Posts Tagged ‘Money’

The Thinker

Greed is a terrible sickness

In the 1987 movie Wall Street, the corporate raider Gordon Gekko (played by Michael Douglas) informed us that greed is good. His character fit in well with the Reagan years, because this was essentially the mantra of Ronald Reagan and the Republican Party. If anything since then the Republican Party has become even more extreme on the issue. Not only is greed good, but also by implication being poor is bad and a personal failure. Poor people are just not trying hard enough, which they view as something of a crime.

According to Merriam-Webster, greed is “a selfish and excessive desire for more of something (such as money) than is needed”. “Than is needed” is of course somewhat relative. However, if you have or take more in the way of resources than you need almost by definition someone else gets less than they might otherwise have. Since Reagan was elected, the only constant is that more of our wealth has gone to the richest while the income for the rest of us has at best stayed the same but has generally declined.

It’s clear to me that greed is a terrible sickness, and not something that should be celebrated. It sure appears that those who are truly greedy are never satisfied. They always want more. Since they believe greed is good, they look on greediness as a kind of religion. Witness our president and most of his cabinet of very wealthy people and who seem to have no scruples. Government is for pillaging, which is why last year they gave themselves a tax cut and threw a few scraps out to the rest of us. Their reputed rationale was that tax cuts would pay for themselves, something that has never proven true. I don’t for a minute believe that they believe it. What they do believe is that if you have power then you should use it to enrich yourself, so they did, worsening income inequality and greatly adding to our national debt to line their pockets now.

Greed is bad and should be treated as a mental illness. A truly greedy person should be seeing psychologists to figure out what is the matter with them. There is something very wrong with our president, who clearly subscribes to the religion of greed. To see how greed perturbs someone, look at our EPA secretary Scott Pruitt. The “greed is good” mantra has him so captivated that he has no problem turning the EPA into the Environmental Destruction Agency. Entitlement is assumed. He has a round-the-clock staff of thirty to protect him, flies first class everywhere and built a soundproof booth in his office.

Being wealthy does not necessarily mean that you are greedy. Berkshire Hathaway head Warren Buffet seems to be one of these types: a billionaire many times over who otherwise lives modestly. To be greedy you need to flaunt it and be consumed by the need to become ever richer, and not always through entirely fair means. At its core, greed denies reality. It suggests for example that you will never die because it’s hard to actually spend and enjoy all the money you accumulate. I suspect Warren Buffet enjoys investing because he finds it personally interesting.

Then there are people like the Koch Brothers who are consumed by greed, so much so that they have no problem if their industries create their profits by foisting their pollution costs on the rest of us. That’s how much greed has perturbed their thinking. It’s not like there is another planet nearby that eight billion of us can go and populate. They either can’t see this reality or more likely simply don’t care. These people are very sick people indeed.

For much of my life, I pursued wealth. I wasn’t a fanatic about it but I wanted to be comfortable, particularly in retirement. It was a long and arduous struggle that I eventually achieved. To me, it meant feeling confident that I could maintain my standard of living until I died, that I would never go hungry or be impoverished again and that I no longer had to work to survive. It’s true that much of my wealth is dependent upon a well-earned federal pension, and I still don’t entirely trust that the oligarchy won’t take it away at some point to feed their insatiable greed. But I feel confident enough about it that I don’t worry about it anymore. In any event, I have a comfortable portfolio and plenty of cash assets set aside to handle future expenses. We have no mortgage payment nipping at our heels every month anymore, no college expenses to juggle and little in the way of electricity bills with the solar panels on our roof.

It’s reached the point where our relative wealth feels sort of surreal. What I don’t feel at all is the need to obsessively acquire more wealth. I feel no particular pull to buy a fancy car, for example. I take no particular pleasure in driving and see it as a chore. In January we took a 19-day vacation, 16 days of it on a cruise ship. It was nice but I don’t particularly feel the need for a more lavish vacation or more days dining on gourmet food in Holland America’s dining room. My needs and wants are pretty much satisfied. My financial anxieties are calmed. At my stage of life, people like me should simply enjoy life.

Today the things that give me the most satisfaction are the most prosaic: daily “constitutionals” around my community, doing the crossword puzzle in the paper, having a cat nearby that I can reach out and pet and having a spouse who I love and who loves me. And yet despite the ups and downs in the stock market, our portfolio keeps increasing. To the extent I still work through teaching and consulting (both very part time) it’s for enjoyment and to spread my knowledge to those who might benefit from it. This income is mostly saved, but occasionally it buys some nice stuff. We are planning a New York City trip next and hope to see some popular Broadway shows.

All these rich people could simply enjoy their wealth if they wanted to, rather than suffer from the psychosis that they must ruthlessly acquire more of it through pretty much any means available. A lot of our spare income now is given away to charitable causes. I feel not just a need but also a natural desire to share our wealth. I try to put it toward causes that I believe are productive uses. It goes to places like the Nature Conservancy, so it can buy up natural space for future generations. It goes to Planned Parenthood, so women in particular can make choices over their own bodies and get health care services at affordable prices. It goes to the Food Bank of Western Massachusetts, so fewer of the people I see holding cardboard signs at intersections have to go hungry. It goes to a local spouse abuse shelter, so mostly women can have a softer landing after from suffering domestic abuse. And increasingly a lot of it goes to arguably non-charitable causes: campaigns of people who seem to be sincere progressives who will work to reduce misery and straighten out the major problems with our politics most of which were caused by the greed is good falsehood.

For the truly greedy, to quote Mr. T., “I pity the fools”. They might want to read some Charles Dickens, particularly A Christmas Carol. Whether overtly or innocently, what they are doing to our planet and the rest of us is intensively evil.

 
The Thinker

Bitcoin reevaluated

In December 2013 I looked at Bitcoin and called it libertarian bit nonsense. Like most pundits, I’m not good at admitting I was wrong. But I was wrong about Bitcoin. In December 2013 a Bitcoin was worth about $716. As of today one Bitcoin is worth about $3250. (See this index chart.) So if bought a Bitcoin in December 2013 and traded it today for U.S. dollars, your return on investment would be 354%. That’s an annual return of 96%. You are not going to get that sort of return from an S&P 500 index fund.

The dates I picked were random so coins bought at other times might have lost money. In truth if you had bought a Bitcoin in December 2013 you would have to have waited until November 2016 to see a positive return on your investment. For the last year or so though Bitcoin appears to be picking up real traction, taking the new currency to surreal highs.

One reason I was wrong in 2013 is that back then I did not anticipate its major use. Back then it was used for shady transactions but existed on the fringes of this world. Bitcoin seems to have found its niche as a method for facilitating ransomware. Illicit hackers are using it to get money from you when they do things like hijack your computer and won’t let you access key parts of it until you pay them sufficient Bitcoins. (Even then it works only about half the time.) If they asked for dollars or yen then hiding their tracks would be much harder. Making you go out and buy Bitcoins and then sending it to them though makes anonymous electronic thievery much more possible and practical. While each transaction is recorded in the Bitcoin itself, there is no mechanism in the transaction to positively identify the buyer and seller. Thus it’s much harder to catch electronic thieves at work.

I doubt these thieves hang onto their Bitcoins. Bitcoins are still a hassle to trade. Bitcoin exchanges are few and their trustworthiness not to mention solvency are problematic. Thieves probably don’t see the Bitcoins they collect as investment since they are hard to spend on real world goods and services. Most likely they are quickly converted into a local currency where they are then used to buy goods and services.

As a libertarian currency, Bitcoin is having some success. It is theoretically money that can be stored and used independent of taxation, although legitimate sellers that accept Bitcoins probably have to charge taxes on Bitcoin transactions. The percent of sellers that accept Bitcoins though is still tiny, which provides evidence that their value comes from being able to transmit value relatively free from prying eyes. This is one aspect of cash that allows it to endure into the 21st century.

So while Bitcoins may appeal to the libertarians among us, its primary usage is probably to facilitate crime, thus its value and surging price. The harder it becomes to trade illicit money with conventional currencies, the more valuable Bitcoins become, since there are a finite number of Bitcoins out there. Most governments are getting quite good at monitoring transactions of conventional currency. Transactions that are too large result in inquiries that may slow down or stop the transfer of money. With Bitcoins this is currently not much of an issue. Governments are getting better at regulating these transactions. At one time China blocked Bitcoin transactions altogether. They are accepted on certain Chinese exchanges now, but China is proposing to make Bitcoin exchanges subject to money laundering laws and to collect information verifying the identity of buyers and sellers exchanging Bitcoins.

As I noted in 2013, the more a Bitcoin is traded, the larger its digital fingerprint becomes. Some of these coins are becoming so digitally huge that they are inefficient to verify it is a legitimate coin. This is frustrating to many in this community, which is causing other more practical digital currencies to emerge like Ethereum. Currencies like Ethereum try to address issues like the huge blockchains in many Bitcoins and to build in features like identifying buyers and sellers and a limited blockchain ledger. If they gain traction then this undercuts Bitcoin’s ability to keep these transactions confidential.

Whether Bitcoin or some other form of digital currency, all such currencies that rely on blockchain technology are inherently risky, for the same reason that I noted in 2013: they are potentially hackable because they are encrypted. So far to our knowledge no one has successfully hacked into a Bitcoin. If it happens though that a hacking algorithm or a quantum leap in computing power reveals an easy way to mine new Bitcoins then the coin should drop in value precipitously and become essentially worthless. However, if a coin can be “minted” by a provable and legitimate source, say a country’s equivalent of a Federal Reserve, then such digital currency should hold value. This could be done by such organizations holding a registrar of coins it has “minted” that are publicly electronically available.

If that happens though then the onus for having a Bitcoin also goes away, as its value is in its surreptitiousness. Electronic coins that only go through legitimate exchanges and follow policies for tracking and handling illicit uses become essentially legitimate currencies because they are issued and accepted by trusted institutions.

So there are likely to be many more digital coins in our future. Bitcoin’s future as an electronic currency though is likely coming to an end as it becomes computationally inefficient to record transactions with Bitcoins and as advancements in computers, like potential quantum computing potentially render obsolete our current methods of encrypting data, making the encryption keys faster to crack.

Bitcoin’s time has arrived but with its success it is also likely quickly passing into obsolescence. What comes next is unknown but any permanent way of electronically storing untraceable electronic value was probably always myth.

 
The Thinker

Mt. Gox: more evidence of why BitCoin is best avoided

Dorothy in The Wizard of Oz learned from Glinda that if she clicked her ruby slippers, closed her eyes and kept repeating “there’s no place like home” that she would magically return to Kansas. So simple! BitCoin adherents are a lot like Dorothy. Dorothy at least made it home from her fantastical journey. True believers in BitCoin, the libertarian currency, got a splash of cold water across their faces this week instead. Mt. Gox, the Tokyo-based BitCoin exchange, has gone belly up, along with about $300M in BitCoins. Most likely someone stole those BitCoins, either someone inside the firm or some shadowy hackers. By any standard, this was quite a heist. Looking at history, you’d have a hard time finding any instance of a similar theft inside what amounts to a bank.

In any case, sorry you BitCoin suckers. Real banks and exchanges still have vaults, but they don’t carry much of their assets in cash. Much of it is commercial paper, bonds, mortgage deeds, promissory notes and Federal Reserve Notes. Whether in paper, assets on an electronic register somewhere, or gold bars in a vault, these assets are quite tangible. Someone with a car loan who defaults on their payments is likely to find their car repossessed. Those who defaulted on home loans during the Great Recession found their houses foreclosed and if they had ready cash assets, they were put under legal assault. BitCoin owners with their BitCoins in Mt. Gox now have nothing and the police just aren’t interested in serving them justice.

This was not supposed to happen to this libertarian currency. Freed of its tie to governments, it was supposed to soar above inflation and always retain a finite empirical value. It was all secure and such through the power of math. After all, exchanging a BitCoin involves keeping a record of who its next owner is. Unless, of course, it just disappears. Undoubtedly these stolen BitCoins were converted into a real currency, just unbeknownst to its owners, and perhaps with the help of some money laundering exchange, perhaps Mt. Gox itself. BitCoin is after all the preferred currency of drug dealers, at least until their fingerprints have disappeared and they can convert the digital money into something more tangible and fungible, like U.S. dollars.

I keep my cash in a couple of credit unions and a bank. It’s unlikely that a credit union like Pentagon Federal, where I have a couple of accounts, is going to go under like Mt. Gox. In the unlikely event that it does, I’ll get my money back because it is backed up by what amounts to the full faith and credit of the United States. Mt. Gox was backed up by the full faith and credit of, well, Mt. Gox. It’s like asking the fox to guard the henhouse.

And there’s the rub with BitCoin exchanges. When you create a currency detached from a government that will assert and protect its value, there is no one to complain to when your BitCoin bank goes bust. The government of Japan is looking into the event, but it is mostly hands off. It never promised to underwrite Mt. Gox, and Mt. Gox never asked it to. In any event, Japan underwrites its Yen, not BitCoins. Japan has a vested interest in keeping its currency solvent. It has no such interest in keeping another currency, particularly one it cannot control, solvent.

An exchange like Mt. Gox could of course seek out local governments for underwriting of their exchanges. Those BitCoin exchanges and banks that want to remain viable are going to have to do something just like this. Good luck with that. In doing so though they are of course defeating the whole purpose of BitCoin. BitCoin is about a libertarian ideal; it’s about money having a value independent of government apron strings. Affiliate the BitCoin currency in a BitCoin exchange with a government, and you tacitly admit that BitCoin is not a libertarian currency after all. In short, you have to give up the notion that money can be decoupled from government control.

It’s unlikely that many governments will be willing to protect BitCoin exchanges. It is reasonable to protect assets that you can actually control: your national currency. For a government to protect a BitCoin currency, it is reasonable to expect that they would also be able to control the amount of BitCoins in circulation and set rules for their use and misuse. They can’t do that, which means that they would be asked to put the good faith and credit of their country against an erratic currency that could prove digitally worthless at any time. This strikes me as a foolish thing to do, but there may be entrepreneurial countries out there, say, the Cayman Islands, that will take the plunge. The risk might be worth the rewards.

I don’t think you have to worry about governments like Germany, England, Japan, China and the United States doing something this foolish. If there is any organization that might see profit in this, it will probably be the Mafia, or other criminal syndicates, many of who are already using BitCoins as a mechanism for money laundering.

Doubtless other BitCoin exchanges will work real hard to sell trust that is now deservedly absent from these exchanges. As I pointed out in an earlier post, it’s going to be a hard sell given that BitCoin’s value is essentially based on faith in its mathematics and algorithms.

Absent from the minds of BitCoin true believers is an understanding that money must be tied to a governmental entity to be real money. It’s tied to governments for many reasons, but primarily because governments are required to govern, and this includes having the ability to enforce its laws and to collect taxes. Money is based on the idea that entities can force everyone to play by the same rules, including using the same currency as a means of exchange within the country for lawful debts. The truth is, there are no rules with BitCoin other than its math. It is a lawless currency. That Mt. Gox’s treasury of BitCoins can be plundered with impunity proves it.

Libertarianism is built on the idea of caveat emptor: let the buyer beware. No warranties are expressed or implied, but even if they are expressed they depend on the trust of the seller. No one can force the seller to do squat. The best a buyer can hope for is to track the thief down and take justice with his fists or a gun. That’s no way to run an economy, which is why libertarianism is an ideology that simply does not work in the real world.

Again, a word to the wise: just say no to BitCoins.

 
The Thinker

Bitcoin is libertarian bit nonsense

Are you intrigued by Bitcoin? It’s a digital currency much in the news these days. It even got a hearing on Capitol Hill last month. Surprisingly the foundation overseeing Bitcoin came out relatively unscathed. Some places are accepting Bitcoins as payment for actual goods and services. They do so on the assumption the currency has value. Like any other currency it has value because some people assert it has value.

Which raises the question, what is its value? There are clearly things you can do with Bitcoin that are convenient. It’s a sort of digital cash for our electronic age. Only it’s not really cash. Real cash doesn’t leave fingerprints. You make a Bitcoin transaction and the transaction is recorded in the coin itself.

If there is value in Bitcoin, maybe it is from the faith we place in its math. There is not much we trust anymore, but you can still trust math, and Bitcoin depends on math, not to mention encryption algorithms, to assert its value. The number of Bitcoins has a finite limit because of the power of math and algorithms. Each attempt to mint a new Bitcoin requires lots of computers to spend lots of time and use lots of energy. For all its electronic novelty, it’s hardly an environmentally friendly currency. In fact, it’s bad for the environment.

You can’t say that about gold. Granted, the process of getting gold out of the ground is often bad for the environment, but once you have it, there it is, probably to sit in highly protected bank vaults and never to be actually moved or for that matter seen. A Bitcoin is entirely virtual but it depends on lots of computer hardware to mint and to assert its value. You won’t be creating one of these with a pad of paper and a slide rule. In fact, a Bitcoin is entirely dependent on computers and high speed networks. No wonder then that it was abruptly devalued last week when China blocked Bitcoin transactions. Keep it from being used in the world’s most populous country and it has lot less utility. Of course, it’s useless to anyone without a computer or some sort of digital device, not to mention some network so you can trade the currency. So it’s not even universal. You can’t say that about the U.S. dollar.

The larger question is whether a currency built on nothing but math really can have value. It does have value at the moment, as I can actually trade Bitcoins for U.S. dollars, which in my country is what everyone accepts as currency. In the long run though I think Bitcoins are going to be worthless. I don’t plan to own any of them and maybe I can make a case why you shouldn’t either.

First, there is whether counterfeit Bitcoins can be created. New ones can be minted if you have the computer horsepower and these are “legal”, but if they can be created for virtually no computer time then they would be counterfeit. Call me suspicious but I bet either the NSA has already figured out a way to hack it or will soon. In short, to trust a Bitcoin you must buy into its assumption that it can’t be hacked. Since the dawn of the computer age, hackers have demonstrated their ability to hack anything. They love the challenge. It’s reasonable to believe that Bitcoin is going to be hacked one of these days.

Second, there’s the question of what its value represents. I’ve discussed the value of money before. My conclusion is that money essentially represents faith that the country coining the currency will remain solvent and viable. I based this conclusion on the observation that currency value falls whenever these assumptions are shaken. Having a currency based on the gold standard doesn’t seem to make any difference, as the United States has been off the gold standard since the 1970s. Printing new currency doesn’t seem to be that big a deal either, providing the new currency is used to acquire assets of value. This is what the Federal Reserve has been doing since the Great Recession: creating money (none of it actually printed, apparently) and using it to buy long term securities like mortgage-backed securities. Curiously, just printing money is not inflationary when it is used to buy tangible goods. This is providing that the institution printing the money is trusted, and the Federal Reserve is trusted. In any event, investors can value or devalue a currency based on examining its monetary system and the country’s economy. With Bitcoins, you can’t do this. It is backed by no country, which is its appeal to its adherents.

What is Bitcoin really about then? It’s about a political idea; more specifically it’s about libertarianism. It’s trying to be a means by which libertarianism becomes institutionalized. If you are not familiar with libertarianism, it’s all about freedom, buyer beware and minimal (and ideally no) government. Libertarians (at least the committed ones) are vesting their wealth in Bitcoins because it’s how they show loyalty to the cause. They want money to be frictionless and outside governmental control. Arguably, Bitcoin does a good job with this, providing buyers and sellers will accept it as having value.

But libertarianism is an idea, not a thing. Libertarianism is really more of a verb than a noun. A currency though has to be based on something real. The U.S. dollar is essentially backed up by the collective wealth of all of us who possess dollars, or assets valued in dollars, or really any property within the United States. It’s based on something tangible. You buy a house in dollars instead of Bitcoins because everyone in the transaction has faith that those dollars mean something. This is because everyone else is trading in dollars too to buy real goods and services. If the U.S. dollar gets too low, there are things we can do about it. We can petition Congress or the White House to take action. There is no one to go to to complain about the sinking value of your Bitcoins. Assuming the currency cannot be counterfeited, its only value is its finiteness, enforced by math and increasingly expensive computational processes to make new coins. That’s it. As those libertarians say, caveat emptor (buyer beware). Bitcoin buyers, caveat emptor!

This tells me something important: Bitcoin is a bogus currency, at least in the long term. Yes, you can buy stuff with it now, but only from a very limited number of sellers: those who have faith in the idea of a libertarian currency. It’s obvious to me that libertarianism is just not doable as a sustainable way of governing. I have no faith it in whatsoever because its philosophical underpinnings do not actually work in the real world.

I would like to see it in Glenn Beck’s libertarian community, however, if it ever gets built. One thing is for sure, no one is going to build it for Bitcoins. They are going to demand U.S. dollars.

 
The Thinker

Why to drive on the wrong side of the road, or the power of rebalancing

Whew! It’s been a long week, which makes it hard to find time to blog. When I slow down the frequency of my posts, traffic to my site sinks as well. Well, sorry, I’ve been busy. It’s not that I have run out of ideas. I generally blog about whatever is on my mind on a particular day. It does help though to know your market.

This blog attempts to be part education, part inspiration and part entertainment. The education part of it is because I probably spend too much time reading disparate stuff and when I find some wheat in the chaff I feel an obligation to get it out. Inspiration happens less frequently as most of my really good ideas and insights came out years ago. (Fortunately, a lot of those posts still receive regular hits.) The entertainment part is to give visitors a reason to come back. Sex sells, even on my obscure blog, as evidenced by a disproportionate number of hits on my posts on stuff like Craigslist Casual Encounters. Apparently I am vain enough to care about these hits, hence I am more than happy to do a monthly post on Craigslist casual encounter weirdness, or harpoon a recently uncovered philandering politician. I just can’t write about it everyday.

Today money, not sex, is on my mind, mainly because my financial adviser and I have been buying and selling mutual funds. So this post can be classified as education. I keep learning stuff from him and I thought I’d share what I’ve learned about the power of rebalancing.

When I speak of rebalancing, I mean shuffling funds you own around. In the case of my wife and I, these are mostly retirement funds. You may have an IRA or a 401-K and you may have the power to move funds around from one kind to another, say from stocks to bonds. This may not apply to many of you because you don’t have any funds. But you may someday, in which case keep reading. And if you do have some funds, you may learn some new stuff.

So let me ask you. Suppose you had a hundred shares of Google, purchased for an average of $500 a share, and are now worth about $1000 a share. You’ve been watching it trend up regularly with few bumps down. Would you sell it?

Most investors would say, “Hell no!” It’s the human tendency to be greedy, of course. After all, it could go to $1500 a share. 200% return sounds a lot better than 100% return.

Rebalancing a portfolio though is all about selling funds that are making money and putting it into funds that are not. Is that crazy or what? It is crazy, but crazy like a fox, and it is the secret to acquiring wealth for us ordinary mortals not fortunate enough to be Warren Buffet. Of course, most ordinary people aren’t buying stocks. We are buying mostly mutual funds, which are combinations of stocks, bonds and securities, and it is being done somewhat abstractly, probably through our 401-K or IRA plans. We buy mutual funds to minimize risk. Yet the principle remains the same. If you have money invested in a hot mutual fund returning 30% a year, it sounds crazy to take profit from it and invest it in some underperforming fund category, say a CD fund. Why would any sane person do this?

It’s because the only thing that is certain in the world of finance is that nothing stays static. In reality, investing is like playing a game of whack a mole. One fund class/mole gets hit and another one will pop up to replace it. It’s as given a phenomenon as the seasons except when it will happen is unknown. It’s well known that over time that certain kinds of funds pay better than others. Stock funds, for example, generally return more money than bonds over thirty years, although their value may swing up and down a lot. Investors chase profit and they chase wealth retention. Moreover, there is a lot of a herd mentality, at least among professional investors. Many take their cues from channels like CNBC. For the most part these investors aren’t looking ten or thirty years out. They are looking tomorrow, next week or next month. They want to grab some profit now. Investors like you and me though are more likely to want to gain wealth in the long term. We can’t time the market. In truth, financial gurus can’t time the market either. They like to think they can. Anyhow, since we can’t time the market all we can really do to acquire wealth is to intelligently ride the dynamics of the market.

And since the only constant in investing is change, we have to ride change to acquire wealth. So if we have a fund that invests heavily in sexy tech stocks like Google, Microsoft and Apple that has had a good and steady return then we need to sell it when it is profitable. We probably don’t want to sell all of it. There are two parts to this wealth business: gathering more wealth and hanging on to the wealth we have. So typically we own a lot of various fund classes, accepting more risky investments when we are younger and less of these investments as we age. So we can and probably should hold on to that sexy mutual fund, just bleed off some of its profits and put it into something that is not so profitable. We obviously don’t want to invest the money in a class of funds known to be a loser, such as a junk bond fund, but one that is currently undervalued and should become profitable once market conditions change fundamentally. Recessions are not events that might happen, they will happen. When they will happen really cannot be predicted, but when they happen a whole lot of panicked investors will quickly sell their new unsexy assets and buy U.S. Treasury securities and various bonds. We saw this during the Great Recession.

Reinvesting is all about buying low and selling high. If you don’t sell those sexy funds when they are high and buy something undervalued with it, you won’t lock in your profit. And if you don’t lock in your profit, you defeat the whole purpose of investing. The purpose of investing for the average person is not to get rich quickly, it’s to be rich in the future and retain your wealth in the future so you can spend it the way you like.

So that’s what my financial adviser and I have been doing: carefully looking at the value of our portfolio, seeing where we made money and to the extent its value exceeds the percentage we want to be vested in it, putting the profits into well managed funds that haven’t done as well instead. Because when market fundamentals change, as they will, we will have bought those funds when they were undervalued and will be prepared to sell them at a profit, probably for those stock funds that will then be undervalued.

In principle this is quite simple, with the hard parts being picking well-managed, low-fee funds in each asset class. The other part requires patience and discipline: ignoring day-to-day fluctuations and rebalancing regularly.

So it turns out that being a financial wizard is not that hard. You just have to have patience and be a methodical, slow and steady type of investor. You also have to adopt a counterintuitive financial strategy. It’s like driving on the wrong side of the road. Except by not following the crowd, you will actually be on the right side of the road.

Ca-ching!

 
The Thinker

The fool’s gold in gold

I was born upon the fathoms
Never harbor or port have I known
The wide universe is the ocean I travel
And the Earth is my blue boat home

Peter Mayer, Blue Boat Home

Are you paranoid? Good! I might not have swampland to sell you, but I am sure I could be unethical enough to try to sell you some gold, albeit at hugely inflated prices. Owning gold suggests you own something with eternal value. Our currency may get suddenly devalued by ninety percent tomorrow but the thinking goes that as long as you got your gold coins locked up somewhere you still have wealth. You can maintain that standard of living because you own something no one can take away, and whose value none can diminish. You own gold! You are a survivor, you shrewd investor you!

I will grant you that gold will probably maintain its value much better than, say, the Zimbabwean dollar. Gold is pretty to look at, quite malleable, won’t tarnish and it must be worth something or it would not make up the majority of wedding rings. Mine is made of gold too, albeit white gold. It seemed better at the time than a ring from a Cracker Jack box. And since I have gold on me at all times should a financial apocalypse arrive, my wedding ring might buy us some food, a tank or two of gas, and maybe a couple of days in a hotel in our post deflated dollar world. Beyond that my gold wedding ring has far more sentimental value than monetary value. It turns out that its real financial value would be if I sold it for, say, American dollars. Dollars are convenient in pre-apocalypse America in that I can use it for an even exchange of value. Gold: well, not so much. Exactly how do you get change for your gold coin or ring in something that will retain value? It might help if everyone else kept a stash of gold coins too, but of course most of us don’t own gold and if we do it probably won’t be gold coins.

How good will gold be in a post Apocalyptic world? Well, it will be better than nothing but in a post Apocalyptic world when push comes to shove you will gladly exchange a large value of gold for basic foodstuffs and medical supplies. See, it’s that stuff you really need to survive the Apocalypse. Gold has no caloric or nutritional value.

Most people who own gold coins don’t keep them at home because they are worried they will get stolen. Gold coins are worth quite a lot, obviously, with an ounce of gold worth roughly $1600 at the moment. A one ounce gold coin though is probably going to cost you more than $1600. Someone has to make the coin and distribute it, and that’s a profitable business. Curiously no one buys gold with gold, but they do buy it with money, which gold dealers are eager to accept. Money, unlike gold, is fully fungible. Which makes money in general far more valuable than gold, which is why people prefer money to gold.

Some people with enough means pay a banker or a company to store their gold in a vault somewhere. It’s nice to know it is somewhere safe, but it’s unclear if everything goes to hell whether you will actually be able to withdraw your gold. I’m pretty sure most vaults are not safe from nuclear weapons. Even if they are, it’s likely that your banker won’t be around to open the vault. How would you make a withdrawal even if you could get to the bank? Hopefully there would be enough infrastructure in place and you will have an armored car to make the trip safely, providing the bridges have not collapsed and the roads are serviceable. Of course, once you have your bullion you would then feel the need to protect it from theft, not an easy thing unless you own a Brinks truck.

So maybe you need a more fungible form of gold. You could invest in gold stocks. Get a piece of paper that says you own twenty pounds of gold instead. Maybe in a post apocalyptic world showing your gold certificate will let the local black market distributor advance you some credit. Or maybe not. Maybe there just won’t be anyone around to barter for goods with anyhow. In a real Apocalypse, gold will be the least of your problems, because you probably will be dead. We’re pretty sure you cannot take it with you.

Are there reasons to invest in gold? As a hedge against inflation its record is pretty spotty, and people often tend to buy it when it is overpriced, i.e. when they are feeling scared. Perhaps having some part of your total assets in gold makes a certain amount of sense for the same reason some part of your assets should be in cash. In the real world though it won’t be gold that you will use to buy goods and services. It will be good old-fashioned money. You will want to convert your gold into money and use that. And unless gold appreciates in value over time, it’s probably not going to be a great investment.

Gold simply offers the illusion that your worth can maintain value regardless of the uncertainties in life. Rest assured this is an illusion, but perhaps it has some value because you won’t need to regularly pop Valium. Real worth is predicated on people thinking something has value. Moreover, real worth is the consequence of the way society is ordered and your place within in. Worth rests on a complex web of relationships, which must be there for your worth to have value. Worth depends not just on your job and your assets, but in the investment that society makes in civilization. It depends on the networks that make ATM machines possible and people’s willingness to work for a living wage, yes even at Walmart. It depends on roads being there so you can get to where you want to go. It depends on a justice system so the criminals aren’t preying on you and your neighbors. Without these and much more gold is worthless. Which means that chasing gold in the hope that it will keep you safe from calamity is foolish. It is fool’s gold.

As Peter Mayer put it, we are born upon the fathoms. Our home and our standard of living is an illusion. In reality we are living on a boat adrift in the sea, a giant Noah’s ark that we all share. There is no permanence; we are just around for the ride, but it’s a ride that we are all in together, so it behooves us to play nice and share our toys. So if you want to maintain your wealth and standard of living, stop looking at gold and try investing in society instead. Let’s make our world a place where we all have the likelihood to achieve our potential. Let’s keep investing in roads, good schools, new drugs and technological inventions. All these things though depend on a healthy and sustainable natural environment. Which means that our real treasure is not our personal wealth, but our shared natural world.

Now there’s a solid investment.

 
The Thinker

Sell

I won’t claim to be an economist or financial wizard. I don’t bother to try to time the stock market. I buy in mutual funds in good times and bad times, hoping that general growth in mostly proven funds will mean I won’t eat dog food in retirement. So I was buying in March 2009 when stock indices reached their Great Recession bottom and I am still buying funds today, albeit steadily and incrementally.

That’s one way to make money in the stock market: keep buying in good times and bad and count on general growth for appreciation. That’s the boring and safe way to make money from the market, as long as you do it in the long term and keep plugging away. Hopefully you are not buying crappy stocks, funds and bonds, but ones with decent track records for beating the market.

The other way to make money is to follow the maxim: buy low and sell high. The smart people with capital were doing just this in March 2009. They were fearlessly investing while others were willing to part with their stocks for just about any screwy lowball price others were willing to bid. Oh my God, the world is going to hell. Gotta turn this stock into cash right now and maybe survive the next Great Depression. That was the wisdom of those times, just four years ago. People were chasing their fears and their fears told them to horde cash. As I noted in June 2009, stock in the bluest of blue chips, General Electric, briefly fell below $6 a share that month. GE, like many stocks, was crazily undervalued. Those with cash and nerve should have been telling their brokers to buy GE in bulk. If they had, and I wish I had enough spare cash to buy it, they would be sitting pretty right now. On March 5, 2009 you could buy GE common stock for $5.88 a share. Today four years later it closed at $23.67 a share. That’s an appreciation of 403% in just four years, or 100% appreciation per year, on average. It was, as I said then, a crazily great investment. Granted this is not as high as GE stock has ever gotten. On June 22, 2001 right before the tech sector collapsed GE traded at $51.86 a share. It was crazily overvalued then.

Most likely GE stock and the market in general are suffering now from irrational exuberance as well. Stock prices are inflated, largely because the Federal Reserve is keeping interest rates artificially low. While the Fed has no immediate plans to change this policy, you know it cannot last forever. In fact, some are speculating that even if the Fed continues to keep interest rates low, the market will correct this artificial imbalance through inflation. Inflation happens when too many dollars are chasing too few tangible assets. With nowhere else to put money in hopes that it will grow, people are buying stocks. This tells me that stock prices are inflated. But also I can sense they are inflated. I can tell from the anemic growth in our GDP, the 7.7 percent unemployment rate and median wages that continue to fall. While increasing stock and home prices will help stimulate growth, if it comes it will come much later, and it is likely to only help stocks reach their current valuation, not actually meet their current valuation.

March 2009 was, in retrospect, the time to buy and hold. Arguably, March 2013 is the time to sell and profit. Convert that valuation into cash, while other irrationally exuberant buyers are willing to buy your stock at inflated prices.

Of course if you followed the crowd and sold stocks and funds in 2009 and are buying them now again in 2013, you are guilty of two things. First, you are guilty of being like most everyone else: following the herd. There is some comfort perhaps in that you were not alone because your neighbors were doing the same thing, which is one reason their net worth (and likely yours too) fell. Second, you are being stupid a second time. You are the bottom fish that the bigger fish are about to consume. They are picking your pocket, not the one you have now, but the one you think you will retire on. You are buying what is likely to be overvalued stock in the long term. Why are you doing this? You are probably doing this because you cannot make a decent return for your cash by having them in savings and money market accounts. You are frustrated and you see the stock market surging up 26% in one year and you are thinking, “I deserve a piece of that action”.

And you do, but you are probably chasing an illusion. There is a stock market correction coming. I cannot tell you if it will be this month, this year or five years from now. But it’s not too hard to see that it is coming. Economic growth is anemic and profit depends on growth. Growth also depends on people having more money to spend. While the rich do, they are a tiny part of the populace. People like you and me are probably watching expenses like a hawk.

What do you do if you have been following the herd? My suggestion is to stop buying stock, most of which is dramatically overvalued at the moment, and put that money in a cash account for future investing. You are unlikely to get much appreciation for your investment, but you are likely to lose money buying stocks. Wait for the next market correction, when the stock indexes have lost a third or more of its value. Then steel your nerves and buy, probably in blue chip stocks. Then hold and sell many years later when the signs are clear the market is overvalued again. That’s when you lock in the profit.

If you did buy GE stock in bulk in March 2009, you are probably smart enough to do what you are already doing: selling it and converting it into cash for future buying opportunities. In general, if you have genuine appreciation for your stocks and bonds as a result of buying them low, now is the time to lock in your profit. Profit may also be found in selling your house. In most markets it is a seller’s market and prices have fully recovered from the Great Recession. If this is true in your area, your house is mostly equity, and you want to lock in that wealth, selling your house may make sense. (Of course there may be capital gains and other tax implications from doing this. Consult a financial adviser before doing this.)

Will I be doing any of this? No. As I mentioned, I don’t time the market. I invest regularly and I invest long term. If you are not this kind of investor though, look at your portfolio carefully and note those funds that now are valued significantly more than what you paid for them. Unless there are some special circumstances for these particular stocks and funds for future growth, now is the time to sell them and convert them to cash. Most likely you will find this to be a very profitable experience.

 
The Thinker

Money is freedom

Americans celebrate freedom. Everyone is free, we proudly proclaim. But what exactly is freedom anyhow? Freedom amounts to being able to do what you want when you want to do it. Based on this criterion, it’s clear to me that some of us are freer that others, and those are people with more money. When you have a lot of money, you have the freedom to go backpacking in Tibet. You are probably not going to realize this particular freedom if you are a product of a single-family household and your mother lives in subsidized housing.

We sometimes celebrate the homeless as free people. Perhaps there is a certain freedom in being a vagabond. You can go where you want but chances are to get there you will have to walk. You had best not walk into certain planned communities, particularly in Sanford, Florida. A George Zimmerman type anxious to try out the Stand Your Ground law may kill you. The homeless are free, but you are likely to frequently go hungry. I understand that the dumpsters behind neighborhood Burger Kings offer al fresco free dining opportunities. Sleep will probably be uncomfortable as you will be outdoors and subject to the elements. You likely won’t be allowed to sleep just anywhere, not even places you would think you would be, like a public park. So be prepared to be rudely woken up at 3 AM and asked to shuffle along, or hauled to a nearby police station and booked for being a vagrant. There you can at least you can get free meals and a warm place to sleep.

For most of us, this freedom is very limiting, and something to be avoided not embraced. In fact, it is a faux freedom. Wild animals have this sort of freedom too, but no one envies them. However, with money freedom becomes tangible. Money can buy you freedom from constant hunger and provide a safe place to call home. With more money it can buy health care and likely keep you out of a whole lot of unnecessary misery. With even more money you can become educated, attract a quality mate and take regular vacations. With yet more money you can take exotic vacations, afford homes in the Hamptons and maybe run for political office.

So in reality freedom is not so much about being free, it is about the how much freedom you can afford to purchase. And that depends on how much money you or your parents have. Consequently, in a nation that values freedom we also value wealth, because the more wealth you have the more freedom you have.

We are also aware that freedom is constrained by law. In many mostly Southern states, your right to vote can be constrained by requiring state issued IDs to be shown at polling places, which curiously affects the poor almost exclusively. Sometimes fewer polling machines show up in predominantly poor neighborhoods as well, making it harder to have your vote count, such as happened in areas around Cleveland in the 2000 election. The consequence of actions like these is to give those with money more leverage to influence laws than those with less money. The rich also have disproportionate resources to influence others politically. This is perfectly legal. In its Citizens United decision, the Supreme Court also asserted something wholly absent in the constitution: that corporations have the same rights as people and can give unlimited amounts to PACs. Unsurprisingly then, our government tends to disproportionately reflect the interests of those with money over those without.

Effectively money not only buys freedom, but also allows some measure of being able to take away freedoms from others. Lately the aspiration that all should have roughly the same amount of freedom has been classified as socialism, a strange assertion for a nation founded on the assumption that all men are equal. Make health care available to all regardless of their ability to pay, and poorer people will effectively have more freedom, but in the eyes of many it is an unearned freedom, thus it should not be allowed.

How does one earn more freedom? If freedom is wealth, it happens through acquiring wealth somehow, which can be hard to do without a good education and the right connections. Some time back I wrote about the rags to riches myth. Yet there was one famous president who arguably demonstrated that it was possible to ascend from rags to riches. He was our greatest president: Abraham Lincoln. He had no formal education and never went to law school, yet he became a lawyer and eventually president of the United States. How on earth do you get to become a lawyer with no formal education? At the time it meant convincing the Illinois Supreme Court, which had only recently become a state, that you were competent to practice law. Honest Abe did it somehow.

Rest assured that Lincoln’s tactic no longer works in Illinois or likely in any other state. If you want to practice law, you had best get a law degree and join the local bar association. That of course will require money, and it’s unlikely some benevolent nonprofit will be giving it to disadvantaged inner city youth. Anyhow, if you can acquire a law degree then maybe the Illinois Supreme Court will deign to let you argue before it. Since Abe’s time, Illinois has tightened its standards on who is allowed to acquire higher levels of freedom, and it is generally doled out only to those with the means. In effect, it has cut one pathway that enabled someone to go from rags to riches. There are virtually none left, but the Republican myth remains that there are all sorts of ways to achieve the impossible.

We have created all sorts of barriers to keep people from moving from one socioeconomic level to the next. If it happens at all, it requires superhuman effort. Few of us are supermen, so we are virtually doomed to fail and we will stay in our social class. This seems to be fine for those who are already have wealth. Indeed, they seem anxious to add additional barriers that have the effect of making it even harder to ascend up the socioeconomic ladder. This is done in the guise of welfare reform, reducing or eliminating subsidized housing, and strict time limits to food stamps and unemployment benefits. The effect is to give certain classes of people more freedom than others and through lowered estate taxes give them the ability to extend those freedoms to their children. It also helps ensure a permanent underclass of citizens and keeps a permanent upper class as well.

The lack of defined pathways to become upwardly mobile feeds resentment and fosters insular behavior, heightening class-consciousness and dividing us as a society. To understand the brouhaha in Wisconsin, one has to look not at the bottom of the income scale, but at its middle and the brazen power of those at the top to push the middle class further down the income scale by lowering their pensions, making them pay more for their health insurance and not allowing collective bargaining. In effect, through legislation the middle class’s freedom and wealth is being moved to those with more wealth. Ironically, this is classified as being part of a pro-freedom agenda. The reaction by a vulnerable but politically important middle class was entirely predictable. It was fed by cluelessness and a sense of superiority of those with wealth that they know better. Mostly it is due to a fundamental unwillingness by those in power to understand the connections that implicitly bind us.

Some of the wealthy understand this connection. They know that their wealth is predicated on keeping the other 99% hopeful for a more prosperous future. They understand that marginally higher taxes on their income are actually an investment in their prosperity. Moreover, the smartest ones understand that for society to be stable there must be viable economic ladders to move between all financial classes. Most of those ladders have disappeared, mostly between the lower and middle classes, but also between the middle and upper classes. These ladders do not appear magically, or they would exist now. Instead they must be constructed by civilized society. While capitalism helps provide the wealth that makes these ladders possible, they do not occur from largess, but are a result of government.

In truth, upward mobility is what truly drives growth and by extension wealth and freedom. It is in the best interest of the rich to empower the poor and the middle class so their talents can be maximized for the benefit of society. For when that happens, rather than wealth trickling down from the moneyed, it trickles up. All are enriched, all share the benefits of greater connection, and all share in a greater freedom. It is a formula that worked well for America until it was abruptly changed with the election of Ronald Reagan. To become great as a country again we must rebuild these economic ladders. The decline of our country will be marked by the day when we deliberately destroyed these ladders of hope and opportunity.

 
The Thinker

A question of monetary confidence

In my last post, I was feeling a bit dazzled because on paper my wife and I became millionaires, although just barely. I found our new wealth somewhat suspect, in part because stock prices seemed surreally high and the dollar was steadily sinking in value. The dollar simply isn’t worth what it once was and the trends suggest it may never recover its wealth in relation to other currencies. In addition, prices for commodities are soaring. No wonder I felt deflated reaching the milestone. It’s not how much money you have that matters; it’s what it will buy. It won’t buy a mansion in Beverly Hills with a cement pool in the backyard, that’s for sure.

When communism fell in Eastern Europe, Yugoslavia experienced incredible hyperinflation. It currency essentially became worthless. In October 1993, the government tried to solve the problem by printing new money. One new dinar became one million old dinars. Not coincidentally, the country fell apart, but not before we observers got an abject lesson in the meaning of money, two lessons of which I opined on some years ago. My take was that a currency is only as valuable as people’s confidence in it. Attempts to prop up the dinar failed miserably and triggered a horrendous inflation and a depression. Once balkanized (literally) into separate countries, former Yugoslavians found their new country’s currency and leadership were more trusted than the old dinar and communists, and things began to recover. What didn’t recover was the country of Yugoslavia, which dissolved. It was always a country on paper more than in fact, and existed mostly due to Soviet support and because of the heavy hand of its military and secret police.

The steady decline in the value of the dollar against other currencies thus should be worrisome. For some, America is undergoing a slow loss of confidence. With enough rumored whispers, some official institutions will take notice. Standard & Poor took notice recently and issued a warning that in two years the U.S. would lose its AAA bond rating if it did not get its deficits under control. Right now, federal deficits are causing concerns about the solvency of our currency.

If investors are wary of the U.S. dollar, so far they don’t seem to be slacking off purchasing dollars via U.S. Treasury bills. If you have surplus you have to save it somewhere, and you also want some of it to be a stash of money, so you can spend it quickly if needed. The currency needs to be in something reasonably stable. The major choices are the dollar, the Euro, the Yen and the Chinese Yuan. It’s unclear if the Euro will be around in a decade. The Japanese Yen looks suspect, particularly since their devastating nuclear accident. The Yuan is as stable as the Chinese government, but in part because they own so many dollars, inflation is becoming a serious problem that could discount their currency and maybe take down the government. The dollar is not a perfectly safe bet anymore, but it is still safer than other currencies. So many want to buy dollars as a monetary hedge, and that it is keeping interest rates artificially low, likely exacerbating the dollar’s fall.

Most commodities are priced internationally in dollars. Oil is the most prominent example, and oil recently topped $110 a barrel. A good part of its price rise is uncertainty in the oil market, but it is also due to oil being traded in dollars. If oil is in demand and the dollar is cheap, oil will cost more dollars. The same can be said for most traded commodities, particularly food. Rioting in Egypt, Yemen and elsewhere may be due in part to the high cost of foodstuffs priced in dollars and the inability of people to afford the inflated prices. The same is true here in the United States. One reason obesity is epidemic in this country is that unhealthy food is much cheaper to buy, in part due to subsidies.

Loss of confidence in the dollar is also probably pushing up stock prices, and helps explain my millionaire status. Why would this happen? What do you do if you are concerned that the dollar you have today may be worth ninety cents next month, but you have enough cash for an emergency? You try to invest that dollar today in something tangible and profitable instead. That is my suspicion. While a recovery is underway, it is a weak recovery and there are no real signs that it is going to turn into a roaring recovery. How to explain exorbitant stock prices? I explain it as we are bidding up the price of businesses because we have more confidence in their retaining long-term value in than than in the U.S. government.

This works fine unless instead of a currency decline there is a currency collapse. Is there a way to anticipate a currency collapse? Porter Stansberry sure thinks so, and he says he is spending his own money to try to warn others. Others think he is just running another scam. I spent about an hour listening to his pitch over the weekend. Unfortunately, there is no fast forward button and he likes to reiterate his points endlessly. I ran out of time and interest, but if you are patient enough and paranoid enough, he has suggestions on how to protect yourself from what he feels will be a major collapse of the dollar and the economy over the next few years. The “good stuff” apparently requires purchasing his report. So I doubt he is acting out of the goodness of his heart.

I agree with Stansberry on one point: if the dollar really did collapse, it would take down not just the U.S. economy but also most of the world economy, at least for quite a while, probably for years. Having a ready supply of Yen, Yuan and Euros to pay for life’s expenses instead of using dollars probably won’t help that much. We’re all tied together now; there are no safe harbors. If the U.S. dollar goes on life support, my suspicion is most other currencies will as well, because so much commerce is traded in dollars which are traded for local currencies. The good news is I have a third of an acre for my lawn. I could become my own farmer until the depression caused by a dollar collapse is all over, providing of course I can rent a tiller and enclose my backyard in twelve feet high fencing with barbed wire to keep out hordes of desperate and hungry people. Or I can do what everyone else will do and procure things with possibly hyper inflated dollars.

Can a dollar currency collapse really happen here in the USA? Perhaps. No one really knows if such a scenario will happen, but it can be triggered if enough people think it will happen. The dollar is as solid as our faith in it and our institutions, which at the moment is low. Arguably people, like Porter Stansberry are rooting for it as a way to acquire wealth by spreading fear. A dollar collapse is possible, of course, but so many have so much currency valued in dollars that no one really has incentive to root for its collapse, except, possibly al Qaeda. Which is probably why Standard & Poor issued its warning. It is trying to make politicians do their jobs.

My suspicion is that the root of investors’ concerns is not the deficit itself, but the underlying problem the deficit exposes. Until now, when parties could not compromise, the difference was charged to the future in the form of deficits, because there was always agreement to extend the debt ceiling. That seems to be changing. What would normally happen in dire circumstances like this would be we would find our better nature, and move toward compromise and shared sacrifice. So far, there is not much evidence that this will happen. My suspicion is that if we can affect a meaningful compromise where all parties have real skin in the game, it will remove most of the financial jitters underpinning the drop in the dollar.

Unfortunately, what’s much more likely to happen is a high stakes game of poker that ends badly. It is already well underway. I am no more prescient than anyone else how it will play out with a vote to raise the debt ceiling. I suspect it will get raised, with much wailing and gnashing of teeth, and in small, tortuous increments and play out like a bad horror movie. I can say that if we reach a point where the United States cannot come together politically to raise the debt ceiling and find real middle ground on raising taxes and reducing expenses (and yes it will take both), I will need my own vegetable garden with its twelve foot fence and maybe even a gun or two and a bulletproof vest. If that happens, unfortunately, it will be too late for all of us.

 
The Thinker

Who wants to be a millionaire?

Not me, at least I never set out with the goal to be a millionaire. When I entered adulthood around 1978 with less than a thousand dollars in my savings account and $5000 or so in student debt, the idea of me being a millionaire someday seemed preposterous. The only millionaire I knew was a character on TV named Jed Clampett, and he had a mansion in Beverly Hills and a cement pond in the back. I kept my expectations more modest. Perhaps I could afford to go into hock for a townhouse, which my wife and I finally did at age twenty-nine. At the time I felt very much overextended, and I was. The first time I wrote a mortgage payment check, my hand actually shook. I had never written a check for that large an amount before and writing a check that big once a month was scary and sobering.

Today, on Good Friday of all days, I updated our accounts in Quicken and found that we had become millionaires. Quicken told me today that our net worth is $1,000,531.14. Approximately. I looked around. Nope, I wasn’t living in Beverly Hills. Nope, Texas Tea was not responsible for our amazing wealth. Nope, no cement pond in the backyard either, although after heavy rains we do get a transient pond, which occasionally will be inhabited by feathered friends. No BMW in our driveway. No butler to fetch my coat. No maid service either; I still clean our toilets. We do have a lawn service. Maybe in 2011 that is one clue you can use to judge if someone is a millionaire. In my case, it is because I am just lazy.

And I still pinch pennies, although not as hard as I used to. There was a time when I kept track of all my cash expenses in a little notebook because I had to make my GS-5 salary stretch to the next payday. Perhaps as a result toward the mid 1980s I started tracking income and expenses. Around 1990 bought a version of Quicken for an antiquated operating system called MS-DOS. Back then our net worth was about $20,000. Still, I had no expectation of someday being a millionaire. For much of the last twenty years I didn’t see how it could possibly happen. Life was just so darned expensive! There were all these massive payments, for the mortgage, for childcare, and to keep our house from falling apart. I needed loans to live my lifestyle, principally car loans, and later home improvement loans. How on earth did we become millionaires?

It is still something of a mystery so I went investigating. One major factor: stocks have recovered. In fact they recovered so well I suspect they are currently overvalued, so my millionaire status may not last too long. In addition, thanks to the recession and all our deficit spending, the dollar has declined precipitously. Which means that a million dollars today is probably the equivalent of $750,000 or so a few years ago, based on what we can actually buy with it. I doubt our purchasing power has gone up that much since the recession began.

We became millionaires principally by holding steady jobs and steadily advancing in our careers, which at least in my case finally got me to a comfortable salary. We did it by investing in us, specifically our educations (a graduate degree for me in 1999, and a bachelor’s degree for my wife the same year). When our income allowed, we saved as much as we could. It also came from living for a few more decades. If you do your best to consistently follow a sound financial strategy, your net worth tends to grow. Another likely factor: having just one child.

It is also true that we were either lucky or canny. I had no idea that when I moved to the Washington D.C. region in 1978 that it would be financially rewarding, at least compared to other places in the country. The high cost of living appalled me, but I had the good fortune to settle in Fairfax County, Virginia, a prosperous county full of beltway bandits and clean industries, mostly of the software kind. It is a place where good jobs were as fungible as money and never required the hassle and expense of moving. While I often groaned while making my house payments, my property values steadily appreciated over the years. Real estate as an investment rarely returns more than inflation, but our house, purchased for $191,000 in 1993 is worth $460,000 today. I expect it at least held its value. We were also lucky. We generally bought in buyers’ markets, getting good value for our money. We could have easily ended up underwater, like many homeowners today. We weren’t bright enough back then to time our real estate transactions to the market.

Building net worth takes tenacity and well-practiced self-denial. It often meant buying used cars when I lusted after new cars, and when buying new cars, buying practical cars like Toyotas and Hondas instead of Lexus and Mercedes Benz. It meant gritting my teeth and adding a couple of hundred dollars to my mortgage payment every month. It meant living somewhat below my income; our single-family house with a one-car garage is modest living. It meant avoiding shiny new toys like cell phones until they got dirt-cheap. My cell phone is currently a $10 model from Virgin Mobile. I still don’t own a smartphone. Since I am by a computer most of the day anyhow, paying $50-$100 a month for an iPhone or Android device seems a poor value.

I still constantly scan the market for real value. Consumer Reports recently recommended the Ooma Internet phone for those of us with landlines who are already paying for high speed internet. I guess we don’t need a landline but we are used to having one for its clarity and reliability, attributes I don’t associate with a cell phone. I currently spend $25-$35 a month for a landline, which includes modest long distance charges. With my Ooma, after paying $249.99 to buy it, I will spend less than $4 a month, all of it going for taxes. I can do all the local and long distance calling within the United States I want for free, forever. My effective cost for a landline will go from $30 a month to $5 a month. Free from my bundle with the cable company, I will now get to play a bidding war between Verizon and Cox for my high-speed Internet and HD TV service.

While we may be “millionaires”, most of our wealth is not easily touched. Our house remains theoretical wealth until we sell it and/or we own it free and clear. ($75,000 to go!) About half of our wealth is invested in retirement assets that we cannot touch without penalties. Perhaps that is why even though we are millionaires I still tread cautiously financially. The kind of wealth where you can rarely think about how much money you are spending still eludes us, and always will.

 

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