25 August 2010

Over the Edge

We often hear about the quiet guy who snaps, goes over the edge, looses it; who explodes in unexpected rage and commits carnage of surprising intensity. No one who knew him saw any signs that he was distraught. No one saw it coming.

Well, I’m close to fury myself. When I snap, though, no one need fear being hurt. Rage expresses itself in bloodless ways as well. In my own situation, it may spew forth in a torrent of words, and then I’ll be fine. Or I may use what power I have in order to merely shut someone off who now has the legal means to rob me.

Let me lay it out for you.

When I was a child in the 1950s, eldest of six siblings, my family had nothing to start with. My parents came from self-sufficient Depression-era households. They were both college educated school teachers, and their gift to their children was a well-nurtured desire to learn. We didn’t know that we were living in poverty – abhorrent conditions by today’s standards – we just knew we didn’t have much. (We often didn’t have a telephone, or a car. Our father carried a bag lunch as he walked to work and we kids carried lunchboxes as we walked to school. We wore darned socks, patched or homemade garments, and re-soled shoes. We saved the bath water for the next kid in line. When I was in fourth grade, we lived in a house with an outdoor hand pump for water. We played outdoors, since only one household in three had a television. Today we have taxpayer-funded programs to prevent that kind of misery.)

To varying degrees we kids took advantage of our opportunity to learn. We were taught that if we earned good grades in public school, colleges would compete to give us scholarships, meaning discounted tuition rates. (That may have been true before the 1960s, but by the time I matriculated at a nearby municipal university in 1969, things had definitely changed.)

Our parents led us to believe that we would never be rich, though. For several of my crucial growing-up years we lived at 1165 West High Street in Lima, Ohio. Our back yard abutted the back yards of houses on West Market Street. The further west on that street, the more enviable the homes. We understood that we would never live like that – spacious brick homes with tree-lined meandering driveways and cultivated flower beds. We believed we would never, even as adults ourselves, know what it was like to go to the bank when we needed money and simply take $1000 out of a savings account. We knew we’d never know what $1000 looked like, but maybe $100 at best. We didn’t expect even to mix with that kind of people, although in school I often found myself among the children of those families. I was self-conscious to find myself accepted and included, but still I held myself apart socially. Rich kids made friends only with other rich kids, right? Kids of teachers became teachers. Kids of poor people grow up to remain poor.

Our house stood nearly on the edge of an all-black neighborhood. I now realize that, even though I had several friends among the kids in that neighborhood, including one who was my best friend for seven years there, the black kids must have looked on us the same way I looked on those on West Market Street. Kids of black people stay black.

Nevertheless, even though we knew our parents weren’t saving to put us through college – heck, our mom was sometimes heard to say she was still paying (hospital delivery charges) for our youngest sister after I had started college – we were taught thrift. I had a daily job (including weekends, as a paperboy) from the time I was 10. I had a savings account from the time I was 12. I bought a car at 15 – a 1939 Chrysler for $395 – and drove it 1000 miles from Ohio to Maine a year later when my family made the big move to my father’s stomping grounds in Farmington.

When I finished a three-year enlistment in the Army and five years of college I landed a low-level management job in manufacturing. I opened a retirement savings plan at work and started an IRA. I worked for that company for 23 years and benefited, slightly, from an employee-stock-ownership plan. I went on to another industry in a related management role, and that lasted nine years. Except for some modest self-indulgence along the way, I’ve been saving for retirement for 50 years. Oh, and I do not have a pension plan (automatic payments for life), only my retirement savings, to count on once I become, in my 60’s perhaps, unemployed. I’m now in what may be my final steady job, as a medical receptionist, entry-level, non-management, and I like it fine. (I already characterize myself as semi-retired: I now work only 40 hours a week in this job, which makes me eligible to buy group medical insurance for $10,000 a year. In my former life as a manager, 40 hours would have been part-time.)

I bought a home when I was young, moved up to a nicer one, and then a nicer one, rivaling the ones I envied on West Market Street. Given the economy of August 2010, I estimate that my home is worth about $180,000 (in rural northern Maine; it would be worth a million or more today in some metro areas), and my retirement funds, all told, are worth about $600,000. A couple of years ago both were worth about 50% more than today, probably about $270,000 and $900,000 respectively. I’m now 59½.

So, why am I close to snapping? I’ve been a fool, that’s why, and it’s too late to back off and rejoin the “poor”. Long ago I fell for the premise that no one else will take care of me (and my wife of several decades whom I pledged to support), so I accepted that I needed to save for my own future. And that may have been a safe assumption if I had earned, and saved, enough to be sitting on a couple of million dollars by now. That’s not a couple million to spend on a spree, but to draw from for support for decades to come in the absence of any other source. That’s to pay the several thousand dollars a year that I’ll need, once I’m no longer employable, to cover the premiums for my “free” Medicare and to buy supplemental medical insurance, to pay my property taxes, to pay for my heating fuel and other utilities, to feed and clothe myself and kin, to remain mobile – and to pay income taxes.

But there is a gap, and I fall within it. A little over half a million dollars is not enough to live on for the next 30 years. It would be if I also had taxpayer assistance. But, because I have “assets” I will evermore be ineligible for such charity. My Social Security, which I’ve paid into for 42 years, will be “offset”. I will be ineligible to have my Medicare premiums paid for me. The other charity that my neighbors enjoy I will continue to pay for: food stamps, unemployment compensation, Medicaid, Social Security disability income, property tax relief, heating fuel assistance, sliding-fee scales, WIC, community action programs, and punitive income tax schemes which assure that more than half the voters don't pay into the program.

I could have believed my parents’ culture lesson – we will never move in those circles and we will never know what it's like to have bank accounts. We will never own assets. I could have rented places to live all my life and could have spent every remaining dollar I made on better vacations, eating out, new cars, more booze, bigger televisions, all-inclusive cell phone plans, tobacco, fancier computers, name-brand clothes and groceries, and a garage full of motorized outdoor toys. Then I might not have ended up with retirement savings or a home of my own; I would have been eligible for hand-outs paid for by fools such as I have become.

Instead, I’m penalized for my thrift and planning. I will continue to be envied by those who remained (as some of my siblings did) in the "poorhouse" as I might have chosen to, while their elected representatives will continue to have hands on my wallet. Their representatives will always promote this class envy – (theirs, not mine – I can’t get my representatives elected because they don’t buy votes by pretending to a false charity which consists of spending other people’s money in order to appear generous themselves).

I do have a choice. It's a bitter choice, and that's what infuriates me. I can spend down my retirement savings as quickly as the Internal Revenue Code allows, being careful not to accumulate assets that can disqualify me from all the assistance schemes. I could – revenuers plug your ears – “spend” my retirement savings as quickly as possible while actually stashing it as cash. I could do the reverse mortgage thing on my house and maybe remove that asset.

Then I could appear, on paper, as poor as those whose elected thieves have their hands in my pockets. What a fool I’ve been!

I’m thinking about it. I'm thinking about it...

09 August 2010

Investing Advice

You can ask: Who am I to give advice? Compared to investment insiders, I know next to nothing about the stock market, and I have under a million dollars invested in my portfolio. I had hoped to be “retired” by age 60, which is now about two months away. But retired isn’t going to happen.

Nevertheless, I have some advice for those picking stocks for secure long-term growth and for quicker gains, say in a year or two. (More on all that in a moment.)

I have been able to follow my own advice with only small amounts of money. Why is that? Well, for much of my career, say, the first 25 years I was working, I did not pay attention to where my 401(k) and IRA money was invested. I left the decisions to my older relatives and their advisors and assumed that I would never understand it. Then, when I did have the confidence to experiment a little, I faced several obstacles: the relatives and advisors were watching; a substantial portion of my portfolio was in my employer’s company stock; I changed jobs and joined a 403(b) plan, which does not allow for individual stock trading; and the overall chaos in the market since the early 1990s has left me reluctant to play with much of my available funds.

But I have formed some solid opinions about what to buy in the stock market and what to avoid.

From 2005 to 2008, for instance, I had been watching a group of stocks on Yahoo! Finance – essentially my own portfolio of traded equities and funds. In September of 2005 that group of stocks was worth $365,000. In January 2008 it had grown to $495,000. (My overall worth also contains annuities and some property that is not reflected in these numbers.)

But in the past two and a half years I have forfeited $150,000 of that half million. My sacrifice of market value helped bail out the banks and helped support the cash-for-klunkers pogrom in which the USA borrowed money from China to help Americans buy Japanese cars which would somehow save Detroit. Anyway, I was clobbered, such that my group of traded stocks is worth about $345,000 today – a 30% loss since 2008 and still 5% down from 2005, assuming a flat value of the so-called dollar.

So, what is my thinking on the market?

1.Consider avoiding the stock market altogether from now on. The federal government is so determined to prevent fraud and corruption in the markets – (Why? Could it be because there is so much corruption in Congress that they assume it’s as bad everywhere else? If it is, do they really believe that more employment for lawyers will really wipe out financial crime?) – that Congress is setting out in 2010 to create a web of utterly insane rules for trading and profiting. The objective of anyone who gets into the market is to make money. To get rich, even. The only people who will get rich any longer will be those paid to make and enforce the rules, because they will be the insiders able to make best use of their high-priest status; ergo more corruption. If you expect always to be a lifelong little guy, like me, then maybe don’t even bother to have a 401(k) or IRA. Instead…

2.Buy property. This means different things for different people, and it depends a lot on where you live. Property means real estate, but it also means goods and businesses. Buy open land, or houses, or commercial buildings. Buy woodlots, development property on lakes and rivers. Buy into a small business. Buy small items that you can store securely yourself and sell and trade inconspicuously, (but learn a lot about them first, whether it is antiques, guns, coins, classic cars, and so on).

3.If you do buy stocks, either as your chief investment or to round out your financial security, then consider the following opinions. Starting with the negatives, these would be my rules if I had a lot of money to throw into it:

a. Stay away from banks and lenders. What do they really have that you can profit from? They lend money. That’s all they can do. Yes, they buy and sell each other, but that’s only to the benefit of the executives at the top of each company involved in the trade, so they and their corporate lawyers can all make a bundle and walk away much richer. What do they have for assets? Rented space and obsolete computers. And one another's debt “portfolio.” And where are you in the line of people to be paid, from the interest they make on their loans? Last.

b. Stay away from retailers. Yes, Walmart has made huge profits for many years. Is there a fund out there that does not include it? But its bubble is going to burst, and because everyone owns some of it, few will be spared the ache. Nowadays, when I go into a big store like that, I am shopping for something to help me finish a project or something to replace a worn-out appliance. Sam Walton has died, and so Walmart has little to distinguish it from Rite Aid and the old K-Mart and all the rest. Our local Walmart is really just Super Rite Aid. When Sam was alive, Walmart at least retained some of his personality, and he was a fellow who also needed to go into a store when he wanted something to finish a project. These stores today are all happy to tell you that they carry the four most-popular items in each category. Well, I usually need the nineteenth most-popular item, or the hundred and thirteenth most popular. But the item I need exists somewhere, and lots of them are needed and bought by people like me – somewhere; my problem is that the stores that happily stock the four most popular items have also run everyone else out of business. Since Walmart and Target and the rest have driven the small retailers out, there is no one, particularly in a rural area, who sells anything past the four most popular items. Large retailers are also brutal on their employees. Perhaps they have to be, in order to remain fiercely competitive. But employers with unhappy staff are constantly facing passive resistance if not outright malicious obedience, and that makes their stock a risk, in my eyes. By the way, I have some experience selling my own product to one of these huge retailers. I paid $7 each to produce the item, which carried a “suggested retail price” of $15, tax and shipping included. The retailer was willing to pay me $6.75 each and then sold them for $12 – 20% off, you see. Treating suppliers that way must certainly eventually have a backlash. (In my own case, I quit making something I couldn’t break even on.)

c. Stay away from manufacturers with heavily-unionized work forces. These are the companies whose lines of products, more and more, are being manufactured overseas. If the bail-out of the car companies isn’t evidence enough that they can’t compete, then what will it take to convince you?

d. Don’t fear investing in foreign companies or funds. Choose carefully, but don’t fear that some foreign economy is going to collapse without affecting our own. Consider, for instance, a fund that holds a lot of Pacific rim stocks. If there is an economic debacle in Asia and the fund is shaken badly, the same debacle will shake almost anything else you are invested in as well. No foreign country can go belly-up without far-ranging and long-lasting ripple effects. I accept that it is a global economy, like it or not.

e. Don’t buy a stock after someone has already published an article saying now is the time to buy. The people who have lots of money to play with have already bought it, and are going to profit well, if the prediction comes true, but you’re not going to. It’s too late to buy when you see those predictions come out. I've had a financial advisor for years who steered me toward buying stock in this or that company within my IRA, but I am convinced by their performance that he bought into them days and days before he called me (but after he had read some alluring article). I'm still climbing back up to the purchase price on several of these, but I bet he isn't.

f. Avoid companies whose executives are treated like royalty. Poor Walt Disney – how he has been exploited! About a decade ago, when the Disney company fired a CEO after less than a year in the job and gave him a ninety-million-dollar severance bonus, I quit buying anything Disney – toys, clothes, videos. Why? Because we’re obviously paying too much for the products in order to make an individual like him as rich as a small country. I had only been to a Disney theme park once in my life by then, and I will never go again. I won’t buy stock in an outfit that bilks not only the consumer but also the investors that way.

g. Avoid companies that can’t seem to decide what business they are in. I think of General Electric in this regard. Several years ago I had life insurance through one company, and then I began getting bills for the same insurance from GE. They eventually called it Genworth, and I think it has been sucked up by some other company since then – sold off by GE so that some executives could retire in obscene leisure. Meanwhile, I have noticed that GE products are often crap. I have a coffeemaker at home with the built-in timer. The clock on that coffeemaker loses two minutes a day. A Black & Decker coffeemaker in another room has kept perfect time for months. GE makes (or should I say, sells its name to) a lot of little products, such as night lights. These are often crap. Yes, they make huge 500 megawatt generators, too. Maybe those aren’t crap, but I’m not reassured when they can’t even make an electric clock. Anyway, over 35 years ago someone gave us newlyweds, my wife and me, a $10,000 stake in GE stock. We have left it alone, and it has grown to an astonishing $12,000+ in 35 years. Aren’t you impressed?

h. Be cautious of companies that are a little too proprietary or quirky about their products. Don’t shun them altogether, but beware of their idiosyncrasies. Kodak is a company that I always wanted to love but never invested in. They made very good roll film and dominated the market for almost the entire 150-year history of film cameras, even though their market share was challenged a bit by Fuji before digital photography won out. I think Kodak responded well and quickly to the digital revolution and decided to be the camera supplier for the mass market. And yet, before the change to digital, Kodak made only a light stab at marketing film cameras: some very early folding cameras when roll film first came out and a couple of weak 35mm models, such as the Pony, which imitated the Zeiss Ikon products of the same era. And I like Kodak in general, because they’ve stuck to one business and have not branched out into insurance. But I’m cautious about Kodak because it is quirky. It wants its cameras to do the thinking for you and resists letting you do it yourself. When I was forced to go digital, I gave up a wonderful Ricoh XR-P film camera on which I had expertly managed the exposure and focus manually to switch to a Kodak P850, on which I supposedly can take manual control, but I have not found out how in the four years I’ve owned it. And Kodak’s digital cameras are tied too tightly to Kodak’s software and Internet sites. Still, it’s probably a good, solid company for a long term, safe investment. Just beware when you hear that Kodak has begun selling food or baby fashions or has a started a branch engaged in financial services.

i. Now for the positives. Look at the products that impress you. A few years ago I bought an Apple computer, after twenty years of loyalty to Microsoft Windows. I couldn’t believe the difference. At the time, Apple still had less than 10% of the PC market, but the iPod was becoming popular, the iPhone was coming, and I saw VALUE. I bought several hundred shares of Apple at $90 around November 2007 and sold it less than a year later for $180. It was the product that sold me on the stock. Look around at what your neighbors and friends consider essential. What do they complain about (even though it may be essential)? Don’t buy that. What do ordinary people that you know find irresistible and also have praise for?

j. Get in, stay a while, get out. My best example of this has been my Apple stock. Sure, it has continued to rise, (after falling from $193 back to $82 since I sold mine), but I doubled my money and left. If you make a serious profit, sell and put your dollars somewhere else.

k. What’s the wave of the future? Don’t trust government to tell you, by the way. Use your own sense. Could you have anticipated the total conversion to digital photography? Sure, once we were able to get 640x480 digital images by the early 1990s. The technology could not help but improve. Here’s one: How about home security? A couple of years ago I seriously wanted to invest some money in Brinks or ADT (Tyco) or some such company. As more people become desperate for cash, thanks to our expert money handlers in the federal government, I reasoned, more homes and small businesses are going to buy products or systems to protect their properties from petty and not-so-petty thieves. I was right. I didn’t invest in Tyco or Brinks, but I can see now that I should have. So what else can you see coming? And incidentally, the less it attracts the interest of federal regulators the better. So, how about alternative energy? Well, the government will probably pander to some companies engaged in research and exploration, but it will also require tight regulations in exchange for government caresses. How about… water? What companies are working diligently to make a modest financial gain by making water accessible first in developed countries, such as the USA, (before exporting the technology to undeveloped regions with unstable governments)?

l. Pay attention to who has the ear of the federal government. Investors will make gains in some technologies that are favored by the prevailing political force, but only so long as that political force retains power. The socialist power that has been in control for the past 14+ years, (which is to say, Congress – the President being of little substantial influence), favors voodoo science such as stopping the cycle between ice ages. If you can find a company that is inventing a solar-powered bicycle, think about getting in. Get out early if the political winds seem to favor rational thinking over feel-good socialism.

m. What industries or technologies are saying to themselves: “Oh, damn!”? What companies are afraid for their future because of technology? Would you have invested in a steam locomotive factory after World War II if that factory weren't spearheading the conversion to diesel locomotives? Would you have invested in Polaroid 20 years ago as its instant photography was being replaced by digital photography (to belabor an industry that at least provides a good example)? So who fears for the future of its own existence, and why? Invest in the companies that are striking fear in the established way of doing things.

n. Trust your instincts! If something stinks about everyone else's favorite stock, let others embrace it. If you have a really good feeling about a company or about an industry, you embrace it. That is, if you choose to violate Rule #1 above.

And I have – violated Rule #1, for the reasons I have already given. I own stock. I own funds and annuities.

And, as I publish this, (Aug. 9, 2010), I am hearing that Congress is about to approve Stim II. This time, people who mortgaged $800,000 McMansions are going to get them for free. I realize that they signed for the three-quarter-million loans at a time when that's what the properties were supposedly worth, and now they're worth only a third of that, while their loans remain at over half a million. But I'm getting nothing from Congress. Instead, I'm still paying on my $150,000 home loan, and getting a tax hike to pay for their palaces that have double bowl sinks in the master bathrooms and all-stainless appliances. I expect to be further diminished as the market reels from this next wave of largesse* from the public treasury. Oh, well; my mistake in choosing to be responsible in the first place when I might just as well have chosen the route of owning nothing and relaxing on the dole.

Even so, for those who still remain invested, I hope you find this advice useful.

-=David A. Woodbury=-

*For those who have not encountered the wisdom of the ages, let me add some context: George Bernard Shaw wrote that a government which robs Peter to pay Paul can always count on the support of Paul. That’s obvious, of course, and cute. But it’s also sinister. A Scottish professor alive around the time of the American Revolution, Alexander Fraser Tytler, gave voice to the sinister side of Shaw’s equation:

A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury, with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.

The average age of the world’s great civilizations has been two hundred years. These nations have progressed through the following sequence: from bondage to spiritual faith, from spiritual faith to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency, from complacency to apathy, from apathy to dependency, from dependency back to bondage.

Amazing that Tytler could have teased this assessment from the history of the world up to his own time.