finance blog, Investing

Only Half… of our Income?

I was having lunch and one of my friends said that something was troubling him.  He said that he worked out the numbers and, by his calculations, he needed to save 25% of his gross income for retirement.  And taxes took another 25%.  So, that meant he only got to use half of his income.  Only half!  Only half?   Were his calculations wrong?

My first reaction, was no, his computations sound about right.  But, I said, “Please tell me more. Maybe I’m missing something too?”

He explained that his projections were 8% return while he is saving, and then 5% while in retirement mode.  He explained that he had talked with his parents and other retired folks to estimate what their expenses are.

I asked him about how inflation factored into his calculations.  He said that he was estimating about 3-4% for inflation.

So, yes, his estimates made sense.  Knowing his age, and assets, etc, made me think that he had it about right.

So he confided, yeah, but I also have a mortgage and property taxes and insurance?  That takes, more, maybe another 30%.  So that leaves me with, like, 20%.  How am I supposed to do anything with that?!   My income is whittled down to almost nothing!

I could only sympathize.  Yes, I said.  You’ve sussed it out.  I hope that nonetheless you are enjoying your life.   Living responsibly for your future is not easy.  You and your family will, hopefully, thank you later.  The twin tyrannies, taxes and inflation, are the saver’s ever-present adversaries.  Facing them taxes the soul.  The intelligent saver faces them nonetheless, perseveres, and is better for it.

That was the best advice I could offer. It is the advice I give myself. It is unsatisfying, it is adult, it is realist. Are taxes and inflation such tyrants, such a drain? Historic facts say yes. It is the harsh truth. The wise face that truth, and succeed in spite of it. Best wishes, and hang in there. You can do it.

finance blog

U.S. Armed Forces kill Osama Bin Laden

President Obama and other sources confirm that Osama Bin Laden is dead.  Reports say he was killed by Navy SEALs working closely with CIA agents, and DNA tests confirm that the body is indeed OBL.

The impact of this news on U.S. and global markets is yet to be seen, but the Nikkei’s performance is positive — up about 1.5%.

The impact of the 9/11 attacks had a traumatic multi-year impact on the U.S. economy, and a proportionally lesser, but nonetheless dramatic, impact on the world economy.

What can I add, but that this is very good news, both financially and in general.

finance blog

58,087 Pairs of Eyeballs

Number of visits (pairs of eyeballs) to balhiser.com so far, based on web analytics data.  (More technically, 58,087 absolute unique visitors.)  By web standards for a web-based business, that’s not much.  But it is a start.  And it is dramatically more visits than for my younger, sister-blog sigma1.com.  Of course I predicted that balhiser.com would only interest 1 out 10 people on the planet and sigma1 (Σ1) only 1 out a 100.  Still 58 K for balhiser.com is underachieving relative to those ambitious goals.

Visits, per se, doesn’t mean much.  Repeat visits say more.  And recurring visits say even more still.  Each seems about an order of magnitude less (one tenth) the previous.

Still, by those calculations I have, possibly, maybe, hopefully 500 or so regular or semi-regular readers.  Other data puts that estimate closer to 100.  Its not an exact science, at least not for a web analytics neophyte like me.  (I know an expert analyst, but can’t afford her expertise.)

Sadly, that means that balhiser.com is not currently getting enough traffic to get in the black, financially.  I do have a plan B.   Taking the 119 and counting financial blog posts and using them as raw material for an e-book.  (FYI, plan A is to keep blogging until, somehow, balhiser.com content gets picked up and syndicated, or keeps building momentum until critical mass or singularity occurs).

Most small businesses don’t grow to medium-sized businesses.  And many medium-sized business fail to grow to big businesses.  However, many big businesses started out as small businesses.  Two examples, Microsoft and Hewlett-Packard, immediately spring to mind.

If, somehow, against the odds, balhiser.com (and Balhiser LLC) become big business, this blog will detail the financial and other aspects of its early ascent.

If not, it still may provide lessons learned and other insights for a) other small business owners and entrepreneurs, b) people interested in personal and business finance.

finance blog, zen

Human Capital

From a financial perspective, we are more than our (paper) net worth.  We also possess something economists call “human capital”.  I’d call it expected earnings potential.  Whatever you call it, it is an asset and is worthy of upkeep and proper maintenance.

So lets say you’ve learned some valuable skills and have a desk job with a comfy office chair… and free juice and soda.  Well, cool — until your age surpasses your waste line.  Your waste line gets jealous and tries to catch up.  This is not cool.  It is time to start exercising your human capital — literally.  (Or swear off the soda.)

Some financial advisers would say its time to think about insurance, especially life insurance.  Possibly.  I’m thinking the best returning investments are exercise and diet.  One’s a four-letter word and the other is even more unpleasant.  Both, however, pay dividends.  Benefits include longer life expectancy, better wellness, healthier appearance, and often improved mental function.  Yes, your mileage and results may very, and please consult your doctor.  Keeping yourself fit and healthy is a good investment.  It is often challenging and frustrating, but many investments in the self are.

Another investment to consider is education and training.  I’ve read articles saying that a master’s degree beats a bachelor’s degree, even after educational expenses and a ~2 year delay in entering the workforce.  I’ve also read publications claiming the opposite.  I think its a toss up and depends on many factors including major.  What I strongly believe is that a four-year college education is both financially desirable as well as rewarding for many people, and that in general state colleges and universities provide a better overall return on investment than expensive private colleges.

I also believe that there is such a thing as too much school, from a financial standpoint.  In many fields, a Ph.D. is no more valuable than an M.S., and is sometimes even a liability.

Some folks are not that into traditional classroom-based learning.  I love the classroom, but if I had the talent (aka a better arm, better glove, better hitting, and better speed) I’d be a professional baseball player.  Right fielder for the San Diego Padres sounds perfect.  Sorry, Will Venable, I want your job.

The long and short of this financial blog post is that an important component in investing in your financial future involves investing in yourself.  For me that takes a lot more emotional effort.  Nonetheless, I am making that effort.

baseball, finance blog, financial, Investing

Financial Baseball Brings the Heat

Inquiring minds want to know, how profitable is Major League Baseball?  Well, the inside baseball says “very profitable”.  This after a surreptitious release of Pittsburgh Pirates’ confidential financial documents.  Which makes me wonder, how did the LA Dodgers drop the big money ball?

Well, in the business of baseball, it appears that its all about winning the mighty dollar.  I’m actually impressed.  Major League Baseball is, after all, a business and the cliche “business is business” applies.

One parting thought:  What would baseball be like if there was a baseball team owned like the Green Bay Packers?

finance blog

CPI Really Stands for…

Ostensibly, the CPI stands for Consumer Price Index. I have a few alternate suggestions:

  • Contrived Price Index
  • Controversial Price Index
  • Captive Price Index

There are several thing that I don’t like about the CPI, specifically the CPI-U (The Consumer Price Index for All Urban Consumers).   Most troublesome, is that it is used interchangeably with the term “inflation” or “US inflation”.  While CPI-U includes food, energy, and medical expenses, for example, it does so in ways that are far removed from the way many consumers purchase.

For me, the CPI-U appears to understate the inflation I’ve seen in the last 10 years.  The price of my satellite/cable TV has doubled.  The share of health-care insurance that comes out of my paycheck has gone from $20/month to $200/month.  I still remember getting a Big Mac value meal for $2.99, but now it’s about $5.00. It’s hard to believe that consumer inflation has averaged just 2.3% annually over that time period.

That’s why I’m glad other folks are developing their own price indexes.  Two examples are the Billion Prices Project Index, and the upcoming Google price index.

I’ve read a number of articles saying CPI-U understates inflation by about 1.0-1.5% annually.  If so, this is  a big deal.  Real interest rates are not only negative they are substantially negative.  And real GDP growth is dramatically overstated.

bond funds, bonds, finance blog, funds, Index Investing, Low-Cost Funds, money

Money and Investing Celebrities

Jim Cramer, Suze Orman. Warren Buffett, Peter Lynch, Bill Gross, John Bogle. The first two are the closest to household investing celebrities and arguably have the biggest media presence. The latter four are perhaps the biggest names in investing when it comes to mutual funds.

While I occasionally enjoy Cramer’s style, I generally dislike his advice. I believe that his high-energy style encourages high turnover, higher trading costs, reduced tax efficiency, and decreased diversification. Suze’s style is more focused on emotion, spending habits, relationships. I believe she offers a kind of emotional support and tough love that can help folks get out of debt and overcome financial life challenges. Suze’s style is particularly well-suited towards women investors (I’ve heard this from several of my female friends). She has a good grasp of mortgages, credit, foreclosures, and debt management. However, when it comes to stocks, bonds, mutual funds, ETFs, 401Ks, and the like, I find her advice spotty, inconsistent, and occasionally wrong.

I have a better overall opinion of the advice of Lynch, Buffett, Gross, and especially Bogle. I’ve found Lynch’s books useful and I’ve liked his advice about almost everything except bonds. And the performance of the Fidelity Magellan Fund under his management was exceptional. Gross balances out Lynch, because Gross has an impressive track record of bond investing with PIMCO. Buffett also boasts an impressive investing and management record. Finally, Bogle popularized and perfected index investing through Vanguard Funds.

It’s a shame that there is no investing superstar celebrity that provides solid, clear, and broadly applicable investing advice. Perhaps that is because prudent investing advice is somewhat boring. So generating excitement is done through either stock-picking mania (which I consider imprudent) or human interest stories (which tend to be getting out of debt, or get-rich-quick). Another challenge is appealing to a wide range of investing situations and widely different levels of financial literacy.

I’m frequently looking for ways to make this finance blog appeal to a wider audience. That’s why I’m looking at investing celebrities today for clues to make this blog’s message more powerful. As of now, my biggest takeaway is that if I focus more on the emotional and relationship aspects of investing and spending, I may be able to more effectively connect with women investors.

baseball, finance blog, financial, Investing

Financial Baseball and the Finance of Baseball

If I was asked to investigate buying a (Major League) baseball team, I’d start by building a mental model of the finance of baseball.  I’d start by observing that a team consists of 1) a roster of players, 2) an collection of player contract and player and pick options, 3) a management and coaching team, 4) a stadium and stadium support staff, 5) league contracts and obligations,  6) marketing, television, and media rights and contracts, 7) financial assets and liabilities,(8) ball park ticket and concessions sales.   Well, that’s a start anyhow.

I’d then consider the competitive environment.  It consists of other ball clubs and is played about half of the time on other ball fields.  Naturally AL vs NL is an important consideration.   Generally, wins lead to more revenue, and better (more expensive) players contribute to more wins.  However, that is not always the case.

A baseball team aptly called a baseball franchise.  It exists as a privately owned piece of a larger governing organization.    That larger organization makes all sorts of rules that effect everything from the buying and selling of franchises to the “luxury tax” paid by high-payroll teams such as the Yankees.

I’d love to get my hands on a MLB franchise’s income statements and balance sheet, say for the Chicago Cubs.  I wonder if they made or lost money in the last decade?  I’d be curious to see what correlation there was between their revenue and their win/loss record for each season.  I’d wager that the Chicago Cub’s win/loss-to-revenue correlation is much less than that of most other MLB teams… simply because the Cubs fan base is more forgiving of (or simply more used to) losing.

So, an MLB baseball team is a privately-held franchise of the larger MLB organization.  Similar to a McDonald’s franchise being part of the the larger McDonald’s Corporation.  A key difference being that MCD is publicly traded whereas MLB is not.  (And, of course, a baseball franchise is way more expensive that a McDonald’s franchise.)

Switching gears, consider the derivatives market surrounding baseball (and other sports).  I’m referring to sports betting.    In Nevada alone, sports betting exceeds 2 billion dollars per year.  Many sports bets are analogous to binary options… they either pay nothing or 2X (less the vig) depending on the outcome of a game (and the point spread).

finance blog, financial, Gambling vs Investing

Safest Possible Investments?

I was talking with a friend the other day, about, what else, investing.  He said he had lost about $100,000 on dot com investments.  He said he had some cash lying around and wondered what was a very conservative investment.

I thought some, and mentioned that, for me, paying down the mortgage is a nice, safe investment.  It certainly  beats earning between 0 and 1 percent in a savings account.  I look at the difference between short-term rates and one’s mortgage rate.  That difference could be 4+ percent.

There is no way this type of investing will pop and make you rich overnight.  But it is a safe, sensible option.  And it is likely to improve your credit score.

bonds, finance blog

US Treasury Debt and other obvious warnings

It doesn’t take a rocket scientist to warn about the US’s debt woes.  For example this finance blog warned about it April of 2010.  And Bill Gross and PIMCO quit holding US Government bonds recently.  Now S&P joins the bandwagon with a warning that US Treasury debt’s AAA rating is at risk.  This in effect would mean lowering the government’s credit score.

Predicting particularly congressional outcomes is not my strong suit.  But I have been predicting growing US debt online since 1998.  Then the debt was a mere $5.3 trillion.  And I’ve been right that not only nominal debt, but debt as a percentage of GDP would rise.

To so many investors like myself the unsustainability of our current fiscal course is blatantly obvious.  During the day I work for a successful tech company, and I get a significant portion of my pay that varies based on the companies performance.  If profits increase my coworkers and I get more cash; if the profits dwindle so does my pay.  If the company stock rises, so does my compensation.  And if it falls, my compensation falls with it.  It is a smart system, commonly called profit sharing.

Might I suggest a similar compensation plan for federal government workers.  I’d call it deficit sharing.  (I’d prefer to call it surplus sharing, but get real.)  Beyond a certain point (say the average US annual wage) base pay is fixed and all future raises are in terms of variable pay increases.  And variable pay is awarded at the end of each fiscal year.  The proportion of the federal deficit to federal spending prorates this variable pay.  If someday there is a balanced budget there is a 1.0X multiplier to variable pay.  If there is a deficit then variable pay is reduced.  Should there be a surplus a multiplier of greater than 1 would apply.  Share and share alike.  The private sector employees do… and right now we are sharing the sacrifices.  So should Federal employees.

What to do you think America?