Sunday, November 30, 2008

People Are Not THAT Stupid

All Financial Matters posted an article yesterday commenting about a Wall Street Journal article in which Robert Rubin, a director in Citi Group essentially shirks responsibility for Citi Group's recent failure. I read the same WSJ article and I generally agree with JLP's sentiment which is that officers and executives are paid to drive their company's success,  and can't just blame the system or outside forces for their company's failure. After all, if the company succeeded, I am guessing no executive would be out saying: "oh, it's the economy", or "the competitors really screwed up" or even "we were just plain lucky".

JLP also makes a comment about the stupidity of thinking that bundling sub-prime mortgages and securitizing them would reduce the overall risk and make such securities a legitimate investment vehicle. There I disagree with him. Kitty, one of JLP's commenters also disagrees and in a detailed and well written comment explains that bundling a large number of risky securities reduces the overall risk through diversification. Sure, some of these sub-primes were bound to fail, but the chance that they would all fail simultaneously was pretty slim.  The real problem was that the risk of failure was highly correlated - in other words, the chance of failure for  each individual sub-prime loan increases as the economy falters or as housing prices start to decline. What makes one loan likely to fail also makes others in the same group more likely to fail.

This strong correlation is what folks were unable to see in advance. It's not that they were stupid - this was not a trivial matter to understand ahead of time. People simply did not realize that real estate prices could be subject to nationwide, large scale declines. In fact, as late as the end of 2006 I heard a lecture from a UCLA economics professor who made the point that real estate is subject to volume cycles rather than price cycles and that real estate prices were unlikely to drop nationwide. Of course, in retrospect it's very easy to understand how risky the whole premise was, however at the time even sophisticated investors were unable to understand the true level of risk. 

Does that excuse management who allowed such investment to made? Not really. Executives are responsible for the success or failures of their enterprises whether or not they understand the true risks they are facing. 

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Saturday, November 29, 2008

Giving Thanks that October is Over

Although I am a couple of days late, and am not typically susceptible to gooey holidays, this year I have much to be thankful for, and I am extremely grateful that October 2008 is over and done with. October 2008 was the most stressful period of time in my adult life, at least as far as I can recall. Here is how it all went down:

Stock market - while the stock market slump began in September, it did not truly turn into a massive, gut churning route until early October. Yes, we all lived through that, and to be honest, while I disliked the drop I wasn't terribly concerned by losses to our portfolio. What scared me was the knowledge that the financial system was on the very brink of complete collapse. For a while there, I was seriously contemplating pulling a few thousand dollars out of our bank account, just in case the banks shut down and we needed cash for our basic needs (we do have some cash reserves available at home, but nowhere near sufficient to live off of for several weeks). OK, but we all lived through this, and I was in no way unique.

Employment - as I have previously written, in late September my wife decided to quit her job. She had the big conversation with her boss just a day or two before the economic turmoil started in earnest. And while I completely supported my wife's decision to walk away, the timing we found ourselves caught in was truly nasty. All at once the hiring environment turned from difficult to practically impossible. However, since I have a well paying job that still would have been OK but...

Fund Raising - my company is a start-up and we were about to run out of money in the middle of November. As the executive responsible for the fund raising effort, I realized that our prospects for raising a new investment round in this type of financial climate were not encouraging. In fact, although I had to put on an optimistic spin and talk-up our chances to the rest of the executive team and the employees, I was truly worried that we would go out of business, which would leave my wife and I both unemployed in the worst hiring environment in decades. Moreover, I felt the heavy weight of 30 families' livelihoods rest on my shoulders. If I couldn't raise the money, I wasn't the only one who would be out of a job, my friends and colleagues, many of which are probably worse off than me, would be unemployed as well. Talk about stress. BUT, as they say in the infomercials, "wait, there's more!"

Sick as a Dog - for almost the entire month of October I was as sick as a dog (where does this saying come from?). I had a constant fever. Not high - hovering around 99F most of the time - but it was there and I felt like crap. I had batteries of blood tests performed ($10K worth, according to the doctor), urine tests, eye exam, even... a brain MRI. Nothing. The Dr. was planning to send me to do a full body CT Scan - which I seriously fought against. What can I tell you. It was pretty bad. Normally, I would probably take a few days off and hide in bed until I got better, but I couldn't do that. Not with our funding round so close to failure and the company so close to going out of business. So during that entire time, I had three meetings a day with venture capital funds, and countless other phone calls and follow-ups. Incidentally, the illness itself was bad, but the fact that the doctors couldn't figure out what the problem was for over three weeks was the really scary bit.

October was a really, REALLY bad month, BUT it is over and here is how it all turned out so far:

I am healthy - one of the many blood tests showed up some faint traces of infection. Ten days and one aggressive course of Cipro later and I am as good as new. 

Wife employed - it's contracting work, and it's only part time, but it pays the bills and my wife is happy and so am I. She is out looking for a new full time position, but we are realistic. It's probably going to take several months to find the next gig. Fine with us.

Money in the Bank - last week we closed a $12 million dollar investment round with two new venture capital funds. This means that we have enough money at least until April 2010. My CEO gave me a lot of credit for the fund raising and praised me to our board of directors. This is a major achievement for me and my reward is that I get to have a steady pay-check in this economy, and so do my colleagues.

The stock market? Well, that's still in the pits, and probably will be for a while, but that's OK. As long as the system itself continues to function (and it looks like it may be stable for now), we can ride it out.

I am extremely thankful that October is gone. While it has been the most stressful month in my adult life, I think I can honestly say that I am better for having gone through it and thrived. Things have worked out as well as could have been expected. 

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Wednesday, November 26, 2008

Getting Economic Good Data

When economic markets are reeling and major news developments happen several times a day, it is important to stay well informed. However, bad information is even worse than no information at all, so making sure that your news sources are reliable and trustworthy is key. In the spirit of information sharing, I thought I would share some of the economic news sources from which I gather my data.

WSJ - I have a subscription to the Wall Street Journal, and while I don't have time to read that paper in full every day, I make it a point to scan the headlines for 10 minutes every morning when I get to the office. I also read a couple of articles in the evening. This is an excellent and very detailed source of economic information.

The Economist - In my opinion, The Economist is by far the best source of detailed and clear economic analysis. While my subscription has elapsed a couple of weeks ago, I shall renew! The only down side: there is no way to "scan" this weekly magazine. I always find myself dragged into to hours of reading, and its not unusual for me to have 5 - 10 previous issues on my night stand waiting for me to finish reading them.
NY Times - again, in my humble opinion, the best daily newspaper in the country. I don't subscribe, but I buy it periodically (especially before getting on flights). I do visit the website every day.

Business Week - as a source of detailed information and analysis this one is pretty weak, however it is a great overview which I scan on a weekly basis. If I find anything interesting, I do a deep dive on my own.

Kiplinger - recently I have started reading Kiplinger's online. I really dislike the website itself, but they do have some interesting information about personal finance, a topic which I have... a passing interest in...

NPR - I am not a member, and shame on me, but I listen to NPR practically every minute I am in the car. Market Place and All Things Considered are two excellent programs that cover financial and economic issues in depth.

Personal Finance Blogs - although us PF bloggers don't tend to break any major news stories, we do provide a lot of opinion and analysis which I find useful. Personal finance blogs also do a far better job of analyzing in depth personal finance issues than practically any news outlet out there. You can find a partial list of my favorite PF blogs in my blog-roll, but my top two choices are The Digerati Life and Frugal Zeitgeist, both written by lady bloggers and both offering excellent, fun content.

Check for Myself - whenever I hear of an important news development that involves a publicly available source of information, such as a government report or interview, I often go and check the source for myself rather than rely on the summary created for me by some news organization. I find that the picture becomes much clearer that way - this however takes a lot of time, so I do it judiciously.

I would love to hear about the news sources you use to gather your data. Sound out in the comment section below.

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Tuesday, November 25, 2008

Thriving through Lay-Offs

As lay-offs continue to roll across corporate America, many of us may soon find ourselves bidding goodbye to some of our colleagues who are laid-off. Many folks who survive a round of lay-offs find themselves suffering from survivor's guilt or becoming demoralized or disillusioned by their company. Those are exactly the wrong reactions. Although a round of lay-offs is tough for everyone, there are some things you can do to improve the situation and there are even some silver linings:

Take on More Responsibility - layoffs in your company can be an opportunity for major career advancement. Think about it: there is more work for fewer people. There are bound to be orphaned projects, programs and areas of responsibility, and guess what? Your boss would be delighted if you offered to take over some of them. Find a project that takes you in the career direction you are trying to go and make a bid for it. Moreover, remember that the more responsibility you have and the better your performance, the more likely you are to keep your job through future rounds of lay-offs (if there are any).

Stay in Touch with Former Colleagues - believe it or not, layoffs in your company mean a major boost to your professional network. Knowing people in your own company is good. Knowing people in other organizations in your industry is excellent, and there is a good chance that many of the colleagues that just left your firm will find new places of employment within your industry. If you stay in touch with your former colleagues your network will become much more powerful. Remember, your colleagues are your assets.

Help Out - losing one's job, whether expected or not, is a traumatic event, but you are in a position to help your former colleagues land their next jobs. Be proactive in offering contacts to headhunters, potential job leads and other resources that your former colleagues may find useful. Giving folks a call every week or two to find out how they are doing is also not a bad idea. One thing that I like to do for former colleagues is to write a recommendation for them on LinkedIn. Of course, I only provide a recommendation if I mean it, but such recommendations can both improve the mood of the recently laid-off and help them to find their new position.

Be a Cheer Leader - lay-offs are serious morale killers, and while you may be tempted to come to the office and hide in your cube, now is a great time to step up and take a leadership position. Don't participate in downer water cooler conversations, be optimistic and be vocal about it. Optimism is infectious and greatly improves results. Moreover, even though you may not realize it, lay-offs are extremely tough on management as well. Management will notice and appreciate your cheer leading. Hell, being optimistic really improves your day, give it a shot.

Pat Yourself on the Back - it is very much OK to stop for a minute, breathe a sigh of relief and pat yourself on the shoulder for keeping your job. Somebody in management knows you are doing a fine job. Somebody there has probably put up a fight for you when the decisions were being made. You are doing something right. Good job.

Don't Take Anything for Granted - it is not unusual for companies to go through multiple rounds of lay-offs, and even if you don't think that another round is coming, being prepared for losing your job is always a good idea.

The good days will come again, but until then hang in there and continue to do your best.

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Monday, November 24, 2008

Day Care Price Increase

Last week we received notice that the price of our child care was about to increase from $1,132 per child per month to $1211, a 7% increase starting January 1. Since we have three kids going to this day care center (our oldest participates in the after school program), we are about to take a $300 a month hit to our budget, with the total monthly cost of day care going well above $3,000. Our rent has also increased recently from $2,000 to $2,100. Not a dramatic rise, but together with the day care, our non-discretionary spending has just increased by $400 a month or almost $5,000 in after tax spending...

While I make very decent money as a VP in my small technology company, my wife is currently contracting part time after quitting her previous position. It goes without saying that in this economic environment, the chances of either my wife or I getting a raise are practically non-existent. This means that the proposed increases are going to come directly out of the amount we were planning to save.

The day care price increase is not yet finalized. Our day care is city owned (one of only a few such facilities in our area), and the city council must approve the increase in a council session scheduled for tomorrow. Many parents are planning to show up at the session to plead our case that in such bad economic times raising prices is really unacceptable. Based on research conducted by one of the parents we believe that the price increase is meant to allow for raises to the day care staff, and while we would certainly like to see this dedicated team make more money, we don't think that this year such raises are legitimate.

Friday, November 21, 2008

Recommended Articles & Commentary

Here are some of the personal finance articles from around the blogosphere that I have enjoyed over the past week. There have been quite a few of them, actually:

All Financial Matters wrote a post about the economic role of government. In particular, one quote from the article rings true: "Unless restrained by constitutional rules, special-interest groups will use the democratic political precess to fleece taxpayers and consumers." Couldn't agree more. However, that's not to say that government should stay on the sidelines in this economic tsunami. Government should continue to take some pretty dramatic measures to prevent this serious recession from turning into something worse. Yes, there will be an economic price to pay later, and taxpayers will no doubt be fleeced, but the alternatives are worse.

Blunt Money is advising his readers to worry about their own darn economy - he thinks that when making economic decisions one should focus on his own economic situation and disregard the economic environment as a whole. I disagree. When making a large purchase, it is wise to consider the possible impact on your finances in case you lose your job. When making a decision to leave your current job and take a new offer, it is wise to consider the economic situation: do you want to be the new guy in the office if your new company starts laying people off? 

Boston Gal is commenting about the drop in household electricity usage in recent months. She is wondering whether the reason is the economic downturn or folks starting to save. I am really hoping people are consciously saving, but I am willing to bet that the recession is to blame (or credit). Some of the commenters seemed to suggest global climate change is the culprit.

My blogger friend Frugal Zeitgeist is out to defend her frugal street cred after making some big purchases recently. In my opinion, frugality is not about living like a beggar. It's about making smart purchases, living below your means, and most importantly not robbing your future self to pay for your current wants. Don't worry Frugal, your street cred is intact, at least from this bozo's perspective.

Millionaire Mommy posted a really cool inspirational photo essay telling folks to get off their "buts". That's not a typo. That's the specific point of the essay. I laughed myself silly. However, while I am a big believer in self-help, I don't believe that a simple shift in attitude can solve all problems. There are some objectively very difficult problems that will not yield to a simple desire for change - here's one example I wrote about earlier this week.

Finally, Mrs. Micah is going through some job interviews and offers good advice to fellow job applicants

Finally, this week I participated in the Carnival of Personal Finance which was hosted by Money Ning, with my call for no bail-out of homeowners.

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Thursday, November 20, 2008

Life Insurance Company Stability: More Info

A few weeks ago I wrote about about how I was starting to become concerned about the stability of my life insurance company - Protective Life. Last week I got more information on the subject. It appears that Protective Life was downgraded by a couple of credit rating agencies, however according to the language of the downgrade the situation appears to be stable. From the downgrade announcement
"This rating action reflects Fitch's view that the risk-based capital level of PL's primary life insurance subsidiaries has deteriorated in 2008 and will continue to be pressured over the near term due to investment losses and reserve strain associated with the company's term life insurance business. The ongoing turmoil in the credit markets has limited PL's financial flexibility and put pressure on its ability to access funding to improve its capital position...

...Importantly, Fitch believes that PL's liquidity position is sound. The company has no significant debt maturing until 2013 and has cash and liquid assets to meet maturing obligations at the holding company and operating company levels. Further, PL has below-average equity market exposure given the company's relatively modest variable annuity business and negligible exposure to unaffiliated common stock. Equity-adjusted leverage remains within expectations, and interest coverage, while down from prior quarters, is reasonable."
The way I read this, my life insurance company is hurting because their portfolio is down, but they are not under any imminent threat of insolvency or any burning need to raise cash. 

I will continue to monitor the situation, but it looks like there is no cause for immediate alarm.

Wednesday, November 19, 2008

Not Everyone Can Quit Their Jobs...

A couple of weeks ago I wrote a post about how and why my wife quit her job in this difficult environment. Late last week, one of my readers posted the following comment in response to my post, which I wanted to share with you:
"I guess it all depends on where you sit. I was married for 14 years then divorced and have been raising my 3 children for the last 10 years on a single income (30K per year)with no child support(blood from a stone thing). I worked for 19 years for a major industrial supply company before suffering some disability. The company does not want to provide me with a position that I can survive on . The disability insurance will soon end and if I can't find a job that will allow me to pay bills me and my kids will be out on the street in a one to two months. You can serve your country in the military, work hard all your life, try to do all the right things and still end up on the trash heap. One thing people may not realize is that many people in such situations as mine are stuck working in positions without promotional opportunities because the company realizes they have you by the balls. You have to feed your kids etc so you just have to take it. Good luck to you all, god bless and consider all things. I hope you find this world a better place than I do at the moment. "
Wow. That was powerful, moving stuff. How do you respond to such a statement. Clearly, my reader is under a lot of stress and feels that she doesn't have too many options. 

It is pretty humbling to hear of a person facing such profound challenges. After all, my wife and I are extremely lucky. We are financially secure. We are both healthy. Our kids are all healthy. We have everything that we need. We have the luxury or resigning a well paying position because it does not allow us to maintain the work-life balance we desire. 

Any advice, insight or commentary would be appreciated.

Tuesday, November 18, 2008

"Big Three" Bail Out: Good or Bad?

Yesterday afternoon I got an e-mail from a PR firm obviously hired by GM to mobilize grass roots support for a government bail-out of their customer (and presumably of other US car manufacturers). One of the things I enjoy about personal finance blogging is that all of a sudden you get all these solicitations from a variety of parties trying to push an agenda, a product or an idea - imagine what it's like to be a member of Congress - but I digress. Anyway, since this is a hot topic, I figured I would put in my two cents on the issue. So, is a bail-out for Detroit a good idea?

Let's examine the proposal: a $25 billion government capital infusion into the "Big Three", presumably with some sort of government over-sight and government ownership stake. It looks like the government is seriously contemplating an active role in the management of these companies. According to automakers, about 3 million jobs are at stake and supposedly $150 billion annually in personal income will disappear if GM is allowed to go bye-bye. Seems like the stakes are big. Now for some opinions:

I went and did some digging. According to Department of Transportation statistics (chart 1-16) the number of domestically produced cars sold in the US was about 5.4 million in each of 2004, 2005 and 2006. No later data is provided. This is a total of about 16.5 million vehicles over the period. Assuming that the number of domestic cars sold last year is roughly the same, the requested $25 billion bailout is equal to a taxpayer subsidy of about $1500 for every domestic vehicle sold over the past 3 years

The so called "Big Three" have been losing money for years. Readers may not remember or know this, but it was the Carter administration who had to bail-out Chrysler back in 1979. At the time, Congress "merely" guaranteed loans by the company. Now we are talking an outright cash infusion. Is it impossible to make money in this industry? Hell, no. Toyota and Honda seem to be doing very well, thank you. So why would we be thinking of throwing away a perfectly good $25 billion of tax payer money into a company like GM who burned through $7 billion in cash in the last quarter alone?

I do not underestimate the possible macro-economic implications of a failure of these behemoths. Clearly, an uncontrolled implosion of such large organizations would have a devastating effect on the economies of Michigan and surrounding states, and I am not advocating that the government allow such an uncontrolled implosion. However, the clear path to a successful resolution of this fiasco goes through bankruptcy court.

If GM cannot continue to fund its operations, it should file for bankruptcy protection. In such a case, a bankruptcy judge could release the company from the ridiculous constraints of its UAW union contracts, could sell off the company's assets to interested buyers who could continue to operate the factories and even take over some of GM's more popular brands. The company could try to raise new private capital and re-organize its operations. GM may or may not be able to make it out of bankruptcy court, but that is none of the taxpayers' business. 

As a society, we should care for the "Big Three's" employees, by offering them extended unemployment benefits, retraining services and actively encourage more capable owners to take over the operations of these companies. However, we have no obligation to guarantee that perennially inefficient and money losing operations continue to exist.

In fact, by allowing these zombies to continue their half-life existence, we are delaying the recovery of the entire auto industry, as healthy and well run auto companies are forced to face hail-Mary, market destroying moves from dying companies. How can we honestly say that we have a free market if we bail-out these companies at the expense of their competitors and, more importantly, at the expense of the taxpayers?

There is one more charge that I need to answer. I have previously argued in favor of a bail-out for the financial industry. Why do I oppose this one? Is my position inconsistent? I believe that my position is completely consistent. In the case of the financial sector, we were facing a classic case of market failure. The market was simply not functioning. People were not lending or trading simply because they had lost confidence. Moreover, the financial industry was in such shambles that the very basis of the capitalist system was being threatened. In this case, the situation is completely the reverse. In the case of the "Big Three" the market has spoken. It is not that all car companies are facing bankruptcy, it is that those big, lumbering, inefficient ones whose products the consumer no longer wishes to purchase that are facing failure. Others car companies, while suffering from the economic downturn, are still profitable and are doing fine. 

I am not quite sure if this was the reaction that the "Big Three" PR person was seeking to provoke from me, but there you have it. I am firmly against a government bail-out of the "Big Three", and my opinion appears to be diametrically opposed to that of the President Elect. I call this mistake one for Obama, but we shall see...

Monday, November 17, 2008

Insurance You Need, Insurance You Don't

The post I wrote last week about reducing your car insurance bill got me thinking about other kinds of insurance, and how useful they are. As I have written before, insurance should be reserved for potentially devastating costs - as a way to reduce your risk to manageable levels. If the risk is something you can handle without a third party (who makes money by charging you more in premiums than they pay-out in claims), you should handle that risk on your own.

With that in mind here are some of the types of insurance that I think are well worth the money:

Life Insurance - that's a big one. If you die, you want to make sure that your loved ones are well taken care of. However, even here it is important to understand that if you don't have dependents, you probably don't need life insurance.

Disability Insurance - possibly even more important than life insurance (although, I must admit I only have the inadequate coverage offered by my employer). You want to make sure that if you are unable to continue doing your job, you are still able to maintain a decent standard of living.

Home Insurance - unless you are a multi-millionaire (and I mean MULTI), losing your home to a fire or hurricane without insurance could completely devastate your financials.

Health Insurance - if your employer does not offer health insurance, you should make every effort to buy your own. If you can't afford a complete plan, at least get catastrophic coverage with a large deductible, to make sure that you have some backing in case of a major illness.

Car Insurance - we can argue about collision damage, but making sure that you have enough liability coverage is key. Getting sued for all you are worth by someone injured in a collision with you is really something you want to avoid...

There are many other types of good insurance, but the important thing is to understand that what they all have in common is this: they protect you from risks that while relatively small, would devastate you financially if you don't have sufficient coverage.

Now, let's talk about some types of insurance that are useless in my opinion:

Extended Warranties - every time I buy anything at Best Buy, the sales clerks try to convince me to get an extended warranty. But why? Very simply: the company makes money on the policies they sell. Conversely, the cost of the insurance is higher than what they expect to pay me in repair costs. I don't know about you, but if my iPod dies, I don't expect to be devastated financially. Worst case scenario, I'll need to live without portable music for a while.

Life Insurance for Children - your kids do not need life insurance. No one is depending on them for income (unless your child happens to be a famous movie star or fashion model, I guess). If the unthinkable happened and your child passed away, your income would not be effected. In fact, although it is sad to say, your expenses would actually go down. The risk here is not financial, it is emotional, and that cannot be off-set by life insurance.

Vision Coverage - if your employer did not provide vision coverage, would you get it yourself? I wouldn't. Again, the same logic applies: your vision coverage covers the cost of your annual exams and purchasing prescription glasses and such. Most people would probably be better off foregoing the insurance and buying the glasses on their own. Remember - the insurance company needs to make money, so they are charging you more than they expect to pay for your check-ups and prescriptions.

Vacation Insurance - unless we are talking about your dream vacation that you have been saving for for the past decade, insuring your vacation makes very little sense to me. If your vacation gets cancelled for some unforeseen reason, worst case scenario, you get no vacation that year. You are not financially devastated. Your life continues along its normal course.

Again, there are many other types of insurance that do not make economic sense, the common denominator is that even if the worst case scenario occurs, your financial condition is largely unchanged. In such cases, it is best to save your money rather than spending it on buying unimportant coverage.

You can also check out my previous article about buying insurance in your 20's.

Sunday, November 16, 2008

Recommended Articles & Commentary

Here are some of the personal finance articles that I enjoyed this past week, with some opinion thrown in for good measure: 

Have you recently tried to use the free annual credit report website? Changes that have been made by the credit reporting agencies have made this website largely impossible to use. I have a post planned for this topic based on my recent experiences, but it appears others are having the same horrible customer experience

Saving advice wrote a good post comparing how saving small amounts of money is much more effective, and easier to do than making additional small amounts of money. This is probably true to a point: there is a given point beyond which saving is probably no longer easy to do without a major impact on lifestyle. 

All Financial Matters published an article about a proposal to eliminate the 401K approach to retirement, and replace it with a $600 tax credit and a government managed retirement account which will be funded by a mandatory retirement tax. Talk about a crappy idea! Yes, I agree that there are big problems with the 401K plan system as it currently stands, one of which is the fact that a 401K is tied to an employer and the investment options it offers. Another is the fact that most individuals are simply unequipped to make reasonable retirement planning decisions. However, this does not mean that I want to turn over my retirement planning to a government agency or to accept their investment decisions on my behalf. 

The NY Times published an article this week comparing the cost of health care in various countries around the world, taking into account each country's GDP. There is a very tight correlation between per capita GDP and spending on health care, with most countries located more or less on a straight line on a graph. However, the U.S. is dramatically outside this line with spending per individual much higher than would be expected given our GDP. What's more, our medical service (as judged by medical outcomes) is not better than that of other industrialized nations. This is mandatory reading to anyone who thinks the health care system requires reform.

Moolanomy has a post about investing in tough markets, highlighting the importance of asset allocation, diversification and continuing to invest when the market is down. I am a big believer in regular contributions - in fact, Friday was our regularly scheduled monthly contribution into our stock portfolio. I was very happy that the market declined 5% that day. I love discounts.

This week I also particiapted the Carnival of Personal Finance which was hosted by The Digerati Life this week. My article Avoiding Getting Laid-Off was my weekly submission.

Friday, November 14, 2008

Don't Bail Out Homeowners

Talk is increasing about a government bail-out for home owners who cannot handle the burden of their mortgages. This annoys me no end. My regular readers know that I have previously written strongly in favor of the government bail out of financial institutions. Why then do I object to a bail out for individual home owners and how can I justify this seemingly inconsistent position? Here goes:

No Win for Taxpayers - when bailing out financial institutions, government, for the most part, received an equity stake in the banks or received other assets that once the markets stabilize will become more valuable and may actually provide tax payers with a substantial return on their investment. The proposed bailout of homeowners will not provide tax payers with any upside or assets in return for their gracious intervention. It will simply make the problems of overwhelmed home owners go away by a wave of the magic wand, at our expense.

Picking Winners and Losers - I am a renter. My wife and I made the decision to rent for a combination of reasons, the most important of which is that we simply cannot afford to buy a house in our town, nor did we think that stretching to buy one would be a good or safe investment. On the other hand, many other folks have made a financial bet on the supposedly permanently rising prices of real estate and decided to gamble their life's savings to buy a house.

A specific example I have in mind is one of the people that worked for me in my previous company, who bought a million dollar house in San Jose, California, even though his household income was dramatically lower than mine, and who did so through an aggressive ARM with a 5 year teaser rate.

Why would government take my money, to reward those homeowners who made bad financial decisions? Not only does such a decision hurt me and millions like me directly by wasting our tax dollars, it also penalizes us by artificially putting a price floor under the housing market, thereby keeping houses out of our reach while letting those who made irresponsible decisions reap financial rewards for their financial recklessness.

By bailing out homeowners, government would be making winners out of irresponsible home buyers, and doing so by penalizing responsible renters and (to a lesser degree) responsible home owners.

Moral Hazard Galore - even though we have all taken to calling it a bail-out, financial institutions were not really bailed-out in the common sense of the word. AIG shareholders were completely wiped-out in the government take-over, BearStearns share holders were very nearly wiped-out. Banks who are now receiving equity infusions from the government are receiving this cash infusion in exchange for shares which dilute the value of shares held by other shareholders and which will hopefully yield a profit to tax payers in the long run. What I am trying to say is that the government may have bailed out the financial institutions themselves, but shareholders have been duly penalized.

However, the government is now proposing a true bail-out of homeowners. It is not talking about wiping out the equity of home owners and turning them into renters or of letting them walk away from their loans without going through bankruptcy, it is talking about improving the terms of their loans so that they are better off. Seriously?

The System is not at Stake - With all due respect to home owners, the financial sector was on the verge of complete collapse, one that would surely have dragged down strong industrial companies and small businesses along with it. This was not a question of saving Wall Street, it was a question of saving all of us. The boat was sinking. The same is not true of individual homeowners. Yes, collectively homeowner losses are a drag on the economy, but no one is even claiming that this will bring a complete meltdown of our economic system. The situations are simply not comparable.

Worried about the economy? Let's talk economic stimulus. Let's talk tax cuts, let's talk public works and infrastructure improvements. Hell, let's even talk a second stimulus check to individual tax payers. BUT don't go and reward exactly the sector of the population whose financial irresponsibility and greed is a major reason for the current economic trouble!

Thursday, November 13, 2008

Saving Money on Auto Insurance

In times of economic crunch, we all look for ways to save money, whether it's by curbing our shopping habits, or just making sure we have the most affordable auto insurance available. While changing insurance companies to take advantage of new-client specials is one way to knock down that premium, there are other methods of lowering your monthly insurance bill, as well. Here are a few:

Bundle Up: Whether you own or rent your home, you can save money by bundling your homeowners or renters policies with your auto policy, under the same insurance company. In fact, most companies discount both policies a little bit, rather than only giving you a discount on one or the other. As well, while those new-client deals at other insurers may seem attractive, they may not entirely offset the hassle of moving your policies around. Instead, ask your existing insurer about loyalty discounts – they're often available for customers who've stuck around for as few as two years.

Be Good: Good drivers and good students both qualify for discounts from many insurers. For the former, you need a clean driving record going back three years; for the latter a B average or better, and/or presence on the honor roll or Dean's list at your school. Parents of teen drivers take note: if your child is on your policy, their grades count toward this discount until they reach the age of 25 or are no longer full-time students, whichever comes first. Want to maximize your discount? Consider taking a defensive driving class. Doing so often nets you a significant (up to 10%) discount that lasts up to three years. Parents and students can take such classes together, and better yet, when those three years are up, you can repeat the course to reinstate the discount.

Be Safe: Even small safety measures, like parking your car in a locked garage instead of leaving it in the driveway, can help reduce your premium in some cases, but for significant savings, make sure that your vehicle is equipped with an anti-theft device. These include tracking devices, like LoJack, audio alarm systems, and less passive measures, like engine immobilizers. Just make sure that any aftermarket safety equipment is approved by your insurance company before you install it. Safety devices like airbags, and certain kinds of seatbelts that make driving your car less risky, may help you save money as well.

Raise that Deductible:  If you have a solid driving record, as well as enough money in savings to offset a higher deductible should you be in an accident, you can lower your premium by raising the amount you pay out of pocket. Think of the deductible as the equivalent of a medical co-payment. The more you pay up front, the less you're billed later.

Join a Club: Members of auto enthusiast's groups, job-related unions, and professional organizations often have access to discounts from affiliated insurance companies, and even some owners clubs are offering deals now, too. Ask around, and check with your benefits coordinator at work.

The five things listed above are just some of the many ways you can save money on auto insurance. When you're shopping for a new policy, or re-negotiating an existing one, remember to ask if there are any discounts you don’t already have. You may be able to save money because of your age, job title, or zip code, as well as the age of your car.

We all need auto insurance, but we need to watch our finances as well. By being a savvy shopper, you can save money without sacrificing coverage. 

Wednesday, November 12, 2008

Preparing for a Layoff

Last week I wrote a very popular post about how to avoid getting laid-off. However, recognizing that in some cases whatever you do will not spare you the pink slip, this article is all about preparing for the worst case scenario. If you get wind of an upcoming lay-off, know that your company may be in trouble, or simply want to take some precautionary measures, here is a series of steps that you should think about taking:

Update Your Resume - whether or not you think that you are at risk of losing your job, keeping your resume up to date is a good idea. You never know when you'll get a call from a headhunter or come across an opportunity that you want to respond to immediately. The idea is being ready to hit the ground running. Even though I feel very secure in my current position, my resume is up to date and ready to go.

Stay in Touch - its a cliche in job hunting circles that most people find a job by networking. Forget for a minute about formal networking - be sure you renew your contacts with old friends, colleagues and acquaintances. I have previously written that your colleagues and former colleagues are important career assets - so be sure to stay in touch or reconnect with some of your former colleagues who have moved on to other companies. This is not only good advice for prospective job hunters - it's also nice to reconnect with old friends. 

To get started, make a list of people you need to reconnect with, and make it a point to give a call or shoot an e-mail to one person a day. This will also make transitioning to formal networking or job hunting mode much easier to do when the time comes, because your relationships will already be fresh and up to date.

Spread Your Name - being easy to find by prospective employers and headhunters is a good strategy in good times and in bad. Your action items here are limited only by your imagination - have a prominent profile on major social networking websites, give talks at industry events, write papers for your industry publications, write white papers or presentations that can be published on your company website etc. The important thing is to have your name attached to some impressive professional achievements and to make sure that these are easy to find online.

Make Discreet Inquiries - don't wait for the pink slip. If you think you are likely to be let go, start looking for a job preemptively. However, be sure to do so discreetly, because if your employer finds out that you are looking, it is very possible that you will find yourself on the lay-off list even if you were previously safe. In this context, I never felt secure about putting up my resume on the online job boards, since I am always concerned that my employer will somehow find out about this in spite of my precautions. Instead, I prefer more discreet job hunting avenues such as very specific headhunters, and job referrals through LinkedIn

Emergency Fund - others have written extensively about the need to build an emergency cash fund for use in case of financial emergencies, so I will not belabor the point. However, if you suspect a lay-off is imminent, and you don't have a sufficient emergency stash built up, move quickly to correct the problem.

These are tough economic times, but luck favors the prepared mind, and much can be done to avert the worst consequences of a lay-off. The important thing is to actively engage the situation, rather than to wait passively for events to unfold. Make a plan, and start executing today.

Monday, November 10, 2008

Dividends? They Don't Matter

Many investors swear that dividend yielding stocks are better investments than other stocks. Some fellow personal finance bloggers like the Div Guy believe in dividends so much that they dedicate their entire blog, not to mention their investment strategy, to the idea that dividend stocks are simply superior. This idea does not make any economic sense to me, and here's why:

Money is money - the value of shares is determined by the value of a company's income stream and the value of its assets - which includes its cash hoard. A company that pays out $1 in dividends now has 1 fewer dollars in its bank account, and therefore the value of its shares should decline accordingly. As an investor, it should not matter to you whether you have received a payment of $1 from the company, or whether the company keeps that $1 and your stock is now worth an extra buck. Money is money, wherever you hold it. Claiming that dividends create money is equivalent to saying that using an ATM to withdraw money from your bank account somehow makes your over all net worth improve... all you did is simply move the money somewhere else.

Taxes - dividends are subject to tax. When a company pays you a dividend, it automatically triggers a tax liability for you. Unless the dividend is being paid into a tax sheltered account, you would have been better off keeping that money in the company and having it compound without taxation until such time that you decided to sell your stock.

Liquidity? No Thanks - Some say that a company generates liquidity for its shareholders by paying them dividends. Shareholders can hold onto the same number of shares and get some of their money out of the company. But why is that a good thing? If I want liquidity, I can sell some of my shares myself, without the company deciding how much and when to make me liquidate.

Efficiency? I don't Think So - a common claim is that by paying out dividends, management in a company is not tempted to use its extra cash on non-productive investments or waste the money. Well, maybe, but if they have extra cash on hand, couldn't they achieve the same objective without creating a tax liability for investors by purchasing back some of their own shares? That would make share prices go up. On the flip side, what about companies who could use the cash they pay out to make some wise investments, but instead pay dividends and then borrow money or sell more stock to support their investment objectives? That's a worse proposition for the company who will now pay interest expenses or share its income with more shareholders.

Nope. This whole idea of dividends simply does not make sense in a highly liquid market. Now before you wag your finger at me and say that I don't know what I am talking about, I did not invent these arguments. These are arguments that I have been taught in business school finance classes and in my corporate law courses in law school. Not enough for you? Someone actually won a Nobel Prize for making these claims - you can read more about the Modigliani-Miller Theorem for yourself. If you are interested in more reading on the subject, see this easy to understand short paper by a Chicago Graduate School of Business professor. This paper also explains why folks make the mistake of believing that dividends actually do matter.

Now, having picked a fight with a bunch of well respected bloggers, let me stand back and wait for the angry mob to assemble its responses in the comment section... Let the battle begin.

Saturday, November 08, 2008

Recommended Aricles & Commentary

Here are some of the personal finance articles I enjoyed over the previous week. To be honest, this week I did not have much time to roam far and wide, as I normally do, and instead mostly stayed with my favorite PF blogs. Here are my recommendations for the week:

Plonkee wrote a wonderful piece about gap years - a common practice in Europe where people take a year off work - often before or after college, and go travel the world. Personally, I did this twice - once before college and once after my first year as a lawyer. Those were some of the best times of my life. Those two 6 month periods also helped to define and mold who I am today. Sadly, very few Americans make travel a major part of their early adulthood.

On the Digerati Life this week, there were two articles I particularly liked. One dealt with not buying a new car - a topic which I wrote about myself a while back. The other had to do with signs of a stock market bottom. I want to comment briefly about both posts - first, the car purchase. It appears that Americans in general have decided to forgo buying new cars for now - as evidenced by the complete meltdown of Detroit auto sales, and that's a perfectly rational decision in tough times. However, let me tell you a story - my company has been going through a fund raising process in this horrible financial environment (I will write a long post about this about 2 weeks from now), and as a consequence, I have been meeting many venture capitalists. The vast majority of these arrive in our office driving Porches or BMWs, but just last week I met one venture capital partner who drives a Nissan Altima. I immediately took a liking to the guy. Here's someone who spends his money wisely, even though he is obviously very well off financially.

Regarding the signs of a stock market bottom, I have this general advice: don't look for them. Trust that the laws of economics, much like human nature, have not and will not change. As long as we remain a capitalist nation and a huge asteroid does not collide with the Earth, stock markets will, over the long haul, yield about 8% a year. Some years will be better, some will be worse. You can save yourself a lot of anxiety and heart ache if you accept this and continue to invest in a disciplined manner regardless of what the market happens to be doing that specific year. Easy advice to give, tough advice to follow (even for me).

Five Cent Nickel this week started to entertain the notion of a second stimulus check- yeah, I don't know that this would be a viable long term strategy for stimulating the economy. In fact, I am not even sure if throwing even more federal money into the battle is a good idea or not. I am concerned about the mounting deficits and debt load. Someday soon we will have to pay the piper in the form of substantially higher inflation, a potentially steep decline in the value of the US Dollar, or both. I am keeping an open mind though, and don't pretend that I know what the right answer here is.

This week I participated in a couple of blog carnivals, including the Carnival of Personal Finance where Sun awarded me the honor of Editor's Pick for my post about leaving your job in a tough economy. I am honored. The post seems to have stuck a cord, since it was also taken up by many other bloggers. I also participated in the Carnival of Money Stories and in the Festival of Frugality. Finally, this week my blog was flooded by traffic when MSN Smart Spending featured my article about how to avoid getting laid-off. Hey, welcome new readers and RSS subscribers!

Friday, November 07, 2008

Late Day Rallies and Crashes: Why Do They Happen?

Have you noticed how in volatile times, it is very often that the stock market swings wildly and reverses trend during the last hour of trading? Sometimes, just when it looks like you are going to get away with a slight gain for the day, 3:00 PM EST comes along and a dramatic stampede for the exits begins in the market. 

I have always wondered why this happens, and last week I found this article on Kiplinger that addresses this question. It appears that this is not a coincidence or illusion but an actual phenomenon that is caused by several factors including the way mutual funds trade and how individual investors are required to handle margin calls.

It's an interesting read.

Thursday, November 06, 2008

Career Advice: 30 Rock Style!

In last week's season premier episode of 30 Rock (which you can watch here) Alec Baldwin's character, Jack Donaghy gives career advice to some low levels employees at GE. I am paraphrasing a bit, but bear with me:

Jack: "You should always dress for the job you want, not the job you have."

Low level employee: "Great advice! Starting tomorrow I am coming to work dressed as a Mexican wrestler!"

Hey, it's solid advice. I don't know about taking it to the extreme like that, but you get the picture.

Seriously, you gotta love that show. It is one of the best comedies on television today. Another fun bit (again, I am paraphrasing):

Jack: "Are you going to close down GE?"

Devon: "It's only G now, I sold the E to Samsung. They are now called Same Sung."

Wednesday, November 05, 2008

Pride, Joy and Exhilaration

It is done. 
Obama is the president elect of the U.S.

Sitting in front of the television last night and trying to watch about 8 different news channels simultaneously, after some of the networks started calling Pennsylvania and Ohio for Obama, it suddenly dawned on me that Obama was actually going to win. Like everyone else, I read the polls and I heard the pundits talking about an Obama lead in the weeks before the elections, but I guess I just didn't really believe it was going to happen. Not in my heart of hearts. When the realization dawned on me that it was a done deal and that Bush's days in the White House are numbered, I felt elated. But then, when I watched Obama deliver his acceptance speech, I felt moved and even a little choked. We have elected the right guy.

Before you take me for a party hack, a wuss or a wide-eyed imbecile, be aware that I am not a Democrat. I am a registered independent that was seriously considering voting for McCain before his ill fated Palin train wreck. However, something dramatic happened in this country last night. For one thing, the politics of hope and vision, won a battle against the politics of negativism and divisiveness. For another, minorities everywhere in this country have received proof positive that the highest office in the land is open to them too. The thought of millions of kids looking up to the President and seeing themselves in him, fills me with joy, and makes me truly proud to be an American (and people that really know me, know that I am not one to toss such statements around).

However, the joy is not complete. In a night that saw the old barriers of the civil rights era shattered, new barriers of discrimination are being put up. In my supposedly progressive home state of California, the voters have narrowly passed Proposition 8 eliminating the rights of single sex couples to marry. It is incredible to me that many people who have voted for Barak Obama for President with full awareness of the historic significance of their vote, at the very same time cast a vote for segregation on the basis of sexual preference. It is even more troubling that the analysts are claiming that 7 of 10 black voters in my state voted for Prop 8 and for the elimination of single sex marriage. The very same people who suffered from horrible discrimination against them simply because of the color of their skin, have willingly cast a vote to discriminate against others on the basis of their sexual orientation. So, while I am proud to be an American on this day, I am embarrassed to be a Californian. Live and let live!

Two final statements. 

Obama has a tough job ahead of him, and since I am a free market capitalist, there are many areas in which I strongly disagree with Obama's positions. These include free trade, the role of labor unions and corn ethanol subsidies to name just a few esoteric examples. I will continue to speak vocally against economic policies that I consider wrong, regardless of who is advocating for them.

I feel that I have spent too many posts in recent weeks on the subject of politics, and while I will continue to occasionally write about political issues and other off topic items (hey this is MY blog), I will now return to my primary focus which is personal finance. I have many cool posts lined up for the coming weeks, including: how to reduce the cost of auto insurance; diversifying your portfolio into carbon credits (yeah, you can actually do that); and my experiences with getting my free annual credit reports. I also realize that I haven't published any new interactive tools in quite some time, so I have a few of those planned for the near future. Stay tuned. Good days are coming.

Tuesday, November 04, 2008

Keeping Your Job in a Tough Economy

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Mass lay-offs are coming across corporate America, and while most of us will remain employed throughout the upcoming recession, millions of us may find ourselves out of a job. While in some cases entire divisions or business units will be eliminated, basically leaving employees no way to escape the axe, in many other cases lay-offs will be more surgical affairs, such as a 10% company wide reduction in force. I am here to tell you that such lay-offs are not random. In lay-offs of this nature, the people who are let go are picked very carefully. In fact, most bosses worth their salt already have a plan in heads for who they will let go if they are asked to cut their team. So how do you keep your job? Here are a few places to start:

Be a Star - the number one thing you need to know is that stars don't get laid off. Bosses will go to almost any length to keep the members of their teams that they consider to be stars. Why? Very simple, your boss only cares about delivering great results (so he or she can keep their own job) and the best way to that is to have the absolute best players on their team. So, if you are the MVP, your job is almost certainly safe. How you can become a star is perhaps a topic for a more extended post, but it involves a lot of hard work, constantly exceeding expectations, and contributing to the organization as a whole, not just to your narrowly defined job responsibilities.

Don't be a Thorn - even the best players can become a liability for their boss if they take too much time and effort to manage. Generally speaking, you want your name to come up in positive contexts, never in bad ones. This means that you don't whine, you don't pick unnecessary fights, you don't break company policy, you don't constantly demonstrate how you are superior to everyone else. In short, don't be an ass...

Be Nice - if people like to work with you, they will keep you around even if you are not the best performer on the team. That's human nature. Wear a smile on your face, have a positive attitude, be optimistic. Make people feel good about themselves - no, I don't mean you need to be a hypocrite or a brown noser, all I mean is that you should just try to be a decent human being who people like to be around. Hey, that's good advice for life in general, no?

Don't be an Easy Target - OK, here's the trick: when it's hunting season, it's generally not a good idea to wear a target on your back... In the context of upcoming layoffs, the following would be considered volunteering for target practice: asking for raises; asking for special treatment; causing trouble or hurting morale. Look, what I am saying is that if you can't distinguish yourself for being a top performer or a particularly cooperative and fun team player, at least don't distinguish yourself by being the guy your boss constantly needs to defend and put out fires for.

Solicit Feedback and Drive Change - talk to your boss and to your colleagues and solicit honest feedback regarding your performance. Ask them to tell you - point blank - two or three things that you can do better. When they give you the feedback you requested, don't get defensive. Thank them for being helpful and go change.

Monday, November 03, 2008

A Four Year Agenda for Changing the World

I don't know about you, but I am filled with hope and anticipation for tomorrow's elections. Even with all my cynicism and jadedness with respect to the American political system, I find that I am unable to stop myself from getting excited at the prospect of change. After eight years of a miserable and failed administration, I am hopeful that Barak Obama will be elected and will bring a new spirit to Washington and to the world at large. With that in mind, here is what I am hoping to see in the next four years:

Energy Policy - massive government investment in research and infrastructure for renewable energy; zero subsidies for oil companies; a gradual imposition of a carbon tax, the proceeds of which will be used to fund carbon reduction programs; end to corn ethanol subsidies; aggressive investments in energy efficiency programs and education; sharply increased fuel economy standards for cars and trucks, to phase in over the next decade; investment in public transportation systems; ratification of an international agreement that calls for dramatic reduction in CO2 emissions globally by 2050.

Trade Policy - more free trade! Completion of the Doha round of talks for the WTO, with the industrialized economies giving up their ridiculous farm subsidies.

Economic Policy - a balancing of the federal budget. If we can't pay for it, we don't buy it. A clear plan for paying down U.S. debt. Serious tackling and solutions for economic time bombs such as Medicare and Social Security. Dramatic simplification of the U.S. tax code (yeah, that's gonna happen...). For crying out loud - open the border to skilled workers from abroad so that companies are not forced to open offices overseas or outsource. Keep the jobs in the U.S.! Encourage international students to attend U.S. universities and remain in this country after their studies are complete.

Foreign Policy - end to Iraq war; aggressive pursuit of Al Quaeda terrorists especially in Afghanistan & Pakistan; Cessation of Iran's nuclear program, through the use of force if necessary; improved relations with Russia and China; cessation of NATO expansion; normalization of relations with Cuba; serious push for Middle East peace, talks with Syria, and serious action against Hezbollah.

Health Care - health care is a basic human right. No person should have to pay to stay alive. Government is the only force that can ensure that everyone is covered. Take a bold step!

I have many other items on my wish list, but if 40% of the ones I listed above are addressed (with energy policy at the very top of the list), I think we will be on the right track as a society. 

May the fates smile upon us all tomorrow, and may the Bush era fade deep into the history books.

Saturday, November 01, 2008

Recommended Articles

Here are some of the personal finance articles that I enjoyed over the past week:

JLP from All Financial Matters posted an article about the 50 worst months in the stock market and how the market performed in the months that followed. It's an interesting read, and demonstrates that over the long haul, stocks are a good investment, even if it's tough to remember this during the bear markets.

Brip Blap posted about how wealth is not a zero sum game - in fair trade, both parties can emerge wealthier. I whole heartedly agree - this is the basis for capitalism, n'est pas?

Clever Dude is voting libertarian, claiming that this is not a wasted vote. Well, I agree in the sense that it is not any more wasted than the votes of most other Americans.

Consumerism Commentary posted about lay-away programs - consumers paying in installments and getting the product when they have completed paying for it. What a strange concept!? Why not simply save the money in a bank account, earn interest, and pay for the product all at once when you have the cash? Strange...

Moolanomy has a good post on one of my favorite topics: career planning. Career progress is not something that just happens. You have to know where you are trying to go and take concrete action to get yourself there. Moolanomy's tips are a good starting point.

The Digerati Life - who happens to live in roughly the same area as I, had a post that showed foreclosures in our neck of the woods. California has seen its share of foreclosures, and then some, but Silicon Valley has so far been mostly untouched by this phenomenon. Not for long though, I think...

Finally, Puny Money had an article about how charitable contributions sometimes don't really make it to their intended targets. It is really a good idea to research your charity to make sure that it uses the money for its intended purposes and minimizes administrative costs.