For Your Consideration

It’s 2013. Governments around the world continue to struggle to keep social and financial order, but with clever and well-intentioned legislation, things are getting better all the time.

The nationalization of certain companies at one time had their non-nationalized competitors at a distinct disadvantage.  Because these nationalized organizations (the “NO’s”) had an unlimited source of funds at their disposal, they didn’t have to worry about the pesky problems of raising capital much less the “cost of capital”, like their non-nationalized competitors had to.

So long as the NO’s continued to do what Congress mandated them to do, things were good for the NO’s. Social and financial engineering through a myriad of regulations has continued unabated.

The credit markets never recovered and disappeared entirely. No bank was willing to lend their capital to a non-nationalized company and the NO’s didn’t need them. When reviewing business plans, it asked a fundamental question: How can this entity compete against an unlimited-funded NO?

The previous “lender of last resort”, the Federal Reserve, is now the *only* authorized and needed lender. This really doesn’t have an impact since private ownership of business was outlawed in one of the better provisions of the Business Users Satisfaction Tax of 2010 (affectionately known in the beltway as the “BUST”).

Other provisions of the BUST forbade future home foreclosures (allowing people to stay in “their” homes even though they didn’t pay for them) and granted ownership of all currently-encumbered homes to the Fed. The BUST also eliminated the word “bailout” from our language and substituted it with “loan”. The penalties for using the “B-word” in print or verbally are severe.

To take advantage of Congress’ vast business experience, the President created a cabinet-level position “Office of the People’s Business” to ensure the NO’s compliance with Congressional mandates. Funding for this new office was easily obtained from the former Small Business Administration, which was disbanded due to lack of interest. Unions have also been legislated out of existence with the recognition that we all work for the Homeland now.

So much so that the budget for “Department of Homeland Entitlements” now eclipses that of the Department of Defense, as created by the “Fairness Tax of 2011″. The good news is that we all now have access to “affordable healthcare”, due to the nationalization of all health care providers. This was absolutely brilliant, as it completely bypassed the need for nationalizing the health insurance industry altogether.

The good news does not stop there, though! The Medicare, Medicaid and Social Security programs (which now take full effect at age 61!) are now well-funded due to the mandatory “age 60″ individual liquidation provisions.

The ownership stake of AIG taken in 2008 was fortuitous as it now “insures” all General United States Auto Worker Motors Company’s automotive products, which we are now mandated to buy. However, it appears its time as an insurer is limited. Legislation recently passed will amend tort laws in 2014 so that private collection of civil losses will be eliminated. All monies will now be automatically transferred to Department of Homeland Entitlements for compassionate redistribution.

The trial lawyers fought a good fight, but the fix was in. They now turn their attention to “The Happiness Act“, a really swell piece of legislation making its way through Congress which would eliminate five of the “least used” rights contained in the Bill of Rights, which is by any measure now “just a piece of paper”, a complete anachronism in our modern times.

But the Happiness Acts’ goodness doesn’t stop there. This bi-partisan proposal would also “update” the Constitution to mandate economic equality and correct the unalienable rights of “Life, liberty and the pursuit of happiness” enumerated in the Declaration of Independence to the much more compassionate “Loving government, wonderful life and guarantee of happiness”.

I mean really… How can anyone be against happiness?

Oh, and if you don’t know the meaning of the word “irony”, go look it up (and have a nice day)!

The stack of stuff I want to share seems to be growing by the day… too much stuff and not enough time! So instead of writing fewer/longer pieces, here are a few succinct words of advice/counsel on each subject in one “omnibus” post. Hopefully, you’ll find a “nugget of joy” that’s of use to you and I can start to cut through my growing stack of stuff. So, let’s get to it…

1. Putting money in bank CD’s may seem like the safest choice today, but it might not be. You’ll be told that these things are “riskless”. They’re not. The one primary risk they don’t tell you about and that you retain (and it’s a biggie!) is inflation risk. Very simply. when the inflation rate is higher than the CD’s APR, you’re losing money. Historically, the one asset class which has a real return ABOVE inflation is equities. With stocks “on sale” at about 40% off, you might consider “buying low” today if you have the time to wait until the market recovers. I suspect that 10 years from now, you’ll wish you put every dollar you had in now.

2. Every personal insurance policy should be reviewed annually to make sure it still meets your needs. Take some time to do it. You might find that coverages can be eliminated, deductibles can be increased, insurers can be changed, etc. to reduce your insurance cost.

3. Every small-business owner should review their insurance program annually as well. If your business operates on a 10% operating margin and you save $10,000 in premium, the savings was not just $10,000- The real savings is $100,000 in gross sales you didn’t have to make just to pay the insurance premium.

4. The “annuity vultures” are out in full force. They usually take the form of “investment advisors” working for insurance agencies and especially prevalent in poor economic times, such as today. They prey on your fears that you’ll run out of money before you die which they cryptically call “longevity risk”. There’s 3 main reasons you should shun: 1. These are extremely complex insurance contracts. Most come with a 200-300 page prospectus. Unless you read and understand all those terms and conditions, be ready to get hurt. 2. Annuities are guaranteed by the issuing insurer- want to make any bets on which insurer(s) are going to survive? 3. COSTS. Depending on the insurer and the particular product being promoted du jour, the underlying costs of the annuity are outrageously high. Remember, the agent needs to be compensated for selling you this complex contract. You’re the one paying the freight.

5. If you have a private disability (DI) policy, look to increase your “elimination period” (which is a essentially a deductible measured in time, not dollars) to decrease your cost. I recently changed the elimination period on one of my DI policies from 30 days to 90 days. When the policy was originally written, I could barely afford to be without an income for 30 days. Blessedly today things are a little bit different. I saved over 25% in making this one change.

6. Our preconcieved notions and the media shape perceptions of risk. Do you really think that Congress knows how to “fix” the economy? Do you really have faith in their stewardship? Should we allow government to grow or would you prefer that industrious, entreprenurial Americans be tasked with our economic recovery?

7. Turn off CNBC. Stock market-timers have to be right not only once, but twice. Even Warren Buffett can’t do it. The stock market-timers “Hall of Fame” is an empty room.

8. Remember, it’s all relative. All assets are being repriced. Globally. There’s no place to hide. Forget U.S. Treasuries with their 0.01% interest rate. Invest in your own education. You want security? Look in the mirror. It’s the only place in this world that you’ll find it.

9. Worry only about the things you can DIRECTLY control. Everything else will take care of itself and you’ll save yourself a lot of heartache.

10. Continue to fund your 401k. If enough people opt-out, these tax deferred programs will go away and that’s not a good thing.

11. If you’re in business (or work for one), don’t forget to advertise and market the goods and services you provide. Your competitors aren’t and it’s a great time to steal market-share from them.

12. You may have noticed the increase in advertising by gold sellers, I know I have. Before buying, understand that gold has a ZERO expected rate of return, as it produces NOTHING. Gold has no intrinsic value, only the value we ascribe to it. You’re also going to need to buy A LOT of it to make it “worthwhile”. Where you gonna put it all?

13. Taking medications (legal ones, that is)? Want to try to save some dough? Live in NJ? Try www.njdrugprices.nj.gov for an online prescription drug registry. Prices for a one month supply can vary widely, even within the same zip code. It works surprisingly well.

14. According to John Montgomery, Founder and Portfolio Manager of Bridgeway Funds, there have been nine bear markets since 1940. The average time for the stock market to “recover” to its previous high is 13 months (excluding this current bear market). 13 Months- a little over 1 year. Of course, this time may be different but know that historically speaking, if you can keep your head when everyone has lost their’s, you’ll be well-rewarded.

15. THIS IS NOT THE GREAT DEPRESSION, PART TWO. We do not have 25% unemployment and the only thing we stand on lines for are HDTVs, not bread! Don’t “buy” the doom and gloom the media is “selling”. It’s all meant to manipulate.

Go live your life. Smile and be grateful.

“Ursus Head” would make a great name for a garage band, wouldn’t it?  The name’s from a small cape located in the bucolic Kenai Peninsula, near Iniskin and Pile Bay Village in southcentral Alaska. (If you click on the link, “zoom out” about 8-10 times and click on the “satellite” button for full effect!) It’s where I’d be right now if I had my druthers…

For those of you who have been wondering as to my whereabouts, I offer (in my own defense) a quick update on the progress of my studies:

1. I’ve passed 3 of the 5 Certified Risk Manager (”CRM“) certification exams, and am awaiting for the results of my third examination. Based upon the timing of the required courses, certification completion should be achieved in the first quarter of 2009. Each course is 20 hours of intensive instruction followed by a 2 1/2 hour short answer, essay examination. These institutes are by far the most rigorous and doing well on the exams requires the most thorough and complete understanding of risk management concepts. The CRM material also provides the most useful “real-world” information and is pretty much all hands-on. Insidiously, I like these courses the most!

2. As of November 1, 2008 I’ve passed all 3 of the Associate in Risk Management (”ARM“) certification exams and now am authorized to use the ARM designation. Each part of the material is tied to a 400 - 500 page academic text for which proficiency in the material is required to pass. While you can (theoretically) take classes on the material, I did this certification completely self-study. It’s heavy on theory, which is why I can’t get too excited about most of the material. That being said, it’s fundamentally a good thing to explore and understand the theoretical underpinnings of risk management and is a great adjunct to the CRM material. However, being exposed to both the CRM and ARM material at the same time, the ARM material alone feels incomplete.

3. I’ve passed 3 of the 5 Certified School Risk Managers (”CSRM“) certification exams and based on the timing of the remaining required courses and exams, the time frame for completion of this certification is the 1st quarter, 2009. I usually get the question, “Why school risk management?” Because it’s entree into the issues and complexities of public entities. As compared to for profit enterprises, public entities have vastly different capitalization issues and legal liability exposures which affect risk control activities and risk financing options. So basically, I want to take what I learn about school risk management and apply the concepts to other disciplines- doing this forms the basis of the sparks of creativity!

So, assuming all goes well on the timing outlined above, there’s a bit more education I have planned for myself. The “ARM-P” designation is the “Associate in Risk Management for Public Entities” designation and is earned by completing one additional course/exam in addition to the ARM material. Late 2008 is my planned completion date for this certification. UPDATE: Got it and am currently waiting for my diploma!

Reaching out to more traditional educators, New York University has 2 risk management programs I’ve found of particular interest: one is a “Certificate in Financial Risk Management” program and the other is a “Graduate Certificate in Enterprise Risk Management” program. Both provide the “meaty” risk management graduate level material I’m looking for without having to suffer through the entirety and hellacious expense of a “formal” MBA program.

The only remaining question is what I’ll wind up doing with all this… Till next time, enjoy what’s left of the summer!

UPDATED RESULTS AS OF 12/6/08.

This post marks the end of my trilogy of modest proposals dealing with our oil dependency.

This morning I was reading new forum posts on brokeroutpost.com. This website is a for mortgage professionals - it’s very enlightening to see the mortgage crisis from the mortgage broker perspective.

One of the forum posts was on the topic of the prices of gasoline at the pump around the country: As expected, prices ranged from $3.75 to well over $4.50. The posts then drifted to alternative fuel sources: veggie oil, plug-in hybrids, etc.

Then, one of the posters calling himself “neo-logic” chimes in with the following suggestion: “Someone should make a car that runs on b.u.l.l.s.h.i.t. That’s a renewable resource.”

True dat!

It’s been a while since we’ve added a new state to the union (Hawaii in August, 1959). Lately I’ve begun to think that maybe we should start thinking about the political process of adding Iraq as our 51st state. Let me plainly state my case:

1. It would solve the “pesky” and on-going problem of the Iraqi’s having to set up their own government.

Our military leaders tell us that Iraq suffers from *political* issues, and not necessarily military ones, which is why we have to stay there “for the forseeable future” (Which I think we can loosely translate to 50-60 years, like Germany and Japan, places we still maintain a military presence after WWII). Well, we can fix this problem: our constitution has worked well for us for over 200 years, so no need for the Iraqi’s to continue to try to start from scratch.

2. It’d be a heck of a solution to our current oil woes.

Instead of us continuing to pour money into Iraq (that we’ve stolen-borrowed from our children and our children’s children without asking, I might add) without reward, we could now monetize our investment for our children. It would be like adding Alaska to the union (with its huge oil reserves), only in one of the most geopolitically sensitive areas of the globe. As I said, we’re going to “be there” for a generation anyway!

3. Having $1.00/gallon gas in the U.S. for at least a generation would sure silence the anti-war crowd.

I don’t think this requires any explanation. Oh, and don’t forget to “short” the oil company stocks…

4. Our enemies would be forced to stop accusing us of being “imperialist”.

Sure this proposal would peeve the Islamic extremist jihadists, so I say let the Iraqi’s vote on it. And no rigged elections this time: if they honestly want us to leave, we should. If they want to be Americans, they should be allowed to be Americans. And this gift keeps on giving- a “free” Iraq as a state of the United States would be Syria’s and Iran’s worst nightmare. Not to mention China, who competes with us for every barrel of oil available to support their burgeoning industrial economy.

My wife gently ribs me from time to time, saying that I view the world as if the “sky was falling”. Well, blessedly the sky almost never falls (but the risk is there that it might), and sometimes it actually does. Well, it *feels* like it, anyway. I try to remind my children that life is messy business and no one gets out alive.

So, I promised some info related to my CRM Principles of Risk Management course that I recently attended. The instructors were bright, articulate and engaging and as a result, the 20 hours of instruction went by fairly quickly. As you may deduce from a “Principles” class, the essential focus was the basics of risk. The class was a fairly large one, with about 90 people. It was also a very highly credentialed group, with about 120 designations granted to these folks. Definitely no slouches here.

The first risk concept explored is an identification of the three generally accepted types of risk, each with their own unique characteristics. They are:

• Pure Risk;
• Speculative Risk; and
• Gambling.

Pure Risks are those where there’s a chance of loss *only* with no possibility of gain. An example of this might be an airplane falling out of the sky wiping out a city block or the death of a loved one. With respect to individuals, insurance does a good job of protecting against many pure risks we face in our daily lives.

Speculative Risks are those where there is a chance of a loss OR a gain. These risks include a *variation* of outcomes where profit is possible. An easy example of this is investing. We invest money in stocks, bonds, commodities, etc. with the hope of a positive result (profit), but where exists the possibility of loss. To spin this concept to financial academia, having the majority of your investments in one company or one industry group, is called “speculating” (and not investing), and we all know how dangerous that can be!

Starting and operating your own business is another form of speculative risk. For my money, this is, for most individuals,  the most “risky” speculative financial risk. Since I have been a “serial entrepreneur” (stop me before I start another business again!) all my adult life, I guess this is why stock market investing seems nowhere near as risky as the commitment and deployment of capital in my own business.

The last risk group is gambling, where there is the chance of loss or gain, but the probabilities strongly favor a loss. I highly doubt this type of risk needs any explanation. Anyone who has ever been to Las Vegas or Atlantic City (or watched CSI: Las Vegas on television) understands this type of “risk”. In the real world, I’m not sure that gambling is really a form of risk. I don’t consider shooting craps or “putting it all on red” to be forms of risk, as I think it’s a virtual certainty that a loss will occur.

Want to keep up with updates to this site easily (and really, without even trying)?

Click on this cute little box:

A new page should open. Press the button “Subscribe Now” to add this site to your Bookmarks Toolbar Folder. This works in Firefox and theoretically, it should also work in IE versions 7 and 8, but since I don’t use either, I can’t verify that for you. (Maybe you can let me know!)

Anyway, if all went well, you’ll be able to see the updates in your browser automagically. (You’ll still have to remember to turn on your computer, fire up your browser and look at the monitor, though).

Go ahead and do this now. Don’t worry about me, I’ll wait here ’till your done. Let me know if you have any trouble.

One of the best ways for people to conceptualize the benefits of passive investing is a game called “Outfox the Box”, created by author Bill Schultheis and found in his book entitled, “The Coffeehouse Investor”, a link to which can be found in the Reading Room.

The game is deceptively (and almost deviously) simple. There are 10 boxes from which to choose from. Which box do you want?

It’s not that difficult to figure out. Everyone wants the $10,000 box.

OK, let’s change the rules just a little. You are now asked to choose a box from here:

Now what do you want to do? Is it worth risking a lot to gain a little?

In other words, do you risk getting less than $8,000 for the prospect of $9,000 or $10,000? This is when most people opt to take $8,000. Passive management/indexing works as a strategy, as illustrated by the fact that 75% - 80% of all mutual funds do not beat their benchmark indexes.

Care for a little game?

“Outfox the Box” is a game I intend to share with the Girl Scouts to help make our workshops together a little fun.

A short note (that needs to be said): I have borrowed heavily (okay, stolen) from Mr. Schultheis’ website here and claim no ownership of his brilliant idea. My intent is to help make this game and his book more well known, *not* to steal his work. If asked, I will remove this blog entry.

In getting ready for the “Got Money?” Girl Scout workshop, I thought it might be neat for the girls to look at stock market volatility and returns in action. I chose (at random) six NJ publicly traded companies: Campbells, Bed Bath and Beyond, Commerce Bank, Johnson and Johnson, A&P and Prudential Financial.

I’ll ask the girls to “team up” for each company and tell me why they think the company is a good stock “pick”. Should be illuminating to hear the thought process. After we go through a little discussion, we’ll take a look back to 12/31/2005 where they’ve been “given” $1000 to “play” the stock market. We’ll chart the progress of each stock through March 12, 2008. This simple chart will illuminate the way:

GS - Value of $1000 Example

The main points I’d like to address:

• Volatility: What’s the likelihood of them holding Bed Bath and Beyond past 2006 (where the decline in value was of over 22%);

• Uncompensated Risk: Buying one stock or a few stocks is very risky as you do not get “compensated” by the stock market for holding a non-diversified portfolio; and

• Returns: Only 1 of our 6 stocks beat the Wilshire 5000 (Campbells) during this period. All others lost. How likely is Campbell’s out-performance likely to continue?

After about a decade of trying to get me involved in Girl Scouts, my wife can *finally* claim victory! She has been a troop leader, “nut” and “cookie” mom, service unit manager…. Ugh! I had valiantly evaded previous attempts to get involved due to other pressing involvements, but I couldn’t in all good conscience evade any longer. I had the time, the knowledge and the inclination. Recently I was asked by the Girl Scouts to teach 2 workshops for teen girls, one on money and investing and the other on business ownership - topics I am no stranger to and I believe we are not adequately teaching young people.

This lack of financial education has far-reaching effects. One of the problems of course is that parents (at least of my generation) lack basic financial literacy themselves. The learning has all been “seat of the pants” and it isn’t always pretty to watch. Consider the increases not only in credit card usage but in average credit card balance amounts. Consider our appalling low savings rates. Consider that once America was the world’s largest creditor nation and are now it’s largest debtor nation.

I think one of the answers is financial literacy.

The Girl Scouts have 2 workbooks for use in these workshops entitled “Got Money?” and “Mind Your Own Business”. While they provide a good overview of the topics, they’re awfully dry. I have a couple of ideas on ways to make the topics more interesting so I don’t lose my “victims”, oops I mean “students” and I’ll share them here in the coming days. Maybe they’ll be of help to you.

This brief comic video reminded me of one life insurance sales call I made years ago on a junior executive and his wife.

Despite his wife’s protestations, the guy was convinced life insurance was a waste because he wouldn’t “get anything out of it”. This type of response, while being ridiculous on its face, is a fairly common objection to owning life insurance. Not rational, but common. Of course, life insurance is not for the person being insured, but for the survivors. I explained that it was for his wife and 5 minor children, to help take care of them financially when he wasn’t around to do it. Not a particularly difficult concept to grasp, but he wasn’t having it.

I then reminded him that he had just taken a $685,000 mortgage and I was curious as to how he thought it was all going to work out for his family if he should die during the mortgage term. He answered that he never thought about it because “it wasn’t going to happen“.

It then hit me. He felt the coverage was worthless because he rationalized in his own mind that he wasn’t going to die anytime soon. Not really worrying about the sale at this point, I forced him to verbalize this more and called him on it. I told him I understood his perspective. I said, “Ray, I get it. You’re not going to die” and smiled wide. He leaned back in his chair and smiled back at me as if he won something. He responded, “That’s right“.

Since there’s no use arguing with the wind (or a cat), I could only tell him that he’d “be the first“.

It’s dangerous out there! Thanks to Ted for the link.