Eating my Own Cooking on December 31st, 2009!

“He’s crying, stop doing that!”

This is an oft mentioned phrase in my house when one of my older children is pestering one of my younger ones – or the other way around too I guess.

It made me think of the stock market news today.  Read the ticker for just one hour of news from this morning:

9:24 AM ET – Cloture vote on financial reform goes to another vote today after being voted down yesterday. The uncertainty is weighing on Stocks. “

9:54 AM ET – Philly Fed Index slightly better than expected at 21.4 vs 21.3.

10:24 AM ET – Weak data, European woes and investors selling on a wider than expected correction notion help to push Stock markets lower.

That first one kills me.  Some reform bill that no one has read was voted down yesterday and the uncertainty of its passing today is apparently the cause of the lower stock prices (and my certain ruin!).

Sadly the daily motion sickness given us courtesy of the stock market is (very likely) caused by the emotional buying patterns of many nervous and disquieted investors who buy and sell based on this kind of data.  It’s wise to remember that this is just NEWS.

If you read and listen to the news wrongly, you might begin to think that the men and women we call Representatives and Senators in Washington (many of whom have never had a real job) are creating the returns in our investment portfolios.  There could not be a great misperception about the value of our investments.

In reality, the level of leadership in Washington is no more measured by daily or weekly stock market activity than my “good or bad” parenting is measured by whether or not my kids are smiling or crying at any given moment.   Thanks be to God for both of those factual statements.

I have no confidence in Washington to take care of me in my retirement years, nor do I need them to “boost” the returns in my investment portfolio.  In reality they have very little ability to do this for as much as they try.

Thankfully, capitalism and the motivation of profit driven companies are more powerful than any fly-by-night politician whose long range perspective might reach the end of his nose.

Worry not investor.  Your portfolio owns the goals and dreams of over 12000 entrepreneurs (if you invest with me, that is), and you’ll be just fine.

Gulf problem solved…by the good ol’ boys

I love the free market.  The wisdom of crowds (all of us) finds answers to many of the problems we all face.

We just need to let it work.  Could it be this simple?

http://www.wimp.com/solutionoil/

Baby Boomers – What ARE We Going To Do With You?

The demographic that started the practice of naming demographics is once again living up to its name.

BOOM!!  39,000 State of Michigan employees need to be done with work – and soon!  Just like that.  To say nothing of the fact that these folks actually do a lot of work, the intellectual data that leaves with them all by itself will adversely affect most of the state’s departments for years to come.

Buts it’s simple really;  these folks make $65,000 to $120,000 per year.  Newcomers start in under $40k.  Not only that, the new employees come with far less future cost as they are being hired in under pension promises that are much easier for the state to keep.

For the individual state employee, this is also a very simple question.  Not easy by any stretch, but very simple.  Middle school math, along with an excel spreadsheet and some simple assumptions will tell you if you will be leaving Egypt with the rest of the Israelites or staying on for a while.

Here are just a few thoughts to consider – I’ll have more on this in future posts.

1. Do not fall for the Annuity trap.  When you take your 401k or 457 or whatever you’ve got, and roll it out of ING (which you should do), DON’T buy an annuity.  It is said that “annuities are rarely purchased but often sold.”  Think about this one for a minute and do some research – this is far too expensive a solution to your retirement income dilemma.
2. On that same thought, don’t sign anything that you do not understand.  Trust is a good thing.  But as we’ve said before, trust everyone, verify everything.  Do not start with the assumption that there are some things that you just won’t understand.  Figure them out.
3. Do the math on the hard costs for eye care, dental, and the rest of your living expenses.  Don’t project forward with optimism, but look backward and determine what you actually spend every month/year.
4. Take the next six to twelve months and finally get out of debt.  Pay off the credit cards and car notes.  If you have $1000 per month going out for consumer debt service, it is like having over $200,000 in investments spinning off income.  Is your car and credit card habit really worth $200,000?
5. Pay for some education about personal finance.  For a few bucks you can buy Dave Ramsey’s book Total Money Makeover.  For a few hundred dollars you can have an analysis done by me or some other fee-based planner that will teach you how to apply 3% inflation, 8% investment return and 4% income from your capital at work.  Personal Finance is NOT a master’s level degree.  It can be learned in 30 minutes and used to make decisions that will serve you well.
6. Make sure you remove the destructive patterns that are so prevalent in the average investor’s mindset and habits.  These are market timing, track record investing and stock picking. You need to assess the level of uncertainty in your investments that you can live with, and then, using a passive investing approach, diversify away the risk.  This too is easy to understand.  We give a seminar on it each month if you want to learn it.

So, if it feels more like you are being “squeezed out” near the end of your first career as opposed to being hugged, don’t take it personally.  Do the math, and if it makes sense, take their money and run!

What Should an Investment Manager Do For You?

Rather than participating in all of the speculative hype so prevalent on Wall Street, your money manager should help you focus on what you can control and make sure you are aware of what you cannot control.

“NO” is the answer I give most frequently to those who ask me investment questions.

Should I buy Google if it goes below $400?  NO

Should I load up on health care sector stocks because of the aging population?  NO

Should I buy more emerging market or small company stocks because they tend to do better after a recession?  NO

The list goes on.

If you really take apart these questions you’ll realize that two things are always true.  One, the question is usually motivated by some fact the investor heard recently, so its based on some kind of past data.  Two, and more importantly, the question is asking the investment manager to speculate about the future.

Put a different way the questions that are really being asked are:

Will the price of Google “live” above $400 and will it go their quickly?  answer:  “who knows?”

Will the health care sector outperform technology, small companies, foreign companies, manufacturing, etc??  answer:  how does anybody know that with any certainty? boomers need cars too.

Will emerging markets out perform other asset classes in the near term?  answer:  “they might.”

Who would risk their $1,000,000 retirement account on the speculative answers to the above questions?

Only those who are okay with gambling and speculating with their assets.

Focus on what you can control.

1.  Don’t make any changes based on predictions about the future or allow anyone at any level in your investments to do so.  This is called market timing and over time you will lose money doing it.  True statement:  Not one money manager has ever made money by market timing  for more than a 15-year period.  An think about it: even if a money manager could tell the future, why would they tell you?

2.  Do not put your future returns in the hands of a few companies.  If your portfolio owns fewer than 300 companies per asset class, then you are not fully exposed to the market.  The fluctuations of single companies or sectors could be very negative for you.  This is called stock picking, and active money managers do it all the time with costly results.

3.  Never use a manager’s track record to determine whether or not your investments are safe going forward.  In this case, their own small print will even tell you that their past performance is not an indicator of future results.  By law they have to tell you that.  The legislators got this one right.  Managers never repeat.  Ever.  I defy you to find me one that has.

Remember, you are an investor for life.  You cannot rely on flash-in-the-pan investment strategies that have only a few years of results on which to base their conclusions.

The following is an non-exhaustive list of a few things we do for you, our client.  It is proven and inexpensive.

1.  We own over 12000 companies in 11 asset classes of stocks.  You are exposed to the market.  We get market returns.

2.  We never make moves in your portfolio based on predictions about the future.  We DO re-balance regularly to keep you in a predetermined tolerance of risk / short term uncertainty.

3.  We never buy or sell a stock in your portfolio unless it falls out of line with our reason for owning it.  A small company becomes a midcap for example, then we sell.  Our turnover is VERY low.  Your costs are very low as a result.  We also block trade as a technique that often gains return in the very purchase of the assets.

4.  We educate, coach, and counsel regularly to make sure that our investors are more and more at ease with the truth about investing and more able to achieve their investment objectives.

The stock market has returned over 12% to the long term aggressive investor and near 10% for the those who are more conservative.  These are huge gains over inflation.  Make sure you don’t do ANYTHING that will keep you from getting and keeping all of that return.

So, contrary to what many managers want you to believe, returns are given by the market, not by managers.  And losses relative to market returns are ALWAYS preventable.

Poor People Can’t Give

Written 2/25/10

Tonight was Dave Ramsey night in Grand Rapids, MI.  As a preferred provider of mortgages in Michigan for Churchill Mortgage (the charter sponsor of the Dave Ramsey radio show), we were able to attend the event in the VIP section—not a section I find myself in under too may circumstances.  The event was very well run.  The meal was great.  Dave was predictably great.  My wife and I had a good time.

I don’t disagree with Dave on too many points, and maybe I don’t disagree with him about this either, but I needed to write this down because something Dave said near the end concerned me.

Near the end of the program Dave said that poor people can’t give.  I think he said it twice.  The qualifying example he used was that not one poor person filled a jet with food and medical supplies and flew it to Haiti like his good friend just did, because “poor people can’t give.”

I think that in a way this is true, but in a more important way it’s false – and not only false – it’s a dangerous statement to make.  The more I ponder this, the more I think that Dave probably didn’t mean it the way he said it either.

Like Dave, I am Christian.  As a Christian, I know and believe the Bible to be true.  The Bible is in fact a book different than other books in that we know it to be always true.  I may not always understand what it says, but what it says is true.  So my problem with Dave’s statement is first a biblical one, and then I think there is practical evidence against it as well.

Biblically, the statement that poor people can’t give is simply false.  If what Dave meant was that poor people can’t REALLY give – like A LOT of money, then I think he’s right.  Poor people don’t have a lot of money, and so they cannot give a lot of money.  They cannot fill jets with a lot of food and fly to other countries.  I get it.

The problem with that short segment of an otherwise great presentation is that based on the progression of the teaching – this being the culmination of his 7 steps to financial success: the message was No, if you are poor, then in order to give in a meaningful way, you need to get rich.  This is false and is not only discouraging to poor people, but even worse – it’s a dangerous belief system to introduce to rich people.

The question is a good one and is really important.  Can poor people give?  It’s not can they give in dollars, as much as rich people? But rather, does their meager giving count?  Can they give in a meaningful way?

The Bible says yes.  And not only does it say yes, it says that when the poor give what they have out of their poverty, Jesus sometimes likes it more than when rich people give out of their abundance.  Could that be true?  That less money might actually please God more than more money?

These few verses are found in the New Testament, in the book of Mark, Chapter 12.  Jesus is the one sitting down opposite the treasury.

⁴¹And he sat down opposite the treasury and watched the people putting money into the offering box. Many rich people put in large sums. ⁴²And a poor widow came and put in two small copper coins, which make a penny. ⁴³And he called his disciples to him and said to them, “Truly, I say to you, this poor widow has put in more than all those who are contributing to the offering box. ⁴⁴For they all contributed out of their abundance, but she out of her poverty has put in everything she had, all she had to live on.”

In another account, the apostle Paul, in a letter to the Corinthian Church, intends to encourage the church to give generously.  Rather than giving an example of a large gift given by a wealthy person, Paul is moved to recount and thank the impoverished Macedonians for their generosity.  Check this out for yourself in II Corinthians 8.

¹We want you to know, brothers, about the grace of God that has been given among the churches of Macedonia, ²for in a severe test of affliction, their abundance of joy and their extreme poverty have overflowed in a wealth of generosity on their part. ³For they gave according to their means, as I can testify, and beyond their means, of their own accord, ⁴begging us earnestly for the favor of taking part in the relief of the saints— ⁵and this, not as we expected, but they gave themselves first to the Lord and then by the will of God to us. ⁶Accordingly, we urged Titus that as he had started, so he should complete among you this act of grace. ⁷But as you excel in everything—in faith, in speech, in knowledge, in all earnestness, and in our love for you— see that you excel in this act of grace also.  (emphasis mine)

These people were poor if ever there was poor.  We are asked to look at these situations so that we know how to give.

Jesus also says that we are really serving Him when we serve those in need.  So if we are serving Him and he really likes the gifts of the poor, then I think that we ought to encourage poor people in their giving, and in their desire and ability to not be left out of the blessing of giving simply because their two coins are not worth as much here on earth as the bags of money delivered by the wealthy.

Life on earth is screwed up.  That is to say, here on earth we will not get it right.  That’s why Jesus died for us.  He will make it right again someday, but until then this world will value things that have no value and devalue what He values.  We ought to value what Jesus values.  We ought to proactively encourage the poor in their meager giving. No amount of giving will get the poor or the rich into heaven. Jesus did that job.  But the poor ought not be left out of the joy of helping to meet the needs of those who are in trouble.

I would be remiss if I didn’t talk about rich people and what they can and should do because they are rich.  Jesus never said (nor will I) that being rich is wrong.  I do not feel guilty for owning a nice home and having nice things that others in the world do not have.  Like Dave, I’m not one to tell you that you are not free in these things.  Being rich and coming by it honestly and out of hard work is to be commended.  These folks often employ people.  They make investments of capital and get a return.  They use their talents, in one sense, better than others, and as Jesus told in the parables, the ones with much are rewarded with even more.  Being faithful with little is often a path to getting more to manage.  (Read Proverbs 10:4)

Jesus loved rich people.  He had many rich people in his corner. It is said that Mary and Martha were probably very wealthy.  They served their Lord with their wealth, and he NEVER denigrated it; instead he commended them for their service.

Yet he and his disciples and the apostle Paul gave stern warnings to those who have wealth in THIS life.

It is easier for a camel to pass through the eye of a needle than for a rich man to enter heaven.  Please read this – you’ll find it in Mark 10, verses 23-31.

James said: “Woe to you who are rich.” Read about that in James 5 the first six verses.

To the rich young man who had DONE everything right he said, “Give away all of your possessions”.  You can read that account in Mark 10 as well, verses 17-22.

To those who would follow Him, He reminded them that the son of man has no home, nowhere to lay his head.  In other words, we ought to count the cost of following Jesus.  Read this in Matthew 8: 18-22.

We need to be careful when we help people get rich and when we talk with them about the purpose of riches.  More on this in future posts – for a good introduction to what Christians believe about the reason for riches, read I Timothy 6: 17-19.

I’m not just saying this when I say that I know Dave agrees with me on these things.  He is a Bible-believing Christian man with an amazing business that has helped literally millions.

Just yesterday one of Dave’s listeners called me for some advice about their high interest rate PMI mortgage loan.  Because of a slowdown in their new business, and because, as they admitted, they borrowed money instead of buying cars and a lifestyle that the cash they had could afford them, they are in trouble with a number of creditors.  They have a reduced but steady income and they are resolved to work this all out.  So we worked on their debt snowball worksheet for a few minutes; I think they will be okay.  They really want to get through this.  They wished they’d been introduced to common sense 40 years ago.  But it’s never too late.

I had some time after we took care of business, and since they are a lot older than I am (they started their business in their retirement) I asked them to tell me about their family and their life up to this point.  They never made a lot of money. They never paid off their home.  They had five of their own children, one of which died tragically in a boating accident at the age of 26, a fact that a decade later still brought them to tears.

They told me the stories about two “foster” children in addition to their own five, I’ll tell you one of the stories.  Their youngest son, at the time in high school, had a friend whose parents had been divorced for some time.   This friend had been living with his dad in a trailer and one day got the news that his dad had met someone and was going to move in with this woman.  She had a few kids of her own and a small house, so the friend was not going to be able to make the move.  The trailer was his if he wanted it.  He was 16.

This couple heard about this from their son pretty soon after and drove over to the trailer.  Finding the boy there alone and confirming the story with his father, they were given permission to have him come live with them.  Because poor people can’t give, they had nothing of real value to give him.  But that did not stop these folks. The boy lived with them through the rest of high school and on into community college.  He went off to serve our country in the Army and now has a family of his own.  He still calls this couple’s home his; and this couple’s kids are his brothers and sisters.  Because the state never knew about this loose arrangement, these folks never got a dime in support.  They never thought about asking for it.  They had a fridge and some room and shared what they had.

Can poor people give?  You bet they can!  And as a percentage of their total portion they likely give far more than the rich.  In fact, I would dare make a bet, that more ACTUAL financial giving is done by people in the bottom half of society measured by wealth and income than in the top half.

The better question, the more important question, the question that leaps from the pages of the New Testament, when it’s all said and done and it all goes back in the box at the end of our lives is this: can the rich person give it all up? If he can, then he gets the real prize – eternity with Jesus – ever increasing Joy!  But if his heart was with his earthly riches all along, then that Camel is not getting through the needle.  Man CANNOT serve two masters – both God and money.

So as Dave wrapped up the night and exited through the back curtain, I so wanted to pull a Barry Sanders and get through the rental cops in the front if the VIP section to talk with him about this.  But if you’ve seen me, you know that a running back I am not.  Who knows, maybe I’ll get my chance someday. That would be a real pleasure.  Until then, I’m going to assume that Dave agrees with me since we agree on almost everything else.  Maybe what I am trying to say is summed up in the following quote:

“He is no fool who gives what he cannot keep to gain what he cannot lose.” – Jim Eliot.