of us shouldn’t even try.

You don’t need to beat the market. Attempting to beat the market means taking risks that are probably not appropriate. Instead, you need to allocate assets in a manner consistent with your financial goals of beating inflation, without exposing your portfolio to disruptive levels of risk....

7. ‘Stocks for the long run’ is the best strategy                                        

You’ve probably heard about “stocks for the long run” or “buy and hold.” These concepts are usually sold to investors using misleading nominal historical returns, or the promise of climbing on the financial roller coaster at age 25 and getting off at age 65, whereupon you stroll into the sunset years.

Of course, this isn’t remotely how life works, and our financial lives should reflect that. Our financial lives are a series of events. You get married, buy a house, have children, send them to college, plan for retirement. Life happens, and investment portfolios should reflect this."

Summing Up

Personal financial matters are important to all of us. Even, or perhaps especially, to those of us who don't want to be bothered or believe we will never understand how all this "investing and financial stuff" really works.

Financial matters matter to us throughout our lives, and knowledge about how things really work is helpful to us along life's way --- extremely helpful, in fact.

Such things as getting a solid education without going deeply into debt, avoiding or minimizing student loans while getting that solid education, avoiding, minimizing or prudently managing credit cards, home purchases and mortgages, insurance policies, home equity loans, 401(k) investments, personal savings and retirement planning and funding issues are each and all important matters to each of us and our families as well.

In that spirit, we'll pass along our own personal financial and investing experiences from time to time.

So while we don't pretend to be an investment pro like Warren Buffett or anything close thereto, we do try to learn from him and others like him.

If you haven't already, you should consider doing so as well.

That's my take.

Thanks. Bob.

MCD Stock is Cool enough for me

The price of MCD shares declined recently due to disappointing sales results.  The “Fast Money” crew on CNBC talked about McDonalds by comparing it to Chipotle, which is rapidly growing sales and impressing investors.  But when I think of MCD, I think more of Wal Mart.  Both companies are wildly popular with the masses of consumers.  Neither is a niche player, to say the least.  And both are extremely capable of running their businesses very profitably for a long time.

Although neither company is the sexy choice (Chipotle is probably more trendy than McDonalds to investors and certain consumers, as Target once was to Wal Mart and Amazon probably now is), it is likely that both will be serving lots of customers for many more decades.  And the companies’ world class management teams will do so profitably and adjust to competitive factors effectively.  I recently read that 8 of 10 shoppers visit Wal Mart regularly.  And my personal experience with McDonalds seems similar.

I suppose the business risk with these blue chip companies is that their “cooler” competitors will one day be their downfalls.  And it is hard not to wonder if people will get so health conscious so quickly, and if McDonalds will not be able to change the public’s perception of their restaurants being unhealthy places to eat.  And it is easy to believe why McDonalds may not be considered as hip as its Chipotle-type peers.  This morning I stopped by a McDonalds and that particular location was being jack hammered and generally ripped apart while attempting to serve me.  With the McDonalds/Chipotle comparison fresh in my mind, I couldn’t help but wonder how clean and nice a Chipotle location probably is.

But I don’t for sure know what a Chipotle looks like.  There is not one in little old Augusta, Georgia.  I suppose we are not hip enough yet.  But there are many McDonalds locations.  And the newer and more recently renovated locations are much nicer than in the past.  And the menu is certainly continuing to get more and more health conscious.  I ordered a bowl of oatmeal with no brown sugar today, after all.

Disclosure:  I purchased MCD today, after the stock had declined 2-3% after missing investors’ estimates for its sales results. And WMT is also a core holding.

Wednesday, July 23, 2014

Job Diversity

Since soon after the financial crisis of 2008, I have seen many articles about the unfortunate college graduates and the newly unemployed of that time period.  It had been long observed that a large setback in the employment market is felt throughout a person’s career as their starting salaries (which would be depressed in such a time) and their absence from the workforce would bring ramifications for decades.  And I recently read that the severity of this latest downturn caused this setback to be even more harsh for those in and near the class of ‘08.

These articles stress the bad timing and luck of this situation.  This made me consider a new phenomenon that I believe to be a growing trend, the concept of people “diversifying their careers and work situations.”  I made up that phrase, so blame me if it is lame.  But what I have in mind is people who do not choose to wait for big, “stable” employers to choose them for long term and supposedly secure positions.

The appeal of full time employment with a single employer is believed to be the security of knowing the job will always be there.  But employers like contracting work on a project basis for a lot of reasons.  And I firmly agree with their positions.  Who knows what the world will need years and decades into the future?  So in addition to the economic incentives (no need to pay benefits) for employers to hire more on a project basis, doing so makes good common sense.

I also agree with something I have heard freelancers say.  Earning income from several sources does a much better job of providing “security” because the people who pay you are less likely to all stop doing business with you at one time.  Call it “job diversity.”  And if security is not the concern, who wouldn’t prefer to be in control of the work and the projects he chooses?

Of course, there are full time jobs at big companies still available to people.  And the particulars of pros and cons of the “diversified contractor” and the “long term” employee can be dissected and debated.  But I like the general trend.

Tuesday, July 22, 2014

Fellow Oldsters .... Demography is Destiny

More evidence about the developing plight of future American generations due to the failures of our current generation is presented in Heading Off the Entitlement Meltdown.

The editorial by Senator Rob Portman is appropriately subtitled 'Demography is destiny: The retirement of 77 million baby boomers is not a theoretical projection.'

It should be required reading by all Americans.

In plain words, we're setting ourselves, or better said, our kids and grandkids, for an unnecessarily and clearly avoidable lousy future of weak economic growth and unaffordable indebtedness.

So let's face facts and take a peek at just how unlike the future opportunities for our kids and grandkids are likely to be compared to those we were given.

You see, my fellow oldsters, facts are stubborn things.


"This year's budget deficit of "only" $500 billion has brought some complacency on federal spending and deficits. It shouldn't. The Congressional Budget Office's long-term budget outlook released on July 15 shows a $40 trillion increase in debt over the next two decades.

While a $500 billion deficit is welcome compared with the $1.4 trillion peak in 2009, the decline is temporary. The CBO's other, more realistic "alternative baseline," which assumes Congress continues current policies, projects new debt of $10 trillion over the next decade, followed by $100 trillion over the subsequent two decades. . . .

And that's the rosy scenario: It assumes no more recessions, wars, terrorist attacks or natural catastrophes, and that interest costs on the national debt will be permanently held down by near-record low interest rates; also that certain ObamaCare price controls widely derided as unrealistic will continue forever.

What drives this long-term debt? It's not falling tax revenues. After averaging 17.3% of the economy over the past 50 years, revenues, the CBO assumes, will level off at 18% of the economy within a decade—with a separate, more detailed estimate showing revenues climbing an additional 1% of the economy each subsequent decade. That estimate shows a typical middle-class family's income-tax burden nearly doubling over the next 25 years. Unfortunately, even these soaring tax receipts cannot keep up with surging spending.

After averaging 20% of the economy over the past 50 years, spending is projected by the CBO to jump to 23%, 29%, and then 34% of the economy over the next three decades—at which point the CBO simply stops counting. All of the rising deficit will come from spending increases (rather than revenue declines), and nearly all of that spending will come from Social Security, health entitlements and the resulting interest costs on the swelling national debt.
Each day, 10,000 baby boomers retire and begin receiving Medicare and Social Security benefits. And while five workers supported the benefits of each retiree in 1960, there will be only two workers funding each retiree by 2030.

Those who dismiss long-term budget projections should re-read the last paragraph. The retirement of 77 million baby boomers into Social Security and Medicare is not a theoretical projection. Demography is destiny.

While Social Security's Old Age program faces bankruptcy in 20 years, Medicare is in even worse shape because (in addition to demographics) it must also deal with rising health-care costs. Thus, the typical couple retiring next year will have paid approximately $140,000 in lifetime Medicare taxes and premiums, yet will receive nearly $430,000 in Medicare benefits. Multiply that by 77 million retiring baby boomers, and it's clear that Medicare is unsustainable.

ObamaCare is also driving spending upward. According to the CBO, over the next decade, ObamaCare will be the single largest driver of rising health-care spending. . . .

The CBO estimates that a deal saving $4 trillion over the decade would put the budget on a path to sustainability. Adjusting Social Security and Medicare's retirement ages, means-testing benefits for upper-income retirees, and supporting broad-based, patient-centered health care can not only help close the debt, it can also create a stronger economy.

Today's declining deficit is temporary, and the longer we wait to enact reforms, the more abrupt and painful they will be. It is time for everyone to come together and start to erase the red ink."

Summing Up

Living within our means and paying our bills when due is neither a new nor a difficult concept to understand.

Neither is it difficult to understand that borrowing from the future to spend what we don't have today will place a huge burden on future generations.

Neither is it hard to realize that an ever growing weaker and more indebted financial situation will only make our nation and its citizens more vulnerable to the crazies of the world in the future.

What are we waiting for is one question for which I have no good or even half good answer? Do you? Do our politicians?

Financial literacy and personal responsibility begin at home.

Think about it.

Thanks. Bob.