Buying a Car on Credit.... Do It Right, Make It Affordable and Save Some Real Money

Most of us do or will at some point buy a car. However, some of us owe more on the car we 'bought' (with borrowed money) than it is worth. Too many cars are 'underwater' and the result is that the otherwise happy car buyer is then 'upside down' on the loan. And the reason why is both a simple and unnecessary one.

When the purchase price is otherwise unaffordable, the car dealer and lender simply lengthen the number of years for the required repayment period on those car loans. As a result, and well before the time the car loan is paid off, the car isn't worth the balance outstanding on the loan. We're 'upside down' or 'underwater.' From the time of purchase, the resale value of cars falls rapidly. Thus, the longer the loan is outstanding, the more the car depreciates.

And even for those buyers who don't end up upside down or underwater, often they're stretched too thin making the burdensome monthly car payments. That's not a good situation, and buyers should not borrow more money than they can reasonably afford to repay in a few short years. Sadly, that's not the custom and practice followed by many buyers today.

How to Buy a Car on Credit is subtitled 'These Strategies Can Save You Money and Limit Your Risk.' The article has some good advice and includes some interesting facts about car buyers:

"Car buyers are taking out loans more frequently, borrowing larger amounts and planning to pay the money back over longer periods. Before following in their tracks, take a few steps to protect yourself.

Among them: Ask the financing office at the car dealership to beat the lowest rate you qualify for from other lenders, and avoid borrowing so much that normal depreciation could soon leave the car worth less than the outstanding loan balance.

Put down a significant down payment, which can offer protection against the car losing value. And if you opt for add-ons that dealers often offer, such as extended warranties, don’t add the cost to the loan balance because that also could increase the risk that you will owe more than the car is worth.

Lenders originated nearly 19.2 million car loans and leases in the first nine months of 2014, up 4.7% from the same period a year prior and 64.1% from that period in 2009, during the financial crisis .... Nearly 24% of new-car loans given out to buyers in the quarter had repayment periods of 73 to 84 months; just two years prior, that figure was 16%.

Meanwhile, the percentage of loans given out in the quarter that are due to be paid back in five years or less has dropped.

Low interest rates are fueling the market. The average interest rate on a new-car loan is 4.5%, according to Experian. Some lenders charge the most creditworthy borrowers as little as 1.5%, and the financing arms of some major car makers offer no-interest loans. . . .

Extending the repayment period can make loans seem even more affordable. A $20,000, four-year loan at 4.5% interest requires a monthly payment of $456. That payment drops to $278 with a seven-year loan at the same interest rate.

But longer-term car loans can pose problems, including larger overall interest payments. On the same seven-year loan, the borrower will pay $1,461 more in interest than on the four-year loan. In addition, longer-term loans typically come with higher interest rates, making the potential gap even greater.

Moreover, most cars start losing value as soon as they leave the lot and continue depreciating over time, so borrowers can end up owing more than the asset is worth in a hurry. . . .

Car buyers who decide to get a loan should talk to lenders before going to the dealership. At LightStream, an online lending division of SunTrust Banks , borrowers can get fixed interest rates between 1.99% and 2.99% on personal loans of $10,000 to $100,000 if they want to use the money to buy a new car and will pay off the loan in two to five years. Capital One Financial offers three-year new-car loans at fixed interest rates as low as 2.39%.

Borrowers should consider checking in with credit unions. The average interest rate at such lenders on three-year new-car loans was 2.51% as of Dec. 30, compared with 4.68% at banks, according to SNL Financial, a financial-information firm based in Charlottesville, Va. At Navy Federal Credit Union, the largest credit union in the U.S. by assets, the fixed interest rate for a new-car loan of up to three years is as low as 1.49%."

See also Car Loans See Rise In Missed Payments.

Summing Up

A car is definitely a nice and often necessary thing to have.

That said, it's only a means of transportation and having the 'car of our dreams' should not become the financial nightmare that it often does.

When purchasing, the buyer needs to make a substantial down payment, followed by regular monthly payments sufficient to pay off the  remaining loan balance within two to three years.

At that point the buyer will have substantial 'equity' in the car, and as a result, the next purchase will be much easier to make. And much more affordable.

That's my take.

Thanks. Bob.

President Obama's Keystone XL Pipeline Delay Politics ... The Time for Politics and Needless Delay is Over ... The Time to Act Is Now

Politics sucks. Politicians lie. Government officials too often act in their own political self interests and not in the best interests of those they purportedly serve.

The need for good jobs, energy independence, free enterprise, increased private sector trade, mutually beneficial bilateral actions with our Canadian friends and allies, as well as the safe transport of oil in America (pipeline vs. rail), are obvious to one and all.

So why then do President Obama and his allies insist on stopping the construction of the Keystone XL Pipeline, other than pure partisan politics and a decision to placate their political green support base instead of serving We the People? I can't think of any good reason. Can you?

The Last Keystone Excuse lays out the facts:

"For six years President Obama has used one pretext after another to avoid approving the Keystone XL pipeline. Now the Nebraska Supreme Court has blown up his last excuse, and the President owes it to the country to either say yes or to come clean about his anti-fossil fuel politics.

Nebraska’s top court on Friday upheld a state law giving the Governor authority to review and approve major pipeline projects. The ruling ended litigation brought by a trio of Nebraska landowners who claimed Governor Dave Heineman ’s 2013 approval of the Keystone route through his state was unconstitutional. The litigation was the latest reason the Administration had concocted—raising it in April—for again delaying a Keystone decision.

And we mean only the latest. TransCanada filed with the State Department for a cross-border permit while Mr. Obama was still running for President. Mr. Obama has since subjected the project to two separate State Department reviews, ignoring the positive findings of both. Even as the Nebraska court ruled, the White House on Friday was back with more delay, claiming the State Department now needs to review the court decision and ponder, ponder, ponder.

The only reason Mr. Obama hasn’t given for his opposition is the real one: His environmental supporters oppose the pipeline as a matter of climate-change religious faith. They include influential donors like billionaire Tom Steyer who have turned Keystone into a litmus test of environmental purity.

This week Mr. Obama welcomed the 114th Congress by threatening to veto a bill to approve the pipeline if it passes Congress. The House moved foward anyway on Friday, passing the approval bill 266 to 153, including ayes from 28 Democrats. The Senate will open debate on its bipartisan version next week, and it already has enough support to break a liberal filibuster.

This debate and Mr. Obama’s veto decision are going to be clarifying moments for the Democratic Party. We’ll see if it’s the party of jobs and the working stiff, as Democrats claim, or of rich green donors who put obsessions about possible future climate change above the well-being of Americans in the here and now."

See also Court Ruling, House Vote Pressure Obama to Act on Keystone Pipeline.

Summing Up

After many years of obfuscation and delay, there's nothing more for President Obama to say.

It's time to see just how accurate Jonathan Gruber's view of American stupidity will prove to be.

We already know that Obama is a true believer -- of Gruberism, that is.

And we already know that politics sucks.

That's my take.

Thanks. Bob.
                       

Paying for an Affordable Community College Education the Right Way versus the Obama Way ... And Receiving a Great Education about the Real World at the Same Time

President Obama's standard response to most problems is either to ignore them or attempt to solve them by spending more money. More government control and spending is the Obama Way.

More government spending and control of higher education is the most recent example of the Obama Way. He wants more government involvement even though our colleges are too expensive and students receive too little in the way of an education to prepare them to compete successfully in the highly competitive global marketplace. And of those who do enroll, most leave without completing a degree, and even if they do manage to graduate, few good jobs await them.

His 'solution' to this problem of too many dropouts, too few jobs and too much student debt is that he wants the taxpayers to foot the bill to keep funding the failing status quo and make community college attendance 'free.' I guess he really does believe that there is such a thing as a free lunch. Either that or he doesn't view taxes as costing anybody anything. Or perhaps that borrowing money to finance huge government deficits is free. But, of course, the reality is that he thinks this will help the Democratic party win votes. And maybe it will.

He certainly doesn't appear interested in improving educational outcomes, reducing the influence of teachers' unions, or controlling costs at any level of government. Instead he proposes to once again silently 'sock it to' the taxpayers of the future, aka the college students of today. And the rest of us too, of course.

Well, there is a very affordable alternative way to attend community college 'on the cheap' for today's serious minded community college attendees. And by the way, it will work for students attending four year colleges as well.

Notable & Quotable: Free Community College? has this solid common sense advice for President Obama and his political allies:

"Jennifer Kabbany writing online Jan. 9 for the College Fix, where she is the editor:

I attended a community college.

That was back in the 1990s, and it was ludicrously cheap. I recall I paid about $90 bucks a class at Santa Barbara City College. I checked my old college’s website Thursday night for a cost comparison, and the price hasn’t gone up too much—it stands at roughly $150 a class now.

My point is—community college is not expensive. It’s not out of reach for low- to middle-class families. Not by a long shot. I paid my way through community college waiting tables at local restaurants. It was one of the best times of my life. Yes, my parents chipped in to help make ends meet, but by no means did I enjoy a free ride.

The experience taught me how to work hard, take care of myself, and be responsible and independent. It was a rite of passage I cherish to this day. I gained discipline, and came to understand the value of hard work and the enjoyment and satisfaction of a job well done.

Perhaps that is why, when I heard of President Obama ’s new plan to make community college free, I immediately groaned. It’s a horrible idea. . . .

The last thing this country needs is another massive entitlement.

And who gets to pay for all this debt? The young people Obama is claiming to want to help. If he really wanted to help young people, he’d propose Social Security reform, or overhaul the student loan racket."

Summing Up

Free lunches are never free. {Please click on  the "writing online" link above to get the full flavor of what Ms. Kabbany has to say. It's worth reading.}

Student loans outstanding are currently $1.3+ trillion, and our officially recognized national debt is approaching $20 trillion. In truth, however, total government debt amounts to substantially more than $100 trillion if we're honest enough to count future taxpayer spending for unfunded commitments, including but not limited to Social Security, ObamaCare, teachers' pensions, and student loan obligations which will be forgiven and defaulted upon.

So now President Obama wants to add new debt to the taxpayers of the future, aka the students of today. But he doesn't want the Keystone XL Pipeline's construction, jobs and energy independence. It's all 'placate the base' politics, all the time.

And this 'latest free' college proposal is just one more example of why politics sucks and why college costs are already far too high.

More government control isn't the answer to our problems, financial or otherwise. The solution lies within each of us as free-to-choose private citizens in a free-to-choose private economy.

That's my take.

Thanks. Bob.

Employment Up ... Wages Weak ... Low Paying Jobs Up ... Labor Force Participation Down

The employment report for last month has just been released, and the news is decidedly mixed, albeit unsurprising. Lower wages, more jobs, not good paying jobs, fewer labor force participants and low inflation are the top-of-mind highlights/lowlights of the just issued report.

U.S. adds 252,000 jobs in December, unemployment falls to 5.6% has the breaking news concerning the nation's employment situation this morning:

"The U.S. added 252,000 jobs in December and the unemployment rate fell to 5.6% from 5.8%, but hourly wages declined and more Americans dropped out of the labor force. Economists . . . had expected a seasonally adjusted gain of 230,000 nonfarm jobs in the last month of 2014.

Average hourly wages fell 0.2%, lowering the 12-month increase to just 1.7%, the Labor Department said Friday. Year over year increases have stuck to a tight range of 1.7% to 2.2% since 2010 even though hiring has surged.

The amount of time people worked each week, meanwhile, was unchanged at 34.6 hours to remain at a postrecession high. Employment gains for November and October were revised up by a combined 50,000. The government said 353,000 new jobs were created in November, up from a preliminary 321,000. October's gain was raised to 261,000 from 243,000.

The economy created 2.95 million new jobs in 2014, marking the biggest hiring spree since a 3.2 million increase in 1999. Yet the labor-force participation rate dropped 0.2 percentage points in December to 62.7%, matching a postrecession low and a level last seen in 1978."

See also Jobs Report: U.S. Adds 252,000 Jobs; Unemployment Falls to 5.6%.

Summing Up

Employment continues to increase at a nice pace, but wages continue to lag behind the increase in employment.

The unemployment rate continues to decline and may even go below 5% this year. That said, the long term unemployed seem to have dropped out of the labor force, and this is obviously a negative contributing factor to the reduced unemployment rate.

In sum, the U.S. economy keeps making progress, but there is a very long way to go before we reach any level that we used to refer to as 'normal.'

That's my take.

Thanks. Bob.

For Individuals, Low Cost Passively Managed Index Funds Will Beat Those Managed by the Professionals ... But the DIY Way Works Even Better

{NOTE: The stock market rallied yesterday, increasing by almost 2%. That's good.

And this morning we'll learn about the unemployment numbers for December. Expectations are for a slight downtick in the widely reported unemployment rate to 5.7% from 5.8%, but the more important numbers will concern such things as (1) wage gains, (2) the number of part-time workers, (3) the quality of jobs created, and (4) the labor force participation rate. Stay tuned.}

But now let's talk about how easy it is for individual investors to outperform the professionally managed accounts.}
.................................................................

Passively managed index funds outperform the vast majority of actively managed funds.

That's primarily due to the simple fact that active managers charge too much more for the added value they provide to their customers.

If two money managers compete and both charge their customers ~1% of the money they manage for doing so, they both won't outperform "Mr. Market." That's simple math, and the total charges by the managers for their investment expertise, advice and services will on the whole reduce the investment returns which their customers would otherwise earn --- and that low cost index funds and actively managed accounts by individual DIY investors actually do earn.

Accordingly, it's hard for active managers to beat Mr. Market in terms of performance, since Mr. Market charges nothing. And in addition, it's not hard to beat the market if a long term DIY methodology is a fundamental part of the investing equation for individuals.

Beating the stock market has become even harder contains this summary of Mr. Market versus active managers for the year 2014:

Only 16% of hundreds of advisers outperformed the Wilshire 5000 last year.

              

"The stock market is no easier to beat today than it’s ever been.

If anything, it may be more difficult.

In 2014, only 15.6% of the . . . advisers . . . did better than the broad stock market . . . . Five years ago, the proportion stood at 33.1%. . . .

A total of 19.9% of equity mutual fund assets are invested in index funds, according to the Investment Company Institute, the mutual fund industry’s trade association."

Summing Up

The vast majority of individuals don't set aside enough money for their long term financial security.

And most of the money that is set aside would be better invested in a low cost passively managed index fund than in actively managed accounts.

What we need are funds with knowledgeable managers who charge little, if anything, and have the long term interests of their customers clearly in mind when making trading decisions.

My own experience is that it's not difficult to outperform the market.

But I've never paid managers to invest on my behalf, and I firmly believe that the DIY way is the best way.

At least that's my take.

Thanks. Bob.

Stock Prices Resume Rise ... Warren Buffett's Solid Market Advice for Individual Savers and Investors .... Stay Calm and Take Your Time When Buying and Selling

After several rough days in the stock market, things improved greatly yesterday. Stock prices rallied for the day, closing about 1.2% higher than when the day's trading began. And early morning indicators point to another solid gain for stock prices again in today's trading.

So what's the lesson to be learned, if any? In my opinion, the lesson is simply that we as individual investors should stay focused on our long term objectives and try to not be overly emotional about short term market declines. This too shall pass, so let's try to keep our eyes on the real prize down the road.

You see, there are two absolute certainties associated with the stock market: over the short term, nobody really knows whether prices will increase or decrease; and over the long haul, prices will increase substantially. Accordingly, understanding and abiding by the rule of 72 (money invested doubles when the average annual rate of return multiplied by number of years = 72) is of critical importance to successful individual stock market investors.

There will undoubtedly be a lot of noise in the short term and some considerable market drops will occur from time to time. In other words, prices will 'fluctuate' in the short term, and sometimes by a lot. And that's about all there is to know about the vast majority of short term market moves, regardless of what the pundits and so-called market experts want us to believe.

The simple fact is that some days prices go up and some days they go down. And when looking at trading on a daily basis, that's only one thing we can ever know for sure --- that prices will fluctuate. {For a summary of the market action yesterday, see U.S. Stocks Rebound After Sharp Selloff.}

So what does all this daily price volatility mean? Not much, if we're long term investors. But long term investors who are planning to buy or sell a specific stock have an additional edge over short term traders --- we can wait for Mr. Market to select an opportune time to do our infrequent but highly consequential individual buying and selling, aka trading.

In sandlot baseball, the batter can afford to sit back and wait for just the right pitch to hit. Since there's no umpire calling balls and strikes, there's no hurry to swing at anything hard to hit. And it's the same thing when it comes to successful individual investing. We can afford to relax and wait for the right pitch to come our way.

Now let's see what famed investor 'Warren Buffet Says Mr. Market Is A Drunken Psycho' has to say about all this:

"When asked about the philosophy that brought him an estimated net worth of about $74 billion, Warren Buffett did not shy away.

“Pay no attention to headlines in the paper or people on television or anything, but put aside a little money each month. I'd put it in a very low-cost index fund. And if you do that regularly throughout your working career, you're bound to have a substantial amount of capital.”

Buffett did caution to not try to time the market and pick individual stocks, but to “just put X dollars per month away and you'll live a very comfortable life.”. . .

“You've got your choice of thousands of businesses. Now, the best thing for most people is to buy a cross-section of them. But . . . the prices change everyday.”

He added: “This imaginary person out there -- Mr. Market -- he's kind of a drunken psycho. Some days he gets very enthused, some days he gets very depressed. And when he get really enthused, you sell to him and if he gets depressed you buy from him. . . ."

Buffett ended . . . with another simple mantra: “Emotions are contagious, and emotions have no business in investing.”"

Summing Up

When Warren Buffett talks, individual investors should listen carefully.

And that's simply because simple and straightforward advice from someone who's 'been there and done that' is worth far more than we will have to pay for it.

And when that simple, straightforward and sound advice is free, so much the better.

With respect to an unsurpassed record of successful investing over a long period of time, Buffett represents the 'gold standard.' He has definitely 'been there and done that.'

So relax and enjoy the long term ride.

That's my take.

Thanks. Bob.

Oil Prices Down Again Yesterday ... How Favorably Will Low Oil Prices Our U.S. Economy?

After a 5% drop Monday, oil fell another 4%. U.S. crude futures closed at below $50 per barrel yesterday for the first time in six years. See Oil Hits New Lows.

This morning oil is up ~1% and the stock market futures are looking positive as well. But as Yogi Berra famously said, it ain't over 'til it's over, so stay tuned.

And speaking of the future, the recent dramatic decline in oil prices is resulting in predictions of another 20% drop in prices, or perhaps $40 per barrel, sometime soon. How's $1.50 per gallon of gasoline sound?

Of course, whether that $40 price per barrel of oil and $1.50 per gallon gasoline will actually become reality or not, nobody knows. That said, if it does happen, it will represent really good news for U.S. consumers and our economy in general. In fact, the new pricing in the oil patch is a sign of many good things ahead for our U.S. economy and consumers.

Oil Price Q&A: What the Plunge Means for Gas Prices, the Economy and Markets is optimistic about low oil prices and an improving U.S economy. Here's a brief 'edited' excerpt from the referenced article:

"Question: Under the most likely scenario of things to come, what are some midterm and long term effects of deflated oil prices for the U.S. economy?

The macroeconomic forecasting firm IHS Global Insight ran some scenarios for what the economy looks like if oil averages $40, $60 or $80 a barrel next year. You can see the results of the simulation here:

The bottom line is that lower prices boost GDP and consumer spending but lower overall inflation pretty dramatically. If prices are this low for the next year it will be a pretty big boost to consumers.

But if prices stay this low for years, it starts to change behaviors. When prices were high, people bought more fuel efficient cars and were less likely to move into the exurbs. If oil stays low these behaviors could reverse. People will again be driving longer in less efficient cars, and over time, some of this boost will fade as people simply buy more gas. In the long-run people will adjust."

Summing Up

Deflation is really happening in the oil patch, and it's a great thing to see.

Although the market's gyrations are a bit unsettling, this is a definite plus for the entire U.S. economy, most businesses and all U.S. consumers. It's also a genuine positive development for Europe, China and Japan as well.

Russia, Iran and Venezuela are the big losers, and Saudia Arabia holds the trump card with respect to deciding on reducing production and thereby stopping the free fall in oil prices. Whether and when they decide to play that trump card, we won't know until the time comes.

So for now, let's relax, stay calm and enjoy the benefits from these game changing lower energy prices.

And let's also hope that the stock market settles down and resumes its upward climb sometime soon, which I believe it will.

{NOTE: I'm not going to comment extensively on President Obama's political grandstanding by announcing yesterday that he will veto the construction of the Keystone Pipeline (See President Congeniality). That's simply another outstanding display of our sick politics in action. But that said, markets and freedom in the private sector will prevail --- eventually.}

At least that's my take.

Thanks. Bob.

Stocks and Oil Took Really Big Hits Yesterday ... Oil's Down Again Today ... Now What?

Both stocks and oil prices fell sharply yesterday as stock averages dropped almost 2% while oil prices dropped by more than 5%. See U.S. Stocks Tumble, Along With Oil Prices.

Both were really big moves, and the oil price decline doesn't appear near its end yet. It's down an additional 2% this morning and has fallen in price by more than 50% the past few months. And when it will stop falling and at what price it will then be, nobody knows.

With respect to stocks, the U.S. markets are getting to look like a bargain, and prices may stabilize soon -- even today. That said, trying to catch a 'falling knife' can be dangerous to your financial health. In fact, although we may be in for a better day today, the rough and volatile ride up and down for share prices is definitely not over.

Here's what I believe --- short term traders should beware and long term investors should remain calm.

Meanwhile, the U.S. dollar rallied again yesterday, interest rates fell and European countries continue trying to fight off a weakening currency, no economic growth, and rising deflationary prospects.

These are definitely interesting times as we enter 2015.

All that said, after we get through this rough patch, the prospects for both the American economy and stock prices look good from now to year end and beyond. And it looks especially bright for U.S. consumers due to declining oil prices, a stronger dollar, more jobs and higher economic growth.

As our U.S. economy continues to strengthen, interest rates stay low far into the future, the dollar strengthens further, and lower energy and other import prices put more money in our consumers' pockets, it's easy to be optimistic about the outlook for U.S. businesses and our economy's prospects.

While the rest of the world struggles, our own domestic economy will keep chugging along, jobs will grow, and the stock market will resume it upward climb. At least that's how I see things

Thus, yesterday's oil price and further interest rate declines, accompanied by a stronger dollar, are all positives, and I'm not at all discouraged about the fall in share prices. In fact, other than the dreary outlook for energy companies, of course, things in the market look good to me.

That's my take.

Thanks. Bob.

Too Much Spending and Too Little Saving in the Present Mean Big Problems in the Future .... Illinois and the U.S. are Between a Financial Rock and a Hard Place .... Are You?

Individuals and governments have much in common when it comes to spending more than we make and saving too little for the commitments related to the future.

As an example, we'll use Illinois, a very financially troubled state, to examine how spending more than we 'earn' while setting aside too little for our future obligations will create seemingly insoluble financial issues in the present. And how, once we're in that situation, there are no easy solutions. Thus, acting in a financially responsible manner from day one is the only legitimate road to financial independence, security and not unduly burdening future generations.

Illinois is in the worst financial condition of all 50 states. While that's not a great achievement, it is definitely noteworthy. And it  took decades of mismanagement and neglect to accomplish. Thus, fixing the state's longstanding financial mess will take a long time as well.

But even more noteworthy and of interest will be how the politicians go about addressing the various issues. More taxes, lower spending, lower public sector pensions, less money for education and other political hot potatoes are all going to be part of the mix, assuming there is a serious attempt to deal with the state's financial shortcomings. Doing everything for everybody and trying to be all things to all people on the cheap simply won't work, as the citizens of Illinois have learned.

Just how bad is it? Illinois Faces Big Revenue Hit in 2015 is subtitled 'Expiration of Tax Increase Comes as State Grapples With Budget Crunch, Unpaid Bills and Pension Woes:'

"As fiscal prospects rebound for most states, Illinois has continued to struggle—and things are about to get worse.

Thanks to the expiration of a four-year tax increase put in place because of fallout from the 2007-09 recession, the state with the nation’s most dire fiscal outlook will see income-tax rates fall by 25% in coming days even as it faces a budget shortfall, a deeply underfunded retirement system and billions of dollars in unpaid bills. . . .

State forecasters have projected that tax revenues will decline because of the falling rates by $2.1 billion in the current fiscal year and an additional $2.7 billion in the new fiscal year starting July 1.

The state spends around $36 billion annually on services such as schools and health care, pension costs, and other operating expenses.

Illinois’s budget challenges come as other states see their fiscal positions continue to stabilize and reserves build after weathering the deep recession at the end of last decade that fueled sizable drops in tax revenue. Illinois ... has one of the most deeply underfunded employee pension systems in the nation.

“Illinois is an outlier obviously in many respects,” said Nick Samuels, a vice president at Moody’s Investors Service, which has a negative outlook assigned to the state. . . .

The governor-elect, who takes office Jan. 12, has talked broadly about stimulating economic growth by holding down taxes and curbing government spending but has provided few details. During his campaign, Mr. Rauner talked about having the income tax at 3% for individuals by the end of his first term, but he hasn’t spelled out what rates he favors over the next four years to get there.

The individual income tax rate in Illinois is currently 5% and will fall to 3.75% on Jan. 1. It was at 3% before Mr. Quinn and lawmakers approved the temporary increase. Illinois doesn’t have tax brackets; residents pay the same rate on all of their income.

Mr. Rauner also has discussed broadening the state’s sales tax. Illinois’s sales tax is largely applied to just goods and not services."

Summing Up

Whatever else he may be, the new Illinois Governor Bruce Rauner is not a magician.

Accordingly, since it took a long time for Illinois politicians to create the worst financial problems of any of the 50 states, it will also take a long time to solve those issues, even if a serious bipartisan effort is made. And common sense bipartisanship has never been a strength of Illinois politics, or the U.S. either, to say the least.

One good sign from the recent election of businessman Rauner (and the recent U.S. elections as well) is that the citizens of Illinois (and the U.S. as well) seem to be ready for some legitimate truth telling and dealing with the state's (and nation's) financial train wreck.

That said, taxes, government spending, educational reform (including public sector pensions), creating more private sector jobs, eliminating unnecessary government jobs and spending, and working to achieve long term sustainable economic growth in the private sector will all have to be part of the solution. How that all happens is the big question that must be answered by Republicans, including Governor Rauner, and Democrats in the state's (and nation's) legislature.

The fixes are definitely possible over the long haul, but politics as usual won't make it happen.

So let's all stay tuned, wish Governor Rauner bipartisan success, and hope for the best for Illinois (and our nation).

Thanks. Bob.          

We The People Have Our Priorities In Order .... Now It's Time for our Politicians to Do the Same

Sometimes it's nice to see what the priorities of our fellow citizens really are. Many of the headlines recently have been about ISIS, Russia and Iran, race relations, immigration, education and income inequality. And, of course, those items are important for all Americans.

But according to a new Gallup poll (for the details, click on Gallup link below), they are not the four most important priorities for the vast majority of us, and that's a good sign for all of us, at least in my view.

Along those lines, maybe --- just maybe --- the year 2015 will see the beginning of some common sense based focus on the biggest issues facing America today. Let's hope so.

Facts & Figures: Government Leadership Worries Americans Most has the clear headed results of a just released Gallup survey:

"A poll released on Friday found that Americans were more worried about the country’s political leadership and political conflict than any other issue.

Via Gallup

In 2014, four issues generated enough public concern over enough months for at least 10% of Americans, on average, to identify each of them as the nation’s most important problem. Complaints about government leadership — including President Barack Obama, the Republicans in Congress and general political conflict — led the list, at 18%. This was closely followed by mentions of the economy in general (17%), unemployment or jobs (15%) and healthcare (10%).
… 

2014 was also the first year since 2007 that the economy was not the top ranking issue, and it was the first year ever in Gallup records that dissatisfaction with government topped the list. Without a dominant issue such as the economy, the Iraq War or terrorism crowding out other issues as they have in years past, this is also only the third time since 2001 when three issues garnered at least 15% in average mentions."

Summing Up

There's hope for better times in America as we enter 2015.

Plenty of it.

Most Americans "get it." We really do.

Now let's 'encourage' the politicians to do so as well. While that's not likely, it is possible. Definitely so.

That's my take.

Thanks. Bob.

Home Ownership and the Mortgage Interest Deduction ... Caveat Emptor (Let the Buyer Beware)

There are many stories concerning the virtues of home ownership compared to renting, and indeed there are many good reasons to own. But there are many myths as well. One of the virtues, or perhaps myths, is the income tax deductibility of mortgage interest paid on loans. The bigger the better, or so the story goes.

What we don't often consider fully when making the buy decision, however, are the many myths associated with buying the 'house of our dreams' --- such as the bigger the mortgage loan in relationship to the purchase price, the more likely the home will be worth less than the amount owed on the mortgage, aka going underwater. Nor do we hear about how the longer the loan's duration and more affordable the monthly payments, the vastly bigger the total interest payments will be over the life of that loan.

But let's consider more fully just one of these virtues or myths today --- the mortgage interest deduction as a reason to buy instead of rent. It's time for some truth telling.

Why the mortgage tax break isn't helping many taxpayers tells the story of low interest rates and the value of the much hyped home mortgage interest deduction:

"For generations of U.S. homeowners, the tax deduction on mortgage interest has been a sacrosanct loophole that no one in Congress dare touch.

But the collapse in interest rates is producing a bizarre and, so far, underappreciated result. It is making that loophole less and less valuable.

Indeed, for growing numbers of homeowners the loophole is now almost completely worthless. The mortgage-interest deduction is no longer a middle-class tax break. . . .

Do the math.

Rates recently plunged to their lowest levels since May 2013, according to Freddie Mac. The rate on new 30-year home loans dipped as low as 3.8% . . . . Meanwhile, according to the National Association of Realtors, the median price on existing (i.e. secondhand) homes sold is $208,000.

So someone who buys a home with a typical 20% down payment will be borrowing $166,000. At 3.8%, they’ll pay $6,200 interest in the first year, and less and less interest each year as the balance slowly declines. (Only the interest payments on a mortgage are deductible, not the principal repayments).

OK, so if you choose to itemize your taxes each year you can write off that $6,200 (and declining) in interest.

But here’s the thing.

You will be able to write off $6,300 (for 2015) just by taking the standard deduction, thereby saving yourself a bunch of paperwork and hassle. And that’s if you are single . . . . If you are a couple filing jointly, the standard deduction doubles to $12,600.

Yes, there are a bunch of other issues in play, and everyone’s tax situations are different. For example, if you itemize your deductions you can also deduct your property and state taxes. And when you add those to your mortgage interest you may find itemizing taxes cuts your tax bill, even if you are married filing jointly. A married couple paying $6,000 in mortgage interest, $5,000 in property taxes and $5,000 in state income taxes can deduct $16,000 from their taxable income by itemizing, instead of just $12,600 by taking the standard deduction.

But for many people that gain will add up to, at most, a few hundred bucks in saved taxes.
Furthermore, if they chose instead to double up their state and property taxes every other year, which is perfectly legal, the tax benefit of the mortgage interest deduction would vanish completely.

Instead of paying $10,000 in state and property taxes each year, they could pay $20,000 this year and then skip next year’s. That way they can deduct a thumping $20,000 in itemized deductions from this year’s taxable income. Then, next year, they can just take the $12,600 standard deduction. So over two years they can deduct $32,600. They’ll end up paying less tax than they would if they had kept their mortgage deduction and itemized each year.

This math is new. As recently as 2008, 30-year mortgage rates were over 6%. In early 2000 they were north of 8%, and back in the early 1980s they were in double digits. Back then people were paying a lot of interest, and the deduction was really valuable."

Summing Up

The point is simple. Don't buy a house based on the tax advantages of home ownership compared to renting.

There are many disadvantages to home ownership, including not knowing how long it will take to sell it when the time comes to move, how much the selling price will then be, how long it will take to sell the house or how much it will cost for realtors and relocation.

Then there are the other costs homeowners 'enjoy' such as maintenance, repairs, renovations, insurance and property taxes.

Owning a house can be a pleasure. It can also be a pain.

Thus, tax breaks associated with buying should be left out of the rent versus buy decision, as should existing low interest rates, assuming this won't be the last home you will buy. If it is, then go ahead and buy.

Because unless this will be the last 'stop,' existing low interest rates will rise down the road, and then that same current positive affordability factor will result in a lower affordability factor for the next buyer. That in turn will probably mean a lower selling price when your time comes to sell.

Caveat Emptor. That's my take.

Thanks. Bob.

'Amateurish' DIY Investing Beats the Pros

Over the long haul, individual DIY investors can outperform the market professionals by following one simple rule. Don't pay for what you don't get. In simple words, the market consists of professional investors competing against other professional investors.

But it's not even a zero sum game for individual savers and investors who pay the pros to 'play' for them. Thus, the fees and charges of the so-called professionals will necessarily result in below average market returns for most individuals. In fact, the vast majority for individuals investing with the pros will be net losers compared to those who take what the market gives them and avoid the fees and charges.

If beating the pros by investing in low cost passive index funds sounds too good to be true, it's not. In fact, it makes sense for the vast majority of long term oriented savers and investors.

As an educational experience, the 81 minute video accompanying New 'Random Walk' wisdom from Burton Malkiel is well worth taking the time to watch. But first we'll read why what Malkiel has to say is very much worth listening to:

"Every year in the investing business a load of flashy new books comes out . . . .

And a few stand the test of time, getting reissued every few years. One of those is being reissued now: “A Random Walk Down Wall Street” is in its 11th edition and will come out in early January. The author of Random Walk is Burton Malkiel, the celebrated Princeton professor (and it) has been a fascinating time in the markets since Burt's groundbreaking book first appeared in 1973. Going back over his early predictions is nothing short of financial time travel.

Proven right

For one, Burt was an early proponent of finding a way for ordinary people to own entire stock indexes. Index funds appeared soon after. He was a strong promoter of passive investing, an approach which has caught fire in the years since.

Burt long has been critical of active management and of the real damage it does to America's retirement investors. He has taken a lot of heat from Wall Street for his views, yet the decades ultimately have proven him right. . . .

As Burt writes in his latest edition, . . . it is possible to figure out which fund is going to give you the best possible return on a consistent, repeatable basis.

"The two variables that do the best job in predicting future performance are expense ratios and turnover," he writes. "High expenses and high turnover depress returns — especially after-tax returns if the funds are held in taxable accounts."

That's why Burt and his fellow members on the Rebalance IRA Investment Committee — his colleague of many years at Vanguard, Charley Ellis, and Jay Vivian, the former managing director of the IBM Retirement Funds — recommend index-style exchange-traded funds . . . .

Powerful steps

In the book, Malkiel specifically recommends a portfolio approach to holding such funds, preferring low-cost funds in risk-adjusted percentages matched to each individual client's goals. . . . Along with “Elements of Investing” — a shorter money basics book Malkiel co-wrote with Ellis — Random Walk is a powerful text to read and study for anyone seeking to take concrete steps toward financial security.

You could grab a bunch of hot new finance titles each year, read through them all and, in the end, not learn anything close to the usefulness of these two books alone. If you're trying to get a handle on your financial future, I say cut to the chase: Get these two books from your local library or order the newest editions just out.

However you ultimately choose to invest, you'll be far wiser for the time spent and more certain of your own financial decisions for years to come."

Summing Up

To repeat, the video linked at the bottom of the article lasts 81 minutes and is well worth taking the time to watch.

It's one of the best I've seen and explains in simple language why investing in a low cost portfolio of diversified blue chip dividend paying stocks is the best way for individuals to achieve financial security and peace of mind.

Successful DIY investing is not that hard to do, but it is definitely a different way of looking at the world. And it's also an approach not endorsed or advocated by self interested commissioned sellers of actively managed mutual funds, including stock brokers.

All that said, relative to other alternatives, low cost DIY index investing is a profitable thing to do. And here's why.

Because at the end of the road, long term oriented investors are likely to have twice as much money compared to what they would have if their money had been managed by the so-called professionals --- a twofer for very little expense, trouble and toil, in other words.

Amateurism works for me, and it will work for you, too.

That's my take.

Thanks. Bob.

A New Year's Resolution Worth Keeping ... Financial Tips for That 'Rational' Person Within Each of Us

Happy New Year! 2015 is here and 2014 is officially in the history books. For individual investors, the stock market turned in another positive performance as the S&P 500 gained 11.4% in 2014, and 13.68% when dividends are included, following on the heels of a huge ~30% gain in 2013.

And now it's on to 2015. So here's my proposed New Year's resolution for all of us individual savers and investors as we try to navigate our way through the challenges, surprises and happenings of 2015 and beyond --- that we will act rationally and make informed financial decisions.

Over many years, it's become obvious to me that many important and life changing financial decisions that individual savers and investors make aren't rational. Instead emotions take over and this often works contrary to our best interests. It's a buy high and sell low mentality, often 'aided' by self serving financial advisers, stock brokers and other sellers trying to convince us to part with our money and give it to them.

This "persuasive selling" is simply a fact of life whenever people are trying to sell us whatever it is that they are selling, whether it be student loans, credit card purchases, cars or homes, As the accompanying article points out, suckers aren't born --- instead we're enticed by self interested sellers. And that's why acquiring personal financial literacy and adopting a caveat emptor attitude, aka let the buyer beware, are necessary 'assets' for individuals to invest in and develop at an early age.

2015 investing tips for the rational investor is well worth reflecting upon as it contains many truisms for all individual investors and other buyers as well:


"Now is the time of year when pundits put forth their market prognostications for the coming year, ballyhoo their favorite stocks and dazzle readers with can’t-miss strategies and trends.

 

So here are a few words to the wise . . . .

• The future will be full of surprises — count on it. No one can see through the curtain that separates today from tomorrow so avoid those who predict the future without divine inspiration.
• Hard times lie ahead, so do good times. This should not frighten you but it’s why your financial planning and investment strategy must be flexible enough to accommodate both outcomes.
• Speculation is the sport of fools. The success of a fool doesn’t prove that his course was wise or guarantee that his success will continue. Luck can bring temporary success but time is the ultimate judge of all speculations. . . .

• Suckers aren’t born, they are enticed. Never forget that a large commission, a bad investment and a small conscience are often found in close proximity to one another. . . .
• Don’t invest your retirement assets based on your worst fears — it’s a sure recipe for failure. Rather, focus on what is probable and move forward. Distinguishing between what is possible and what is probable will eliminate many investment mistakes. . . .

• The wealth of a nation lies in the minds of the citizens, not in its natural resources or the gold in its vaults. . . .
• The dominant emotion in investing is fear. It can overcome the weight of the historical evidence and all intelligent analysis.
• Your investment life should be boring — make the rest of your life exciting.
• Patience is the most important ingredient in wealth accumulation. This, sadly to say, is one reason why so few people are wealthy.
• We live in an age of information overload. None of the cacophony emitted by the financial media will give you an edge in the market because all the information is already factored into asset prices.
• After subtracting the costs of management fees, trading expenses and taxes; most mutual fund managers don’t add value — which explains why their average tenure is about five years. They’ll never admit that most of what they do is just speculating with shareholders’ money.
• Wall Street’s big names will continue with business as usual in 2015, efficiently transferring client wealth to their own accounts.
• The beneficiaries of all those “What to buy in 2015” articles in financial publications are more likely to be advertisers, not readers. If you come across an article entitled “2015– Another Good Year to Buy Index Funds,” you’ll know things have changed.

In 2015, investors will once again have the opportunity to receive the market's return with little effort and almost no cost. Don't pass up this golden opportunity.

The ending value of a continuously funded, globally diversified, annually rebalanced indexed portfolio over an investing lifetime will be greater than most investors can imagine and which few stock pickers or market timers will ever achieve."

Summing Up

I especially like the suckers aren't born but enticed piece of advice. To most sellers, it's all about getting the buyer to part with his money.

So always be careful when confronted with all the self interested 'enticers' that are out there.

Let's resolve in 2015 to act rationally when making personal financial decisions of all kinds. 

That's definitely a New Year's resolution worth both making and keeping.

Happy New Year. Bob.

The Certainty of Uncertainty

In my view, the best way to have a successful year in 2015 is to (1) prepare for the worst, (2) hope for the best, and (3) get ready to be surprised. In other words, nothing about the future is guaranteed.

That said, we still need to prepare ourselves for what may lie ahead, because often our 'well-laid' plans will 'surprise' us and work out for the best. Frequently, however, what we predicted and planned to happen isn't what happens at all. That's life.

And it's the same thing with investing. The so-called market professionals and pundits purport to tell us what lies ahead for both the economy and stock prices. Sometimes they are right but more often they are wrong. See The Big Economic Unknowns of 2015, From Unemployment to Oil.

Uncertainty is a fact of life. And predictions are dangerous --- especially those about the future. {But what other kind are there? And besides, they're fun to make.}

So the sooner we acknowledge that simple certain fact about an uncertain future, the better prepared we will be to handle life's many victories and setbacks alike.

The Consistency of Inconsistency, and How to Adapt Your Financial Goals tells the story of the certainty of life's uncertainties:

"From investing to world affairs, we tell ourselves that there’s so much information available that we can know what’s going to happen next. We tend to overlook that our certainty comes from selectively building a picture of the world that conforms to what we want to happen, not what will happen.

I see it all the time when people talk about trying to time the market by buying a bundle of stock at just the right moment. They’ll compile a list of recent events. Then, based on that list, they’ll express, with great certainty, that it’s time to get into the market. At that same moment, others will assert that it’s time to sell and get out of the market. It’s both entertaining and frustrating to hear different people use the exact same information to justify two opposite actions.

Unfortunately, the noise isn’t going to disappear any time soon. Change and uncertainty are consistent in their inconsistency. We don’t really know what will happen next, and we need to get better at living with that reality. We can start by putting the noise in context.

By accepting, or even embracing, the idea that uncertainty is part of the deal, that in itself becomes a type of certainty. Instead of being shocked by every change or unexpected piece of news, we adapt. We figure out another path that keeps us moving toward our goals.

If you do this yourself, you’ll soon discover that your certainty about uncertainty separates you from a lot of people. Just look around and listen. It’s mind-boggling how sure people are about what they “know” will happen in the future, even though their certainty is an illusion. . . .

Yes, it’s not easy to get comfortable with uncertainty. But as we know from the old saying, few things in life are certain except for death and taxes. There’s no reason to think we can’t learn to deal with the rest as it comes and end up pretty close to where we want to be anyway. It will just happen with fewer panic attacks along the way."

Summing Up

We were all told at an early age that there is nothing certain in life except death and taxes.

Nevertheless, we too often act as if nothing could be further from the truth.

We can affect most outcomes in a positive way, of course, and working diligently to do so is always a worthwhile endeavor.

That said, let's try our best not to be too shocked when the inevitable bad news arrives.

That's just life happening, and we shouldn't want it any other way. Why be bored?

That's my take.

Thanks. Bob.

"Cost Based Pricing" Is One Huge Reason College Costs Are Too High ... Easy to Get Government Sponsored Student Loans Don't Help

Government sponsored and subsidized entities price their services based on the costs incurred to provide those services, aka 'cost based pricing.' In contrast, private sector companies operate in a competitive world and practice 'price based costing.' They must generate a profit and still price their offerings low enough to attract customers. Thus, unlike the way things are done in the public arena, cost control in the competitive private sector is essential.

There is a world of difference between organizations that practice 'cost based pricing' and those who employ 'price based costing.'

College costs are too high. Student loans are easy to get. These loans make college costs higher than they otherwise would be, and make thereby big debtors out of young students at an early age. This debt dilemma affects college attendees from all backgrounds. (See Colleges' New Aid Target: the Middle Class.)

And contrary to popular belief, these student loans frequently do more harm to, than good for, those students and their families who receive them. And just why is that, you may ask?

Well, the vast majority of the money loaned to students for tuition goes to hire and compensate professors and administrators, but also for such things as building or renovating expensive campus facilities. The cost of college is essentially a cost based formula where all the costs of the college (primarily personnel related) are added together, and only then are tuition and fees determined.

And after all that has been factored into the equation, student loan balances fill in the remaining financial shortfall. Thus, what becomes free money to the college results from expensive loans to students. But that dirty little secret isn't even part of the college recruitment and enrollment discussion.

{NOTE: We're using student loans as the prime example of the dangers of debt which all too often begins at an early age. We're skipping other lender related problems such as (1) punitive interest rate credit cards, (2) lengthy car loans which make the purchase price high, monthly payments low, and result in the borrower going under water before the loan is paid off, and (3) low money down home mortgages to buy otherwise unaffordable houses, and which mortgages put all of the risk of a price decline on the often unsuspecting home buyers.}

Colleges Need a Business Productivity Audit is subtitled 'Professors are teaching less while administrators proliferate. Let's find out how all that tuition is being spent:'

"College tuition rates are ridiculously out of hand. Since the late 1970s, tuition has surged more than 1,000%, while the consumer-price index has risen only 240%. The percentage of annual household income required to pay the average private four-year tuition reached 36% in 2010, up from 16% in 1970. What explains the ever-increasing costs?

For one, three quarters of a typical college budget is spent on personnel expenses, including benefits. Yet the average professor spends much less time in the classroom today than two decades ago. In 2010 44% of full-time faculty reported that they spent nine or more hours a week in the classroom . . . . In 1989 more than 60% said they did. The traditional 12-15 hours a week teaching load is changing into a six-to-nine-hour workweek, a significant decrease in productivity. . . .

There’s another problem: The number of college administrators has increased 50% faster than the number of instructors since 2001, according to the Education Department. Administrative costs have far outpaced other college expenses during the past two decades.

There are numerous examples, but some of the more stunning cases include the University of Minnesota, which added 1,000 administrators in the past decade, reaching a ratio of one administrator for every 3.5 students . . . .

All the while, colleges launched a prestige arms race, dropping millions on extravagant buildings. Higher-education construction spending has doubled since 1994, with a peak of $15 billion in 2006 that has leveled off at $11 billion in recent years. . . .

On top of that, student-loan debt has skyrocketed to $1.2 trillion. Easy access to government loan money has given colleges license to boost tuition with no motivation to keep costs down. College counselors encourage incoming freshmen to take on unconscionably large loans that ultimately fatten school coffers. The institutions know they will not be held liable for missed loan payments. More than 20% of the nation’s households have incurred student debt, averaging $33,000 for the class of 2014 . . . . Default rates stand at 14%—higher than for mortgages, autos or credit cards.

In short, colleges and universities engaged in a spending spree because they can."

Summing Up

In the private sector, companies that don't offer competitive prices and compelling values cease to exist. They go broke.

But that market based price competition factor simply doesn't exist in our sick monopolistic system of government sponsored and subsidized higher education.

As colleges spend more, they just raise the price and 'help' the students secure more government loans to pay the higher tuition and fees. It's a monopoly with no price discipline imposed by the 'buyers.'

This makes a mockery of fiscal responsibility and the presumed fiduciary role of college leaders and their government allies. They certainly aren't acting in the best interests of American citizens, and especially college students and their hard working families.

If less money were available, then competition would be introduced and college costs would inevitably and properly decrease in dramatic fashion.

Let's teach our young college friends to have a healthy aversion to debt lest they find themselves in a deep hole from which it will be very difficult to escape.

That's my take.

Thanks. Bob.

When Investing for the Long Haul, Don't Be Your Own Worst Enemy

Stocks go up and down. The only sure short term bet is that share prices will fluctuate and sometimes violently.

Long term, however, the market's direction is up.

The simple fact is that emotionalism plays a much larger role than it should when it comes to investing for the long haul.

In other words, individual investors have a tendency to do the wrong thing by buying high and selling low.  It's not the intelligence part that makes us our own worst enemy. Instead it's the emotional side.

How Investors Sabotage Their Own Performance is subtitled 'People Often Fall Prey to Biases that Harm Their Returns. How to Recognize the Pitfalls:'

"It’s funny what a bull market can do to our brains. . . .

Money earned passively in the market, rather than from toiling at work, can feel easier to gamble with. It is a dangerous bias psychologists call the “house-money effect.”. . .

Everyone wants to assume that they can think rationally. But with bear markets now a fading memory . . . now is an important time to understand the common behavioral biases that cause investors to make regrettable decisions during bull markets.

Here are five others.

The backfire effect. This is a powerful bias that causes us to double down on our beliefs when exposed to opposing viewpoints.

“We think this response occurs because people respond defensively to being told that their side is wrong about a controversial factual issue,” says Brendan Nyhan, an assistant professor of government at Dartmouth College, who has studied the backfire effect in politics.

“In the process of defending that view, they can end up convincing themselves to believe it even more than they otherwise would have if they had not been challenged,” he says.

The same flaw can run wild in investing debates.

If you are convinced that we are in a lasting bull market, how do you feel when you hear someone say that stock valuations are historically high, or that we are overdue for a correction?

If you find yourself so critical of opposing views that you become even more convinced the bull market will last, watch out. Once your priorities shift from determining the truth to blindly defending your original views, you have lost the ability to think rationally.
 
Confirmation bias. This flaw causes us to seek out only information that confirms what we already believe.

Access to financial opinions has exploded in recent years . . . . But it can be dangerous, because no matter what you believe—and no matter how wrong those beliefs may be—you can likely find dozens of investors who agree with you. Having other people confirm your views may cause you to become more convinced that those views are correct.

Charles Darwin had a knack for obsessing over information that disproved his own theories. Investors should try to do the same.
 
Anchoring bias. This phenomenon causes us to cling to an irrelevant piece of information when estimating how much something is worth.

Your opinion on how much a stock is worth may be anchored to how much you paid for it. If you paid $100 for a share of Apple stock, you are probably more likely to think shares are worth more than $100 than another investor who paid $80 for the stock.

But the market doesn’t know how much either you of you paid for the shares. And it doesn’t care what either of you think is a fair price. Markets will do as they please, regardless of what price you are fixated on.

Recency bias. This one is simple: It is another term for the tendency to use the recent past as a guide to the future.

People like patterns. If stocks have just gone up, the natural tendency is to assume they will keeping going up—at least until they go down, and then we assume they will keep going down....

Markets move in cycles, but people forecast in straight lines. That is recency bias, and it is particularly dangerous after a long bull market.

Blind-spot bias. This—the most dangerous investing bias—is a flaw that causes us to think the biases described above affect other people, but not ourselves."

Summing Up

Individual investing has to be a long term commitment in order to be successful.

Part of successful individual investing includes the ability to understand the role that our emotions and biases tend to play when stock prices decline.

Since we humans tend to react more quickly to negative events than to positive occurrences, we are much more likely to do the exact wrong things at market bottoms and tops. We too often panic and sell when the market is falling rapidly, and then turn right around and buy when stocks are rising.

That's the losing buy high and sell low 'model,' and it's harmful to one's long term financial health and well being.

So becoming better acquainted with our emotional side is perhaps the best thing we need to know about individual investing.

And the second best thing to learn is the power of compounding and the rule of 72 (money doubles each time the number of years multiplied by the percentage annual rate of return equals 72, as in 12 x 6, 9 x 8).

So start early, stay the course, and reap the long term benefits of a rising stock market.

That's my take.

Thanks. Bob.

American Governance ... An Informed Citizenry is a Fundamental Requirement of a Well Functioning Society of Equals

American citizenship in the world's oldest democracy is a wonderful thing. But it comes with civic obligations and responsibilities. It's definitely not a free thing.

Somewhere along the way too many of us seem to have forgotten that for our nation to prosper, it must be made up of free, hard working, educated and informed American citizens.

As Americans we are each equally free to pursue our individual goals, but there are no guaranteed outcomes. General Douglas MacArthur said it best, "There is no security on this earth; there is only opportunity." So while we are blessed with unlimited opportunities, what we do with those opportunities is up to us. We're free to choose and pursue our way through life as we see fit.

Our government is there to serve us, and not to tell us what to do or to do for us that which we can do for ourselves.

Perhaps the 'Father of our Constitution' James Madison put it best in 1788 when he wrote the following in The Federalist Papers: No. 51:

"Ambition must be made to counteract ambition. The interest of the man must be connected with the constitutional rights of the place. It may be a reflection on human nature, that such devices are necessary to control the abuses of government. But what is government itself, but the greatest of all reflections on human nature? If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself.

A dependence on the people is, no doubt, the primary control on the government; but experience has taught mankind the necessity of auxiliary precautions."

Freedom in a democratic form of government requires its members to properly assume and discharge their civic responsibilities. In that regard, an informed electorate is essential. However, it's not a given and it doesn't happen automatically. It must be learned and continuously practiced.

Civics Instruction Moves Up in Class is subtitled 'More states mandate tests on the Subject Amid a Movement for Use of Citizenship Exam:'

"After years on the back burner of the nation’s educational agenda, civics is making a comeback, with a number of states mandating new classes or assessments and a burgeoning national push for high-school seniors to pass the exam required of new citizens. . . .

Recent national reports show students could use a lesson in civics, which generally studies the role of citizens in public issues and covers such topics as how to dissect current events or apply the Constitution to modern issues. About two-thirds of students tested below proficient on the civics portion of the National Assessment of Educational Progress in both 2006 and 2010. Only 10 states require a social-studies test to graduate from high school, according to the Education Commission of the States. . . .
               
A Center on Education Policy study found in 2007 that about 45% of elementary schools reported cutting time for other subjects to focus on math and reading. And only about one in three elementary teachers reported covering civics subjects on a regular basis, according to federal survey data taken in 2006 and 2010.

Proponents say enhancing civics instruction could help reverse low voter turnout—about one in five adults ages 18 to 29 voted in the 2014 midterms, according to researchers at Tufts University’s Tisch College of Citizenship and Public Service—and address mounting frustration with dysfunction in Washington. They also say it can help increase engagement by minorities and the poor, who typically receive less civics education than more affluent and white students.

“There’s a stronger sense from people now that we must do something in order to be functional as a nation and at the community level,” said Meira Levinson, an associate professor of education at Harvard University who has studied civic-empowerment issues.

Meanwhile, coalitions in seven states have launched a growing movement to require students to pass the U.S. citizenship exam before they can graduate. By the end of next year, proponents aim to introduce and pass legislation in 12 to 15 states.

“So little has been done over so many years now, let’s make sure we take that one solid first step,” said Sam Stone, political director for the Civics Education Initiative, an affiliate of the Joe Foss Institute, a nonpartisan nonprofit based in Scottsdale, Ariz.

But some backers of more civics study doubt the value of the 100-question citizenship exam, arguing it is more about rote memorization than learning how to be a better citizen.

“This is addressing the right problem with the wrong solution,” said Ted McConnell, executive director of the Campaign for the Civic Mission of Schools, a nonprofit that advocates for civic learning.

American high schools typically offered three classes in civics and government until the 1960s, according to Mr. McConnell’s group. More typical nowadays is an “American government” class that focuses on the structure of democracy more than the practicalities of making it work. Mr. McConnell said schools need more hands-on instruction now, not another test.

Some caution that jumping into civics instruction could invite teachers’ political biases into the classroom. “Teachers need training on how to lead discussions on controversial issues,” said Anna Saavedra, associate policy researcher for RAND Corp, a nonpartisan nonprofit, who supports greater attention to civics in the classroom. “There are ways for teachers to learn that, but it’s a learned skill.”

Only 15% of civics and government teachers surveyed in a 2013 national report from Tufts University’s Tisch College of Citizenship and Public Service said they had been mentored or coached by an expert or administrator."

Summing Up

Here's my question --- Who will teach the teachers about our democratic freedoms and civic responsibilities?


And who will teach the teachers about the relationship of our free enterprise system to a free and prosperous society of equals?


Sadly, too many of us act as if an educated and informed citizenry aren't all that important to a free, successful and prosperous America.

And too many of us believe that a thriving and entrepreneurially oriented economy is over and belonged to an America that no longer exists.

The hard work and sacrifices of our Founders gave us this wonderful thing we call America.They took nothing for granted. Neither should we.

Let's teach our kids and grandkids a much needed civics lesson about what being a free and informed American really means, including the hard working part.

Both they and we will be glad we did.

That's my take.

Thanks. Bob.

Our Weakened System of Education ... Inputs and Outputs ... The M.B.A. Example and the Capability of U.S. Students Compared to Asians

The benefits we derive from things are a direct result of the time and effort we put into those same things. We refer to this input-output connection as productivity, aka the relation between what goes in and what comes out.

The more we get out of any given amount of effort in terms of time, money, or machinery, the more productive we are. And in the final analysis, it is this thing we call productivity that determines our individual, national and global prosperity. Inputs generate outputs.

In education the discussion seems to always focus on spending more money and not the skills, knowledge or capabilities of the finished product, aka the 'educated' individual. But in education, as elsewhere, productivity matters most, and outputs must become Job #1.

Compared to the rest of the world, the overall U.S. educational system, all the way from K-12 through college, is too expensive and our students are becoming uncompetitive globally.

As a result, the system is sending warning signals about our nation's future competitiveness, and in turn, our future prosperity.

So let's wake up while there's still plenty of time to fix what ails us educationally. And let's make sure that our young graduates are prepared to compete with all comers in the competitive global marketplace of the future.

On B-School Test, Americans Fail to Measure Up offers this gruesome commentary:

"New waves of Indians and Chinese are taking America’s business-school entrance exam, and that’s causing a big problem for America’s prospective M.B.A.s.

Why? The foreign students are much better at the test.

Asia-Pacific students have shown a mastery of the quantitative portion of the four-part Graduate Management Admission Test. That has skewed mean test scores upward, and vexed U.S. students, whose results are looking increasingly poor in comparison. . . .

The GMAT, administered by the Graduate Management Admission Council, is typically required to apply to M.B.A. programs, along with undergraduate transcripts, essay responses and letters of recommendation. Students at top programs like Harvard Business School and Stanford Graduate School of Business have mean GMAT rankings around the 96th percentile.

Of the test’s four sections—writing, integrated reasoning, quantitative and verbal—admissions officers view results from the quantitative section as a key predictor of business school success.

Percentile rankings are calculated using a raw score—for the quantitative section, typically between 0 and 51. In 2004, a raw score of 48 in the quantitative section yielded a ranking in the 86th percentile, according to GMAC; today, that same score would land the test-taker in the 74th percentile.

U.S. students’ raw scores on the quantitative section have remained roughly flat over the last decade at around 33, but their percentile ranking has fallen as more of their higher-scoring international counterparts take the exam.

Hires with Western training are in demand overseas, and students from Asia are flocking to U.S. business schools. Asia-Pacific students comprise 44% of current GMAT test-takers, up from a decade ago, when they represented 22%, according to GMAC. U.S. students, once the majority of test-takers, now comprise 36% of the whole.

On average, Asia citizens fare better on the quantitative section of the exam than Americans do, according to GMAC data. This year, the mean raw score for students in the Asian-Pacific region on that section was 45, above the global mean of 38 and the U.S. mean of 33. . . .

The shifting data give an impression that U.S. student aptitude is declining, said Sangeet Chowfla, GMAC’s chief executive officer. He said schools have complained to him that the test’s global rankings were becoming more difficult to interpret and asked for new ways to assess both U.S. and foreign test-takers separately.

To address those concerns, GMAC in September introduced a benchmarking tool that allows admissions officers to compare applicants against their own cohort, filtering scores and percentile rankings by world region, country, gender and college grade-point average. . . .

Rather than effectively creating a different standard for U.S. students, one admissions officer at a top-ranked business school said American students need better math instruction, starting in elementary school. Students in South and East Asia tend to have a strong grounding in math fundamentals during school . . . .

American business schools . . . don’t want to become factories for high-scoring test-takers from abroad."

Summing Up

Relative performance counts. That's why we keep score.

Facts are stubborn things, but knowing what's what will wake us up and ensure that the U.S. remains the top performing economy in the world.

And for that to happen, America's students must be the top performers as well.

Our system of education needs careful and immediate national attention to fix what's wrong and continue to build upon what's right.

That's my take.

Thanks. Bob.