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Wednesday, February 27, 2013

Predicting the Outcome: Striking While the Iron's Hot

Narratives in sports can change in an instant. Unlike the trajectories of movies, politics, actors, authors and other institutions and individuals in popular entertainment, sports is subject to a constant and relentless schedule of matches where there must be a winner and a loser. If you polled the football world the day before the NFL playoffs began on which team would win the Super Bowl, the Baltimore Ravens would have been near the bottom ahead of only the Colts, Vikings, and Bengals.

The reasons given would have been myriad. They dropped 4 of the last 5 games, the Broncos will crush them in Denver, and if not, then the Patriots will in Foxborough. Flacco isn't an elite quarterback and has had mixed results in the playoffs. If you were smart, you'd have money on the Patriots, Broncos, Niners, and Seahawks because they were the hottest teams in the NFL at the time.

But the Ravens compiled improbable win after improbable win on the backs of the offense, with Flacco's huge arm lobbing downfield to underrated receivers and the underperforming Baltimore defense getting a late season boost by legendary linebacker Ray Lewis' retirement announcement, providing just enough stops to win against the impressive Broncos, Patriots, and Niners' offenses.

That is what the average football fan knows about the Baltimore Ravens' season. More interested fans would know about Joe Flacco's contract negotiations and how his impending free agency prospects would hinge on his playoff performance. Well, when all was said and done, he came up big and won the Super Bowl with elite-QB play.

When the Ravens triumphed over the 49ers in Super Bowl XLVII, perhaps nobody was more thrilled than Ray Lewis. But Flacco was a close second. And a close third is Joe Linta, Flacco's agent. Because that playoff run boosted Flacco's contract stock by a huge amount. Before the playoffs, the prevailing narrative on Joe Flacco's professional football career was that he was an average quarterback with an inaccurate cannon of an arm who was carried by the traditionally elite Baltimore defense.

If the Ravens had ended their playoff run in Denver, where everybody expected them to have lost, I would think that Flacco would be resigned to a 3 or 4 year deal with 21 to 28 million dollars in guaranteed money. For a comparison, Drew Brees, widely considered to be one of the top 4 quarterbacks in the NFL, recently signed a 5 year, 100 million dollar deal with 60 million of that sum guaranteed. After that playoff run, I expect him to fetch a much higher sum.

So here's for another round of predicting the outcome. Joe Flacco will either have a franchise tag placed on him (which pays him, in guaranteed money, the average of the top 5 non-guarnteed salaries at his position, for 1 year) or he inks a new contract worth 10 million average-per-season guaranteed payday. If I'm within 15% of the guaranteed amount, I'll consider this prediction vindicated. If not, it gets tossed onto the loss pile.
Accountability Department:

Predictions Outstanding: 4 (Marissa Meyer, Fisher v Texas, Michael Dell, this)

Predictions Vindicated: 1 (2012 Presidential election)

Predictions Erroneous: 1 (Romney Veepstakes
P.S: A lesson to be learned from Joe Flacco is that you can be mediocre for most of your life and then if you string together a short series of impressive success, your peers and your friends will reevaluate your past much more favorably to account for what could very well be an incredible run of luck.

Monday, February 25, 2013

Timing Is Literally Everything

I got started in investing in the summer of 2007. I had a decent paying temp job during the summer and one of the contractors I worked with suggested investing the money I was making there. By the end of the last trading day of the year, I was up 44.7% over my initial investment. The good times were rolling.

2008 was a vastly different story. I was in school when Lehman and AIG catalyzed the financial crisis and by the time my portfolio limped to 2008's finish line, I was down 55.4% for the year, completely wiping out all the gains I had made the previous year and also taking a significant chunk of my principal investment away. But I stayed in the market.

When the financial crisis hit, I had already read multiple books on investing, had a subscription to the WSJ which I read on a daily basis, and had already accumulated a solid foundation on investing. When the financial crisis hit, I was able to keep a level head and stuck to my guns. I became a fan of Efficient Market Theory and passive investing. All of my assets were tied in exchange traded funds that tracked a broad market.

My reasoning was that if most of the pros on Wall Street didn't see this crash coming, it was unrealistic to expect me, a lowly retail investor, to figure out what most of them didn't. I figured that since everybody else was taking a beating, there was no shame in taking a beating along with them and then taking opportunity to buy more assets at lower prices. To be sure, a number of notable contrarians made a killing when everybody else lost their shirts, but they are notable precisely because they were so few.

The trough of the market was in March of 2009. And after that, stocks came roaring back. By the end of 2009, I was only slightly down from where I was initially in 2007. By 2010, I was treading water, barely. And that 2 and a half year stretch really opened my eyes to how financial markets worked. The experience was worth a lot to me, and I'm a much wiser and smarter investor now than I was back then.

I have no clue what would have happened if I had started investing in the summer of 2008. If I had pushed my 2007 timeline exactly one year ahead, I would have just put in all of my initial investment about 3 weeks before AIG and Lehman. With the markets in free fall and with very little experience, I could have very well sold out after sustaining a substantial decline, and then never waded back into stocks until well after the mini bull run of 2009 and 2010.

The conclusions I would have drawn would have been vastly different had I started investing right before the market crash versus accumulating 1 year's experience and then experiencing the market crash. In hindsight, I was very lucky to have started investing when I did. There are many anecdotes of people who got into the market right before the Great Depression who never got into stocks again. They had heard about the amazing gains of the Roaring 20s, but they only got in right when that extraordinary run ended but right before the biggest bear market of the 20th century hit them.

Luck played an extraordinary role in my investing experience. A year too late, and I might have been one of those guys who never touched stocks again. It's so easy to play the "what if" game, but if there is one thing I've learned, it's that you can never take anything for granted. And it doesn't take much to alter one person's course. There's a saying, very similar to "fortune favors the bold". It's "chance favors the prepared mind". And perhaps this is so, but it's impossible to prepare against everything. A very prepared mind could find itself dashed against the rocks of misfortune. A chance encounter, bad break, or indigestion on a certain day, and our lives are changed forever.

Saturday, February 23, 2013

I'll Take the Credit

3 years ago, I started watching this TV show called Archer. And after the show ended, I remember watching this 2 second clip where you see this peach, the state symbol of Georgia, and a voiceover that said "made in Georgia". I didn't really think too much of it at the time and promptly forgot about it until next year, when I started watching The Walking Dead and read that the show was shot in Atlanta. And then I watched the second season of Archer and saw the same clip with the same voiceover.

Growing up, I had the distinct impression that most shows were filmed and produced either in Los Angeles or New York, as those were where the major studios and production companies were located. But, increasingly, high taxes and regulations pushed productions out of those two main locales to other places. And I found out that, in 2008, the state legislature crafted one of the country's most generous film production tax credits into law. Since that period, a number of TV shows and movies moved their operations here. Archer and The Walking Dead were just two of them. A comprehensive list can be found here, and there are more than a few surprises on there.

The reason why I bring this is up is because I wanted an easy, accessible example to show how tax rates and incentives affect behavior. Lower taxes attract businesses, because they would be able to make more in profit than they would if all other things were kept equal. This might be a no-brainer moment for many people, but you'd be surprised on how differently states have acted since the recession left most state treasuries bare.

2 years ago, Illinois Governor Pat Quinn signed one of the largest tax increases in Illinois history, raising tax rates 66%. The top rates for personal income increased from 3% to 5%, while the top rate for corporate net income increased from 4.8% to 7%. It doesn't sound like much, but other governors have placed billboard spots, radio ads, and television commercials in the state urging businesses to relocate their operations to states like Wisconsin and Indiana.

Now, an individual isn't going to move across state lines if taxes reduce his take-home pay by 2%. But companies, many of whom have interstate operations, think on the margin. And if Illinois increases its tax rate and a state like Indiana cuts its tax rate in response, it makes a future expansion in operations more likely to occur in Indiana than Illinois, all other things equal.

But all other things aren't equal. Illinois has the second worst credit rating out of the 50 states in the union due to its extraordinary spending obligations, particularly in state employee compensation packages. The worst state? California. And California recently implemented tax hikes in order to repair its own budget deficit. The vast majority of states have tax revenue comprise from 12 to 20% of the state's GDP. California and Illinois both ring up in the upper register of 17-18%. And now they're asking their taxpayers to shoulder an even higher burden while other states cut tax rates and deregulate in an effort to lure other out-of-state workers and companies.

At the time of this writing, California currently has an unemployment rate of 9.8%. Illinois has an unemployment rate of 8.7%. Both are significantly higher than the national average of 7.8%. The last thing these states should have done would be to increase taxes on those individuals and businesses that employ the state's population. Because they sure aren't using the extra tax revenue to employ individuals in the public sector.

In national politics, Democrats and progressives are fond of saying that the Federal government has a revenue problem, not a spending problem. But in high tax states like Illinois and California, no similar argument can be made.

Tax rates and credits matter. And businesses are expanding in areas that offer them the lowest tax burdens, whether through rate reductions, credits, or both. The small government idealist within me would like to see only rate reductions instead of targeted credits, but as long as tax rates are low, I'm happy.

Friday, February 22, 2013

Lest We Forget

Megan McArdle, who longtime readers know to be my favorite blog writer (analyst/pundit?), has come out with a pair of excellent reads about the problems with placing faith in government regulators and the calcification of the labor market.

The first one is the better read, and it has to do with the widening divide between our regulators and those at the helm in the private sector. McArdle is one of the few writers in the political punditry who realize that sometimes the talking heads simply have no clue what they're talking about. Anybody who's ever read a breathtakingly arrogant opinion piece in Slate or The Atlantic knows what she's talking about.

Wednesday, February 20, 2013

An Immigrant Talks About Immigration

I was born in Beijing. Shortly after I was born, my parents left for the United States so my dad could continue his studies. I arrived in the US three years later. I only have two memories of life before I came to the States. One was standing in a stairwell with a bright red exit sign with my grandparents. The other was the airplane ride that brought me stateside. I remember them serving peanuts mid-flight. That's it.

My grandparents flew over to visit my family a few times during my childhood. And to be honest, I didn't much care for those visits. They were people who I rarely ever saw, speaking a language I could barely understand. My parents never let me forget that we were blood, but aside from a grudging acceptance of that fact, I never felt any bond. It's safe to say that I was an American before my parents ever filed for my N-400.

And now that I'm knocking on the door of 25 years of existence in this world, I think it's safe to say that I am a successful American. I have a 4 year degree from a prestigious college. I am a software developer, a well regarded profession, for a Fortune 500 company. I contribute heavily to my 401k, Roth IRA, and taxable brokerage accounts. I have a mortgage on a condo whose value has increased greatly since I bought it 2 years ago near the trough of the local real estate market. By any reasonable socioeconomic or financial measure, I have "made it". A true success story.

A true American success story, that is. Because if I had been raised in any other country, I don't think it's very likely that I would have had anywhere close to the same level of success that I currently have. Had my family stayed in China, the best case scenario for me would be becoming a midlevel government bureaucrat after nearly 2 decades of exhaustive rote study, with maybe one fifth of the purchasing power that I currently enjoy.

If my parents had moved to Western Europe, with their inflexible labor markets and dogmatic preference for "home grown" candidates, there is still a chance that I could have turned out similarly. But it's a much smaller chance. The only other country that comes close to the US is Canada. And Canada is just America's hat. So basically, what I'm trying to say is... USA! USA! USA!

In the full flush of the President's reelection victory, the Obama Administration is eyeing comprehensive immigration reform for its second term signature accomplishment. And they just might have the votes in Congress to pull it off. The only hitch that could muck things up is the provisions for the ~11 million illegal immigrants who currently live in the shadows and whether they could have a path to legal status and citizenship.

One of the more common arguments you'll hear opponents of comprehensive immigration reform say is that "amnesty" for the illegal immigrants would punish all the immigrants who have successfully negotiated or are currently negotiating the labyrinth that is the US immigration system. To those people, I have two words: go away.

Our current immigration system only provides for foreigners who are either rich, famous, smart (and credentialed), professional athletes, or have immediate family who are currently legal permanent residents within the US. For everybody else, unless they win one of the 55,000 slots for permanent residency through the annual Green Card Lottery, there is no legal pathway to permanent residency (and citizenship) in the United States.

My parents were smart and credentialed. That's why the US government approved their immigrant visas. And I am extremely grateful that they were smart and credentialed, because if they weren't, I would still be in China. But I'm not. And the only reason I'm not is because I had the great fortune of being born to two extraordinarily intelligent and hard working people.

Fortune does not shine on most newborns that way. The vast majority of them are born to poor and poorly educated parents in some undeveloped country that no sane American would ever want to live in. The vast majority are consigned to a life of relative deprivation. And who are we, the immigrants and children of immigrants living in a fabulously wealthy country by sheer dint of luck, to deny other people the same opportunity to prosper as we did?

The people who dream of coming to these hallowed shores don't also dream of leeching off our welfare system. They dream of coming here and succeeding on their own merits in a system where merit can actually take you places. And the same goes for the illegal immigrants who crossed our borders, not in an act of defiance for our country's laws, but out of desperation and hope.

This nation's institutions and laws are not perfect. And sometimes civil disobedience in the face of an unjust law is both necessary and proper to ensure that the founding principle of this great country continues to persist. Our Republic was conceived on the principle that all men are created equal. That men have rights and freedoms endowed not by other men nor their various creations, but from Providence on high. It's time that our nation's laws better reflected that principle.

Monday, February 18, 2013

The Hallmark of Class

People in the service industry can make a lot of money. Depending on how much charm and experience a person has, combined with the venue, a waiter or a bartender can make just as much money as an engineer or a lawyer (of the non-partner variety). But we, as a society, don't think of waiters and bartenders as part of the same class as an engineer or a lawyer. A key component is missing. What is it?

Is it education? Well, there are plenty of waiters and bartenders out there with bachelor's degrees. There may even be a few of them toting master's as well. So that can't be it. Maybe it's the fact that most waiters and bartenders don't have college degrees. And, on average, waiters and bartenders do make less than engineers and lawyers.

Society looks down upon waiters and bartenders as a group. But what about individuals? Why do we also not give the same amount of credit to say, a bartender who can make low six figures as we do to the lawyer who makes a low six figure salary? Therein lies the rub.

When F. Scott Fitzgerald wrote The Great Gatsby, he painted high class society as divided between two distinct groups: the nouveau riche and the old money. The old money crowd had respectable family names. They could trace their lineage back to the patriots who fought in the Revolution. Their fortunes were accumulated from generation to generation through a variety of means. But it endured for a very long time.

The nouveau riche were a different group. America during the Roaring 20s was caught in transition between the 2nd Industrial Revolution and the post-industrial era. Great fortunes could be made and lost within a generation, as various technologies matured or were displaced. Rockefeller, Carnegie, Vanderbilt, those individuals whose names are synonymous with great wealth and patronage today built their entire fortune within their own lifetime.

As you can imagine, there were tensions between the old money and the new money. But, ultimately, there was intermingling. Old money families might have seen their fortunes erode while new money families, eager to ingratiate and insinuate themselves into the establishment, would marry into an older family. And this was not some new phenomenon. In the Middle Ages, rich merchants would marry into old aristocratic Houses, combining land, title, and wealth.

And this is why money is never viewed as endgame. People are searching for something more. They dream of dynasties. Of titles and lands handed down from generation to generation. Because money has always been viewed as something that could be wiped away in the blink of an eye. Its perceived transience has always been its downfall. Things that couldn't be taken away, that were concrete, such as land, castles, and titles (concrete in the sense that it couldn't be destroyed except by monarchical fiat), those were the things that people craved in the end. Money was simply a means to that end.

And although money is still power, the ability to "make" money was seen as a greater power. Lands generated tithes. Castles and titles compelled people to serve under you as serfs and vassals. Because as long as you had land, you could always generate money. Bankers and merchants were viewed with suspicion and wonder because they could generate money without land. But it was always viewed as more precarious. More risky.

So going back to the waiter/bartender question. The reason why we look down upon even the successful and high-earning waiters and bartenders is because we do not think they can continue generating money. Maybe their looks fade or their charms get dulled or stop working. Maybe people simply stop tipping well. Because their incomes are so dependent upon the whims and generosity of others, we think of their income as transitory. They can make money, but they have no perceived wealth.

But lawyers and engineers are always in demand. Their incomes are tied to things other than generosity or whimsy. People will always need lawyers to wade through the murky waters of government regulations and statutes. People will always need engineers to build things that make modern society possible. And so their income generation is viewed as more permanent. They have wealth and income.

But that perception is still flawed. Because you can be a lawyer or engineer, make a ton of money, and still be living paycheck to paycheck. And if for whatever reason you find yourself unemployed or out of work for an extended period of time, at that moment in time you're no better than that waiter/bartender.

The secret to wealth in modern society has been in our face this entire time. Wealth is financial assets. The only problem is, the vast majority of society still views finance as something bordering on sorcery. They don't trust it. But the knowledge to use finance to your advantage. To save and invest in financial assets. That is the modern equivalent of land and titles. The hallmark of class today is not about who you are or how much money you make, it's about how much money you save and the knowledge to invest your savings intelligently.

Saturday, February 16, 2013

Real Time With Bill Maher: Counterpoints (2/15/13)

The show wasn't great tonight, but it did have some interesting moments. Anyways, here are the things you need to know.

1. Stop Paying Attention to the State of the Union:

Maher and Brazile had a lovefest over President Obama's State of the Union address and began criticizing the Republicans for disagreeing with Obama's policy preferences. It's time we all admit what the SotU is: a speech full of platitudes and partisan cheering sections.

Near the beginning of the panel discussion, Maher trumpeted the fact that 91% of the viewers viewed the speech positively. And he expressed (feigned) disbelief that the Republicans could be so brash as to not applaud on things like raising the minimum wage, universal pre-k education, and gun control regulations.

But State of the Union speeches are designed to be crowd pleasers. If you conduct a survey asking the populace whether they want clean air, free money, and justice and freedom for all, you can ring up 90% margins as well.

The difference between rhetoric and policy execution is the widest it has been in a very long time. Our politicians are too focused on winning reelection than governing, and that's why the vast majority of viewers can approve of Obama's speech and disapprove of his job performance.

2. Ted Cruz is still emblematic of a Republican Party too focused on riling up the base:

When Ted Cruz suggested that Defense Secretary nominee Chuck Hagel could have accepted money from North Korea and Iran, it just created another example where Democrats and progressive/liberals like Brazile and Maher can use as a cheap talking point when talking about the extremism and virulent incoherence of the Republican Party.

Any well managed corporation knows that its employees and affiliates represent the brand. Those who work for the NFL are supposed to "protect the shield". Corporate executives are coached and advised to refrain from making any public statements that are unrelated to the company they're governing. Because when you make a statement that can be twisted, taken out of context, or is just plain stupid, your enemies and competitors will try and make a big deal out of it.

When athletes do stupid things, they lose endorsers. And when people like Cruz, Mourdock, Akin, etc make incendiary and outrageous statements and accusations, they need to be publicly disavowed from the Republican Party. When Meacham suggested that Rove had become a moderate power broker within the GOP, he was absolutely correct.

The GOP needs a PR makeover. And part of that is putting an end to the unforced errors like Mourdock, Akin, Angle, and O'Donnell.

It also means being smart about when to pitch an ideological flag in the ground. The Violence Against Women Act is not the place to test ideological purity. I understand and support the arguments against the Act as matters of Federalism and limited government, but at the same time, it's just a PR nightmare for a male politician to vote against something called the Violence Against Women Act that provides Federal funding and statutes for prosecutions of domestic abuse and rape.

3. Minimum wages are detrimental to the economy and especially to black teenagers:

I thought Donna Brazile could have had a Nixon-to-China teachable moment when Maher brought up the subject about raising the minimum wage. Instead, it turned into a Republican pinata beatdown where the progressives in the panel just hammered the Republicans because they're seen as the party of rich elitists.

The truth is wage floors are devastating to new entrants in the labor market. And they especially hurt teenage and minority employment because a white kid from a middle class family might not want to work at 3 dollars an hour, but a black kid from a working class family might want to. But if you raise the minimum wage to 9, the white kid will be more likely to take an entry level job, and employers still subconsciously discriminate. So the black kid couldn't even offer to take a lower wage to gain employment. He's been priced out of the labor market.

While I was minimum wage employee at my local theater in high school, I hated every minute that I was working. But I also gained a lot of valuable experience. Don't give your bosses a hard time. Know how to please the customer or delegate action to the manager when the customer is being irate and unreasonable. Show up on time. And be courteous, because coworkers who are dicks makes work more miserable than it has to be.

All of those things are valuable experiences and lessons. And you never learn them until you get your first entry level job. If we keep pricing people out of the labor market, they don't contribute to the economy. And they just become liabilities that the government then has to take care of in the form of welfare programs.

It's no secret that black unemployment is vastly higher than white employment. And black teen unemployment is even higher. The minimum wage is a big factor in those numbers. A good Republican counter to the minimum wage hike is an expansion and reformation of the EITC. That is smart governance and it gels well with their "workfare" mantra of self responsibility with a helping hand, not a safety hammock.

4. Jaimie Weistein was on cocaine or methamphetamine: 

Just another PR problem for Republicans/libertarians... we need to have better ambassadors to the public, because this guy was just nuts for half the show.

Friday, February 15, 2013

If It Keeps Moving

Last year, the world's largest brewer, Anheuser-Busch InBev, announced that it would increase its ownership stake in Mexican beer maker Grupo Modelo from 50% to 100% in a 20 billion dollar deal. A few weeks ago, the Justice Department filed suit in Federal court to block the merger, citing potential anti-competitive actions. Yesterday, AB Inbev has floated the idea of selling an additional 2.9 billion dollars in an effort to salvage their acquisition of the rest of Modelo.

The action filed by Justice is a complete farce. Beer is not a natural monopoly. Nor does it have any strategic importance to the country. There is no conceivable "anti-competitive" measures that AB Inbev could try in order to increase their profits. I hope the case gets thrown out of court, but most likely it'll be settled out of court. I think this is a mistake. It would be easy to convince any jury that it's impossible for a brewer to raise the price of its product and be able to make a huge profit.

Beer is not the only game in town. And its consumption has actually been decreasing relative to other alcoholic drinks. Increases in price for popular brands like Corona and Bud Light will simply drive consumers to try craft beers, wine, liquor, or even a competitor like Coors and Miller. The best part is, juries would actually be swayed by this argument. We're talking about a consumer staple. Everybody drinks alcohol. And it would be impossible for any Federal prosecutor to argue that this merger would hurt competition.

Go out to any bar and see what people are drinking. There will be no clear choice. You'll see a variety of beers such as Bud, Coors, Miller, Yuengling, Sam Adams, Sweetwater, locally distributed microbrews. And you'll also see people shooting vodka, sipping whiskey, drinking wine and everybody has their favorites.

This case is nothing more than some US Attorney trying to make a name for himself by stirring up the pot. And he knows that AB Inbev is gonna settle because although they would most likely prevail in court, it would take years to resolve and hundreds of millions of dollars in legal fees to litigate. It simply makes much more business sense for a public company to settle out of court than to fight it out.

This is the regulatory state run amok. Where government employees care more about furthering their own ambitions than implementing optimal public policy in order to keep the gears of the US economy turning. And these silly legal fights have real consequences on the economy.

Because these are huge companies that make billions of dollars in profits per year, everybody assumes that they have money to spare. This is especially the attitude that prevails in the public sector. The end result is a bruised and battered private sector that limps along until it completely collapses under the weight of the overbearing regulator.

If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.

Truer words were never spoken.

Wednesday, February 13, 2013

A Quick Math Problem And a Lesson

I finally understand why Wall Street and political polling firms use "points" to describe a numerical change. But let's get to the problem.

Maker's Mark announced a couple days ago that they would begin diluting their product slightly more. What was the amount? Well, a bottle of regular Maker's Mark bourbon used to be 45% alcohol by volume. The liquor company will now sell it at 42%.

There were a lot of snobs out in full force, and I happened to catch a thread in a forum I frequent about the topic. And the math on display was not pretty. So I'm going to pose the same question to you:

Maker's Mark produces 6 million bottles of Bourbon whiskey per year and each bottle contains 45% alcohol by volume. Due to extraordinary demand, especially overseas, the decision was made to water down the product slightly to 42% alcohol by volume. How many additional bottles of whiskey will Maker's Mark now be able to produce?

If you got the right answer, congratulations, you're probably in pretty exclusive company. If you gave this question to Americans from ages 18-49, I doubt you'd more than 10% of them would get the answer correct. We don't teach our students math very well, and because it is so frustrating initially, many people will simply give up on the subject in middle school.

The correct answer is about approximately 428k bottles.

6 million * .45 = 6 million * .42 * x, solve for x.

.45/.42 = x = 1.0714

Multiply 6 million by 1.0714 and you get 6,428,400.

A lot of people would have looked at 45% and 42% and think: hmm, that's a difference of 3%. But it's actually much more than that. Because % means per cent. As in, per 100. It's really a difference of 3 per 45 (or 42, depending on how you choose to calculate the relative difference). And because people get tripped up on that simple mathematical concept, they won't be able to correctly answer that simple math problem.

This is a major problem with our education system. A poor foundation in math generally means you won't be good at financial problems. And if we, in aggregate, aren't good at those types of problems, we have a weaker national economy.

If you have kids, make sure they have an absolutely rock solid grasp on basic arithmetic and algebra by the time they enter high school. Because that's really all the math they'll ever need in the real world. And that knowledge gives you a lifelong benefit.

Tuesday, February 12, 2013

Calling out the Media: Matthew Yglesias Proves He Shouldn't Be a Financial Journalist

See, Slate? I can make a mildly incendiary and breathtakingly arrogant headline with the best of them. But let's move on to the heart of the matter:

Yglesias, Slate's financial journalist, posted today on the trend of large funds buying up swaths of housing all over the country and renting them out and then explains risk mitigation the following way:

The alchemy is not that sophisticated, and while you can't "guarantee returns no matter the vacancy rate or the economic climate" you can truly reduce the average volatility without reducing the average return. It's basic diversification that works for the same reason that holding an S&P 500 index fund is probably a better idea than rolling the dice and buying a single S&P 500 stock at random.

But rental income is a lot like a fixed income instrument. A much better argument can be made for risk mitigation akin to loaning money (at a fixed, preplanned rate) to multiple parties instead of loaning just to one party. So the analogy is simply terrible and only shows that Yglesias knows the very basics of finance.

Equity investing is different in the fact that there is potentially infinite upside. The same can't be said about fixed income, where the best case scenario is that the lender gets their money back at the agreed-upon-beforehand interest rate. There are companies whose stock price have increased 500% over the course of a year. But nobody will ever lend at a 500% interest rate.

 So did I just skewer Yglesias over using a poor metaphor when a much better one was available? Yes I did. I think I could be Slate's best writer.

The Perception and the Reality

There's this writer over at The Atlantic who constantly writes about the value of a college degree. And he gets these charts and data sets from various sources and I always shake my head because he's looking at the wrong data sets. It doesn't matter what the average college graduate makes because, in the current labor market, a college degree is only really important when you're finding your first career track job.

After that, it's all on you to deliver to the company. Because once you get actual real world job experience, your college degree matters less and less. By the time you move onto your third or even your second job, it becomes nothing more than a small line towards the bottom of your resume. Work experience is worth its weight in gold and it's much more important to your career than your college degree.

The degree only really helps you get your foot in the door. But considering the average young adult takes just over 5 years to gain their 4 year degree and that only 47% of recent college graduates hold a "college level" job, it has become pretty apparent that for the newest college students, college hasn't become the ticket to success that they were led to believe.

That writer over at the Atlantic, Derek Thompson, made the mistake of conflating older college graduates, who have already been in the labor market for an average of two decades with the value of current college degrees. When the "Great Recession" hit, it uncovered and exacerbated the declining value of college. Because suddenly businesses and employers didn't have the luxury of taking on marginal candidates and they quickly shed all of their employees who were really nothing more than barnacles encrusting the hull of the corporate ship.

About 18 months after the financial crisis, we were right back at the same amount of GDP, except we had shed about 4 million jobs in the process. Think about that. We essentially got rid of 4 million useless employees, who were apparently nothing more than window dressing and suffered nothing for it. That's what financial crises do. It makes people focus on the bottom line. You wanna work here? Close.

So every other college graduate is essentially stuck in a retail or restaurant job and we have people defending the value of a college degree? They were better off defending the better economy they had the good fortune to be in by the time they got out of college and got their first job.

Now, I'm not pissing on all college graduates. Because the fact of the matter is, in better times, all bachelor's degrees were a signal for employability. What exactly did it signal? A mixture of good parenting, intelligence, hard work (supposedly), perseverance, and social awareness. So if you got out with a college degree, that signaled to employers that you were somebody worth hiring.

Well now the recession (and its aftereffects) has put an end to all that. Now employers (with career track positions available) want the cream of the crop. So things have changed and so have the signals. Do you still want to signal employability to prospective employers? Now you have to get a B.S (bachelor of science) in a STEM discipline with a calculus requirement. That's the bare minimum.

Other signals of employability? Top half of your class in a top 14 law school. 700+ GMAT with an MBA from a top 10 business school. Oh, and the good sense to look sharp in a suit, speak in clear, full sentences, and look into the interviewer's eye when talking.

What everybody in the upper middle class always forgets is that 70% of this country don't have even a bachelor's degree. And most of those people who are working age have jobs. The great lie that parents have told their kids and to themselves is that college is a springboard to success. I'm coming around to the notion that, for the vast majority of people in the US, it's not.

I suspect that there is quite a large minority of high school students who are perfectly capable of getting through college who could also skip college entirely and enter in the workforce as soon as they got their high school degree, and then by the time their former high school friends graduate from college and enter in the workforce with them, they'd be in very similar overall situations. There is a definite opportunity cost for people who go to college. And half of them won't even graduate within 6 years or drop out completely.

In its current form for most people, college is nothing more than a social experience where kids can cloister together with other kids around the same age so they can drink, party, attend football games, have sex, and learn how to socialize in a non-high school format. And it's only recently that the perception of college and the reality of college have begun to intersect.

Monday, February 11, 2013

The Problem With Accumulated Wealth

I can't remember the last day where I did not check my investment portfolio. I can't even make an educated guess. Even during the financial free fall days of Fall 2008, I still took a look to see how much money I was losing on that given day. There were days where it's been close, and I've realized late in the evening that I didn't check how well my investments did. But I've never forgotten to check on my brokerage accounts for an entire day.

It goes against most advice that the financial "pros" give you to not be constantly distracted by the ups and downs of the market, but I do it anyways. I'm not particularly sure why, because I barely ever trade my positions. And when I do, it's usually a buy order because I buy every month on my 2nd paycheck. But it got me thinking about the knowledge of where you stand, because for me, I can't stand not knowing.

Some of my friends think differently. After I found out about an online tool that can calculate your net worth  (Mint, incredibly useful finance tool, by the way), I told a lot of my friends about it and a few of them responded positively in the moment, but weeks later when I asked them if they had set it up, they told me they hadn't. One friend in particular, I suspect, hasn't done it because I think he don't want to know. I've bugged him about it and he keeps putting it off. Not knowing is preferable to knowing. Ignorance is bliss.

This, I suspect, is one reason why it's so hard to get people to save money. People don't like reducing their life situation down to a number. Because money is potential energy, and everybody wants what money can buy, but money in and of itself is anathema when it's just sitting in a brokerage account. Because it can lose value. And that scares a lot of people.

I remember reading this news story a few years ago about some engineer in the Midwest who had died. He never made more than 50k per year in salary when he was working. And when he died, he left behind an estate worth 2 million dollars that he built up simply by investing in his company 401k and his own personal brokerage account. And the reason why it was so newsworthy at the time is because it was such an unfathomable amount of money for a person who had never really struck it rich. The concept of saving and investing is so alien to most people that an incident like that was so interesting. It's the ant and the grasshopper fable except this guy was the ant. He worked diligently and saved his money all his life and left behind a fortune.

But let's flip that fable on its head and change it so that, at the end of the story, this gigantic flood comes and wipes away the ant's stockpile of food. In that instance, the ant would look pretty foolish, wouldn't he?

When I first started investing (Summer 2007), I was so sure in my own investment strategy that I started hectoring my own parents (who were diligent savers, almost to a fault in my opinion) that they should change their strategy to match mine. Months later, I began to point at my recent success, which was far greater than theirs, as proof. And then my dad told me something that resonates with me to this day: "Yes, you've done very well so far. But what happens if the market takes a dive and your portfolio drops 40, 50, 60%. What then?"

I calmly told him that because I was invested so heavily in index funds, that if that happened, everybody would be suffering and the best course of action was to stay put and ride it out. A few months later, Lehman Brothers and AIG declare bankruptcy, triggering the financial crisis and sent the market into a frenzy. At the lowest point, my portfolio was down by over 70% (I was heavily invested in emerging markets, which got hammered even harder than the domestic market) from its peak a few months back. And I still didn't sell.

Eventually, markets bounced back and since then, I'm back to where I started on my initial investments. While my later investments did very well. Overall, I'm in the black from where I was in 2007, and I'm very glad I stuck with my beliefs and rode out the storm. But I didn't have much invested in 2008. It was just under 7k at the time. So when the markets tanked, while my relative losses were extraordinary, in absolute terms it was a modest loss.

4 years later, and my portfolio has swelled thanks to my full time job. I'm worth a lot more than I was back then. And I'm not sure whether my actions (or non-action, rather) would have stayed the same should a similar panic happen sometime in the near future. I have so much more to lose now than I did back then, and it's hard for me to say whether I'd still stay the course this time around.

This is the fundamental problem with accumulated wealth. Ever heard of the saying "the first million is the hardest"? For a person who starts out at 0 net worth, gets a job, saves and invests diligently, the time they spend getting to 1 million in investable assets is far greater than the time they'll spend getting to 2 million. But their portfolio could tank with the market at any time.

If a person was on the cusp of 1 million in the summer of 08, they would have seen their life savings halve 5 months later. The knowledge that that could happen, and the regret it would trigger is one of the biggest obstacles to saving money. Because spending money is fun, enjoyable, and there are always good memories attached to the things we've bought with our money (trip memories, funny stories, or something tangible that we can see/feel/use) but it's never fun to look at your portfolio on a down day and think "I could have gone to Rome with the money I lost today".

The threat of potential losses is too much to bear. So people spend their money freely in the present. Buying things that they receive immediately as opposed to saving for the nebulous and uncertain future.

Saturday, February 9, 2013

Real Time With Bill Maher: Counterpoints (2/8/13)

Hey, guys. Back in action after a week's worth of fatigue and sickness. I missed last week's show, which was a real shame because it had good guests and good dialogue. But today's show was good too so let's get right down to it.

1. Argument by Lawrence Krauss: "government shouldn't have the authority to murder people"

That's what he actually said. It was in response to the legal memorandum issued by the Justice Department justifying the use of lethal force against American citizens if they are suspected to be terrorists and can't be easily moved stateside to await trial.

Maher shut him down pretty hard on this, but it bears repeating. This guy's opinions are dangerous in the fact that he can't imagine that he lives in a world that is far more cruel than whatever cloistered upper middle class community he calls home.

2. Argument by Lawrence Krauss: Government policy would work better if we measured policy against empirical evidence.

This guy again. And the problem with this kind of simplistic thinking is that government policy, unlike a scientific experiment, can't be measured in a vacuum. There are hundreds of millions of people and hundreds of thousands of different organizations all pushing and pulling in their own direction. It becomes extremely hard to measure one specific policy's effectiveness when you have to consider the entire system.

There are no do-overs or retests in politics. What appears to work in one era might not work in the next. Because there are billions of factors at play and we can't control for all of them. To suggest that if we simply went with what worked that government would be a better place is foolish because we simply don't know what works. At best we have educated guesses.

In politics, everything can be spun. And everything can be explained after the fact. That doesn't make it right. And it doesn't make it possible for people to truly know what causes what. The guy is a naive fool who never possessed executive authority a day in his life.

3. Bill Maher says Republicans believe in supply side economics like religious dogma.

This isn't true. What the Republicans actually believe in is letting people keep more of the money that they earn. That individuals are better suited to making decisions about their own lives than the government is when it comes to their own money. Now, you can always find instances of people foolishly blowing through all of their money (the professional sports world is littered with such instances), but this is a country that believes in the rights and freedoms of individuals.

What Maher neglected to mention was how the Californian economy was doing. It's terrible. Unemployment is still at 9.8%. And businesses and individuals do respond to tax incentives. A regressive sales tax does disproportionately affect lower income groups, but it's also more effectively enforced. State governments don't have the same resources that the Federal government has. That's why local governments rely so heavily on property taxes (houses can't move). Why state governments rely on sales taxes (it's hard for businesses to move). Only at the Federal level can you effectively enforce an income tax.

Given that just about every state government is suffering from a fiscal crisis of some sort, it makes sense that the states want the most cost-effective (from their point of view) ways of raising revenue.

4. Infrastructure this, high speed rail that, in Europe they have whatever.

A big portion of the discussion devolved into a leftist circle jerk about all the things that America does wrong. When it comes to the power grid, we're a third world country. When it comes to transportation, we're inferior to the Europeans. When it comes to people, they believe in stupid things.

It was incredibly aggravating to watch these people obsess over these "problems" of ours when they can't understand that they're taking the tragic point of view in life. That everything is always wrong and must be corrected at once, without delay, and with no consideration as to the cost.

The reality is that we live in rather privileged circumstances. Energy is cheap and, barring extraordinary circumstances such as what happened in the Super Bowl, it's on 24/7. People like having their own cars. And traffic, although at times unbearable, gets along fine for the vast majority of the time. Life is good in the US.

And sometimes that means people aren't necessarily in a hurry to do something better. Because change can be either good or bad. But when you already have things going rather swimmingly, what's the rush to improve? This is the type of inertia that drives public policy types mad because they see a system that could be better without realizing that many people within the system are already extraordinarily happy with what they currently have.

It's that inability to see another point of view that has people shouting past each other when it comes to politics. Because we can't possibly see what the other person is seeing. But we mistake that for the other person's stupidity, naivete, or ignorance. And that is the fundamental difference between progressives and conservatives.

5. Richard the III, really?

Much ado about nothing.

Friday, February 1, 2013

Predicting the Outcome: A True American Capitalist

Wall Street is an old favorite movie of mine. And there is an iconic scene in that movie where Gordon Gekko, the film's antagonist, gives a speech to convince the company's shareholders at their annual meeting about buying the company out. Here's an excerpt:
Now, in the days of the free market when our country was a top industrial power, there was accountability to the stockholder. The Carnegies, the Mellons, the men that built this great industrial empire, made sure of it because it was their money at stake. Today, management has no stake in the company! All together, these men sitting up here own less than three percent of the company. And where does Mr. Cromwell put his million-dollar salary? Not in Teldar stock; he owns less than one percent. You own the company. That's right, you, the stockholder. And you are all being royally screwed over by these, these bureaucrats, with their luncheons, their hunting and fishing trips, their corporate jets and golden parachutes....
 Teldar Paper has 33 different vice presidents each earning over 200 thousand dollars a year. Now, I have spent the last two months analyzing what all these guys do, and I still can't figure it out. One thing I do know is that our paper company lost 110 million dollars last year, and I'll bet that half of that was spent in all the paperwork going back and forth between all these vice presidents. The new law of evolution in corporate America seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated.
It's perhaps one of the finest speeches ever caught in a movie screen. And it very clearly illustrates the power of nostalgia, accountability, and empowerment. But, because Gordon Gekko is the antagonist, that beautiful speech is used for more mundane purposes: to convince a majority of the shareholders to give control of the company over to Gekko so he can sell off the company's assets in a piecemeal fashion to make a profit. A classic example of 70s/80s style corporate raiding.

This week, we have another example. Founder and CEO Michael Dell is reportedly seeking a controlling interest in the eponymous company so he can take it private by increasing his own personal stake in the company. Faced with sagging PC sales and thinning margins, the company's stock price has been beset by a steady downward climb from its peak in 2004. One of my friends actually brought the news to my attention and my response was something along the lines of: "He's a true American capitalist. But I think he's making a big mistake."

It's incredible how fast computer technology has moved over the past decade. Dell and HP were once the top dogs in the industry and now their computer divisions have declined to such lows that HP was considering selling its PC division while Dell is currently in talks to go private in order to restore the company's former glory.

Dell is betting a pretty substantial piece of the farm that his leadership can turn the company around. I, on the other hand, think he's running a fool's errand and that he's blinded by his own pride. So here's another edition of Predicting the Outcome, although this one is going to have a very long time frame.

Here is Dell's stock price at close of business today:

 

Here's my prediction. Within 5 years, Michael Dell will resign as CEO of his company, whether private or public. And if it goes public within 5 years after being taken private, its market cap will be at or below 25 billion dollars (accounting for inflation during the same time period).

He's not gonna turn it around. And I think he has enough sense to hand over the reins to somebody else when it becomes clear that the company's fortunes have declined to an even worse position.

Basically, the only thing I think can turn Dell around is a gamechanger. And a company that built itself on cheap PCs and strong supply chains simply doesn't have what it takes to produce one.

Accountability Department:

Predictions Outstanding: 3 (Marissa Meyer, Fisher v Texas, this)

Predictions Vindicated: 1 (2012 Presidential election)

Predictions Erroneous: 1 (Romney Veepstakes)