Ask Uncle Bill

The Can

We went back and forth to Brazil a few times but still problems.  But slowly things started to change a little.  We were still spending money down there and running around trying to find local debt but something was going on.  I had heard through the grapevine about a new marketing campaign but new marketing campaigns rarely fix structural problems.  New marketing campaigns rarely fix non-structural problems either.   I basically ignored the new marketing campaign but something was going on because the Brazilian noise level was going down.

I had to go see Pepe about something and stopped by his office.  Pepe was a pretty active guy (he had ten kids) and you ususally didn't find Pepe sitting at his desk.  But there he was.  Looking.  Looking at what looked to me like a land mine sitting in the middle of his desk.  The land mind analogy was not bad because Pepe was going to have to make a decision that might blow up in his face.

"What do you think?" he said pointing down at the land mine.  He shoved it across the desk like a hockey puck and I picked it up, turned it over, put it back down.  A can.  Wanting to appear wise, I didn't say anything.  Pepe looked at it, said "It's a new can."  He didn't sound real excited.

But the story started coming out.  He was telling me but I think he was really practicing his Executive Committee presentation when he would have to convince a bunch of gringoes to back a new fish program.  Because this land mine was going to make or break the sardine business. 

"Jaimie tried something new."  Pepe said that with a hint of praise in his voice for Jaimie--managers like initiative if the initiative works.  Jaimie was a brand manager in Brazil and he was in the meeting when Pepe said he didn't want to hear anything more about devalutation and inflation.  Jaimie got the message because Jaimie was the brand manager for sardines and Jaimie figured out that if he didn't do something he would be out of a job and good jobs were hard to find in Brazil so he better do something and fast.  As Samuel Johnson wrote, "Nothing concentrates like a hanging."  And Jaimie wanted to avoid the hangman so he got on it.

A note here.  When looked at backwards, solutions seem so simple.  At least, solutions that work.  Thus, the saying that hindsight is twenty-twenty.  But Jaimie had to buck a lot of thinking-you sell to people that have money, your product has to look imported, you sell a 'quality' product, you are selling a 'branded' product, we've always done it this way.  But the fish were piling up, literally, and his job was on the line so Jaimie went 180 degrees in the opposite direction.

He turned the sardine into a commodity.  And he started with the slums.  Which aren't hard to find in Brazil.  Went to the small stores and saw milk, bread, beans, coffee.  That's about it.  No deli sections, no meat sections.  Not much of anything in the protein department.  And no fish.

Then he went to the production line and saw the women cutting the big sardines into little sardines so they looked like Norwegian sardines.  Cut back on the cutting and your costs go down.  The Brazilian sardine was coming out of the closet.

Went to the packing line and saw tons of cute little cans but nothing that could hold a foot long sardine.  But Dieter had taught his guys well and they were pretty inventive and figured a packing machine was a packing machine and the machine could be adjusted to handle a bigger can.  The only caveat being that the can be flat.  Jaime called the can company and said I need this can at this price and he got it.   

And finally for the outside of the can.  Jaimie had noticed in his store visits that the processed products, the stuff in cans with the labels, had big pictures of the product on the can.  If you picked up a can of tomatos, there was a picture of a tomato on the can.  The same for beans.  Peas.  And so on.  Because a lot of Brazilians, especially poor Brazilians, can't read.  But they know a tomato when they see one.  And they know a fish when they see one.  But they don't know a can with a picture of a sea captain painted on it has fish inside.

So back to the plant.  And then to the paint booth where he had the guys take the new cans, paint them army green, and paint a fish on it.  And it wasn't a salmon swimming upstream or a trout jumping out of the water after a fly.  It was your basic, hand drawn fish.  Two lines.  The lines meet at the front to make the nose and cross in the back to make the tail.  Your basic Christian fish.  Jaimie was pulling out all the stops and wasn't above throwing in a little religion as 99.9% of Brazilians are Catholic.

If you have ever taken a marketing course you know the four P's.  Place, promotion, product, and price.  Jaimie was closing in--he had place (the stores in the slums), he had promotion (the can itself), he had product (the sardines).  Now for price.  Jaimie solved this one by taking the price of beans and the price of the lowest type of meat, this being chicken, adding them together and dividing by two.  And got the price of his sardines.  And he was making money.  Nowhere near the margin for the sea captain sardines but he wasn't selling much of that so Jaimie went for volume.  And he got it.

Because the fish flew (swam?) off the shelves.  And Pepe got Committee approval to go nationwide and sales exploded and we made money and paid off all our debt and even paid a dividend and everybody lived happily ever after. 

Well, not really.  Jaimie was eventually made general manager of Brazil but his sister-in-law married my Indian Brahmin boss which added a lot of stress in the family and Pepe got a little big for his britches and ended up leaving his wife for the CFO's secretary which didn't go over too well but, boy, did we sell a lot of fish.

So, in summary, what did Jaime do?

First, he threw out the old business model.  Then he found his real customer.  And he changed his product to fit the new customer-the customer wanted fish and protein and the big, foot-long Brazilian sardine who could last forever in a can, fit the bill.  And he changed his marketing--the can--so the consumer knew what was in the can.  And he priced low to spur volume.  But he didn't price below cost, like some auto makers, to spur volume. 

And I learned that Thomas Edison was right.  Genius is one percent inspiration and ninety nine percent perspiration.  And Jaimie was sweating it.      

   

The Sardine Man of Sao Paulo, Actually It Was Rio

Yesterday I gave the recipe for business success-sell a good or service for more than it takes to produce that good or service and reinvest in the business.  That is true but worth about as much as telling the coach of the Dallas Cowboys that the way to win the Super Bowl is to score more points than the other guy.  Absolutely true but of not much value.  Business success is hard to define but, like pornography, you know it when you see it.  So in the next couple of posts I will talk about successes, and failures, that I have seen.  If you want formulas, go somewhere else.  If you want stories, read on.

"What did I do wrong?"  That thought was soon followed by the realization that my career was finished.  For it surely was.

I was called into the Treasurer's office, the door closed, and I broke into a sweat.  I liked the guy and considered him to be the smartest, best finance guy I ever met, then and now.  But Dick wasn't, what's the right word, smooth.  He had been made Treasurer when he was 33 and basically stayed there as the company brought in three CFO's in the time I was there and Dick outlasted all of them.  Dick didn't really know how to deliver views diplomatically.  Once we were in an Executive Committee meeting and Dick responded to a suggestion from the Chairman.  Dick called the idea stupid.  Ouch.  It wasn't said like, "That's the stupidest thing I've ever heard."  It was more like "we would being making a stupid mistake to go that route."  But the audience heard 'stupid' and Dick's shot at the CFO slot slid another notch.  But when things really got tough, senior management overlooked Dick's shortcomings and he was there making the hard things work.  And Dick was independently wealthy. 

But I was not and I was nervous because Dick said "You've got Latin America."  No, no, no.  I had Europe and the Pacific and I was satisfied, if not happy, dealing with crazy French controllers and a British general manager who didn't like dealing with 'colonists.'  The guys in the Pacific were great except you had to get up at 4 in the morning to talk to them.  So we didn't talk much. 

But somehow, for all those years, I had avoided Latin America for the most part.  And it was a mess.  Falling pesos, coups, strikes, price controls, wars, drug cartels, lousy airplane service, kidnappings.  Not exactly where a kid from the Corn Belt wants to spend his time.  And I didn't speak Spanish, or Portugese.  I was absolutely the worst choice for the job.  And a lot of the guys down there didn't like me because in an earlier job I had to bug them for reports.  And nobody likes reports.

And then there was the topper-Sardines.  For some reason Quaker owned the largest sardine factory(?) in the world and it was smack dab in the middle of Rio de Janeiro, right off the bay.  We had a fleet of fishing boats and then the factory.  I had never seen it, didn't want to see it but I sent it a lot of money because it was bleeding cash.

But the stars were aligning.  The head of Latin America had just resigned to be the second guy at a leveraged buyout which turned out to be a disaster but so was he.  A bit of a bomb thrower.  If you think corporate dealings are all pretty adult, think again.  As a beginning analyst I was in a meeting with this guy and my then boss, a British educated Brahmin Indian, who thought he was pretty smart.  And he was.  The head of Latin America kept insisting that he was making a million dollars in Brazil.  Which was true.  My boss was pointing out, louder and louder, that it was costing the company $100 million in assets to generate the $1 million.  Which was also true.  This was getting to be a pretty hot arguement and I was trying to fade into the wallpaper when the head of Latin America sighed and exclaimed, " You guys are going to give me a heart attack."  My boss shot back, "Can't happen soon enough for us."  Wow.  Latin America was hot.

And I was being thrown right into it.  But so was Pepe.  And Jim.  And Dieter.  A more woeful bunch you will never see as Pepe was now general manager and told to make money.  Jim was international controller and told to clean up the accounting--accounting in hyper inflationary countries is really difficult.  And Dieter was the factory guy--keep them running with no money.  And me--no more money for Latin America.  I had the easy part except telling a general manager from Argentina or Venezuela that he wasn't going to get any money can be physically dangerous.  Pepe had another problem--he was Mexican.  And Latins are the biggest bunch of racists on the planet and the group they love to hate is the Mexicans.          

And off we went to Rio to fix the biggest problem of all-the Sardines.  A bit of background and I'm not an expert here but the Norwegian sardine sets the standard for all sardines.  Go into a grocery store and you will find, if you look hard enough, the sardine section which will consist of flat cans, tins to the Brits, about six inches long, four inches wide.  They will have a little key to take the top off and there will be a nice, quaint, cute picture of a sea captain painted on the can.  Looks like something out of Sergeant Pepper.  And they are expensive.

So we land in Rio, jump in the car and head straight for the sardine factory.  Tour the fishing boats and then the processing sheds.  My idea of hell.  A block long building, corrugated metal roof, no walls, a station every five feet made up of a sink, a table and a knife.  And women standing there in white uniforms, gutting fish.  I would last about five minutes.  But I did notice that our sardines were different than the the Norwegian sardine.  A lot bigger.  Like a foot long and looking more like a trout than a sardine.  The Brazilian sardine is the Barry Bonds of the sardine world.  And we were cutting them up to fit in those little cans.  With the cute little picture of Sergeant Pepper painted on the front.

Why?  Because that's the way we always did it.  Latin Americans, like North Americans, have inferiority complexes and tend to do things the old fashioned way.  Plus in markets with a very large class with no money and a very small class with lots of money, the producers go after the small class with a lot of money.  Which was our strategy.

And the sardines were piling up.  Pepe convened the meeting and the Brazilians started bitching about inflation, currency devaluations, price controls, and so forth.  Pepe listened and then asked something along the lines of "What's next?"  The general manager started talking about inflation, currency devaluations, price controls, and so forth.  Pepe said something along the lines of "I've heard that and we can't control that and I don't want to talk about things we can't control."  Silence.  Brilliant.  Pepe's first rule--facts aren't problems.  They are facts.  Find a way to deal with them.  And quit bitching.

More silence.  And I was falling asleep.  Meetings like these after 13 hour plane rides are no fun.  And more silence because the Brazilian managers had slid for years blaming inflation, currency devaluations, and price controls for their problems. 

Finally, Pepe ended the meeting.  And he ended it like this.  He said, "Somebody in this stupid country (he actually said stupid) is making money.  Find him and do what he is doing."

And we left.  Tomorrow, the can.

 

Not Exactly

Got this in response to You, Inc.  You, Inc. was a post on the tax advantages of owning and running your own business.

"Great post. I've been thinking about this recently also. So I assume you have your own business?  Can you take a post and explain to us the entire process and what your business does to try to make a profit?"

Love the beginning, then it goes downhill.  The poster assumes that me, the postee, has my own business.  And I do but probably not in the way the poster believes. 

So,  this disclaimer.  Whatever success I have had, whatever money I made, I made working for The Man.  Yep, corporate guy for 25 years until I shot it out with Cheney and his gang.  And one thing for Cheney, he shoots straight.  Just ask his lawyer friend. 

But I had the good fortune during those years to be around a few very smart people and a lot of really dumb ones and saw a lot of dumb mistakes and some really brilliant moves.  I also got jobs that included evaluating new products, financing start-ups, helping bail out really sick companies and watching companies revitalize themselves.  I never had to put my money on the line but I saw people that did and learned from them.      

The poster continues "I've been thinking about this recently also."  Who doesn't?  Probably sitting in a kind of dull job thinking "If I ran this place, boy, would things be different!" and that is good. 

"Can you take a post and explain to us the entire process and what your business does to try to make a profit?"  Yes, children, gather around and I will tell you how to make a million.  And in one post.  Just kidding. 

But first, let's look at what everybody thinks about when they think about their own business.  My picture is of a benevolent despot, adored by his employees, has a niche product with pretty good margins, and drives home, or the club, every night about 4:30 in his vintage Austin Healey 3000.  Which is exactly what the Steve Martin character did in "Father Of The Bride."  And he came out in that movie as pretty much a bumbling idiot.

Your tastes may run more to reeling back time and starting that coffee shop selling way over priced coffee or buying an operating system from IBM for peanuts and starting Microsoft or being in that garage with Steve and the other guy dreaming up Apple.  The old "Why didn't I think of that?" school of entrepreneurship.

Can't go back in time though.  But the reader's question remains--"explain to us the entire process and what your business does to try to make a profit?" 

So enough beating around the bush.  The secret to success in owning your own business is 1) selling a product or service for 2) less than it costs to make that product or provide that service and 3) reinvesting in the business.

Knew you wouldn't like that.  That's why it took so long to get here.  I hate to disappoint.  And I hear the delete button getting slammed as we speak. 

But that is the truth.  We called it the Checkbook School of Finance.  Because running a business is like running your life.  You get paid and you pay your expenses.  Hopefully, have a bit left over to invest.  If you do, you are a successful business.  If you have credit card debt and car debt and school loan debt and rent debt or house debt and a significant other that spends money like a drunken sailor or you spend money like a drunken sailor, then you are not a successful business. 

But this is so dull.  And so obvious.  I realize that so tomorrow will begin with some true life success stories and real life disasters to illustrate the process.  Tomorrow--The Sardine Man of Sao Paulo.

The Two Martini Lunch

In last Friday's post I mentioned the Two Martini Tax Act.  A number of readers, well, two actually,  asked for further elaboration.  First, there wasn't exactly a Two Martini Tax Act and it wasn't two martinis, it was three, and it became part of the lexicon because of this quote by presidential canditate Jimmy Carter in a debate in 1976.  So get in the Wayback Machine and set the dial for 1976.

"Another one that is very important is the business deductions. Jet airplanes, first-class travel, the $50 martini lunch--the average working person can't take advantage of that, but the wealthier people can."

(I don't know if younger readers are familar with Professor Peabody, Sherman and the Wayback Machine but for those who are not, they are part of the 'Rocky and Bullwinkle Show.'  The original, not that lame movie a few years ago.  Every episode Sherman and the professor would travel back in time and visit some historical event like Shakepeare writing 'Romeo and Zelda' which Sherman, of course, changed to 'Romeo and Juliet.'  Don't know about anybody else but I think I became a history major primarily because of the Wayback Machine.)

Back to the debate.  First, Jimmy's grammar wasn't very good and, two, the $50 martini lunch somehow morphed itself into the "three martini lunch."  And $50 for lunch was a lot of money back then. 

But what Jimmy was really saying was 1976 speak for 'tax breaks for the wealthy' with every Democrat channelling Jimmy ever since.  Not necessarily bad because Jimmy was right, the tax system was a mess.  The highest marginal tax rate was 50% for individuals offset by tons of dubious 'loopholes for the wealthy' like land deals, cattle deals and futures, oil deals and deals in general.  Deals were being done for tax purposes only which is the stupidest reason to do a deal.

The little guy got some breaks as well but they were also misdirected.  To offset the high marginal rate just about every kind of tax and interest charge was deductible.  Deductible items included auto loan interest, credit card interest, student loan interest, and sales tax.  The obvious reaction to this was that everybody loaded up on debt because they got a deduction.  Told you it was screwed up.   

But tax talk makes you thirsty, and bored.  So let's take a break and look into the martini as a drink since I've never had one.  Let alone three at a lunch.   

The basic martini recipe is

6 oz. of gin

5 drops of dry vermouth

2 small twists of lemon rind

2 olives

Wow.  Three of those at lunch and you wake up in a month.  Assuming you wake up.  Three drinks times 6 ounces of gin.  That's over a pound of gin.  I think.  And leads to situations as put down in verse by Dorothy Parker. 

"I like to have a martini,
Two at the very most.
After three I'm under the table,
after four I'm under my host."

For those that don't know Dorothy Parker she was a 1930's writer and columnist that is famous for the saying, "Men don't make passes at girls that wear glasses."  Sexist but kind of funny.

Back to taxes.  And Jimmy won the election.  Not because of tax reform but because Gerald Ford pardoned Nixon.  And then Jimmy really screwed things up resulting in double digit inflation and double digit interest rates and a really upset population.

And along came the Three Martini Lunch.  Resurrected by none other than Ronald Reagan.  Dutch, as he was known at our house because my dad went to college with him, knew even better than Jimmy that the tax system was screwed up and he set about to fix it.  Well, first, he had to have a recession to get rid of inflation and high interest rates but after that he rolled out the Big Martini to take the hit for the tax changes. 

And here is what he did, along with some help from some powerful Democrats.  (Try that today.) 

He chopped the top tax rate from 50% to 28% and reduced tax brackets from 14 to 2.  He eliminated most deductions. 

And he whacked the Three Martin Lunch which is why when you go to Schedule C you will see Line 24B--Meals and Entertainment and the Line 24C--Enter nondeductible amount included on line 24B (see instructions).  The nondeductible part is the martinis.

What Dutch knew instinctivly was that there had to be a shared sense of sacrifice and if some people thought giving up martinis at lunch was a sacrifice, it was good enough for him. 

And he won.  And the economy went on a twenty- year tear, thanks to sacrifice of some gin and a few olives.

You, Inc.

The major difference between you as an employee and you as a business owner is that as an employee your income is taxed and then you pay your expenses with what is left over.  As a business owner, you pay taxes on the income left over after you pay expenses. 

As an employee of a company, you get paid, say, a $100.  Then you pay Federal income tax, state income tax, local income tax, Social Security tax and Medicare tax.  With the $55 you have left, you have to pay everything else. 

But let's assume you have a business and your tax return will look something like this:

Sales

minus Cost of Goods Sold

minus Advertising

minus Car and Truck Expenses

minus Commissions and Fees

minus Contract Labor

minus Depletion

minus Depreciation

minus Employee Benefit Programs

minus Insurance

minus Interest

minus Legal and Professional Expenses

minus Office Expense

minus Pension and Profit-Sharing Plans

minus Rent

minus Repairs and Maintenance

minus Supplies

minus Taxes and Licenses

minus Travel, Meals and Entertainment

minus Utilities

minus Wages

minus Other

minus Expenses for Business Use Of Your Home

Net Profit or (Loss)

It won't look pretty much like that, it will look exactly like that because that is Schedule C, Profit or Loss From Business, Form 1040, Department of the Treasury, Internal Revenue Service.  A bit intimidating the first time you do it but pretty easy after that.  And a good accountant can do them in their sleep.

But the main take away is that you pay your tax and Social Security on the BOTTOM number, not the TOP number. 

But, you say, I still have to make enough to live on and that is taxed.  That's true but a lot of the stuff you need to live on is, or will be or can be, part of the business and thus deductible.  And small business owners deduct a lot.

Take a look around at your cubicle.  But, first, get up and get a cup of coffee or some bottled water out of the breakroom.  Tax deductible to the company--the breakroom, the coffee, the bottled water.  You are reading this using the company computer, monitor, internet service--all deductible.  You like what you read so you print it out on your printer, staple it with your stapler, put it in the company mail--all deductible.  You have a business trip, take a limo to the airport, get on the plane, stay in a hotel, eat a lot of meals--all deductible.  (Meals are subject to some really dumb rules that have their basis in some really stupid thinking.  If anyone is interested in the history of the Two Martini Lunch Tax Act, let me know.)   And the convention is in Las Vegas, not Cleveland.  And the expense is tax deductible. 

So now you are home and you look around--coffee, bottled water, computer, internet service, printer, trips to the airport, cell phone, and maybe a home office.  And a car.  And property taxes, mortgage payments or rent.  Heat, gas, electricity, newspaper.  All deductible to some degree--if you owned a business.

"But I don't, you moron!" you scream.  Well, get one.  You don't have to quit and risk everything.  If you want to, go ahead.  But you could also start a part time business doing, well, anything.  The IRS doesn't really care what you do as long as you are serious about making a profit someday (don't quote me on this but I think you have to be profitable in 3 out of the last 5 years or something like that.  But that is open to interpretation as I don't think GM has been profitable in the last three years and they are still deducting stuff.) 

Let's say you keep your regular job and start a company selling Beanie Babies, or whatever, on Ebay.  After deducting postage, electricity, mileage at 48.5 cents per mile, your computer, your coffee, your bottled water, etc. you have a loss of $20.  That loss of $20 is netted against your income from your day job of $100 so you pay taxes on $80.  That's a tax break.

I am not giving tax advice.  Read the disclaimer to your left.  But business owners use the tax code to their advantage and deduct just about everything.  And some of it is not ethical.  I looked at a business for a friend who decided not to buy it because the owner only made $25,000 a year.  I got a look at the books and after adding back the owner's Mercedes, travel, country club dues, home lawn service, payments to her kids who never set foot in the place, and so on, the company turned about $90,000 in real profit.  The guy still didn't buy it.  I should have but wasn't interested.

The $90,000 lady is not who you want to be but you do want to use the system to your advantage and take advantage of what is offered.  The taxing authorities know that running a business is tough so they give you some breaks.  Take advantage of them.

Lady Madonna

Linking Paul McCartney singing about Lady Madonna and her kids and taxes because April 15th (acutally April 17th this year because the 15th is a Saturday) is coming soon is a bit of a stretch.  But Lady Madonna had a lot of kids and the Congress gives people with a lot of kids, a lot of tax breaks.  And I don't think that is fair, especially to young people.  At least, young people with no kids.  In fact, young people get basically no tax breaks at all.  Not that I can find anyway.

So if I were a young person I would revolt against the tax system and the Social Security system and the Medicare system as well.  Not sure what form the revolt would take but I would revolt because here is what a taxpayer with kids gets and you don't.  Note:  a taxpayer with kids may not qualify for the all the deductions and credits but since they have kids they at least have a chance.  Assuming you have no kids, you have no chance.

-A $3,200 deduction for each kid

-Credit for child and dependent care expenses

-Child tax credit

-Adoption credit

-Hope credit

-Lifetime learning credit

-Tuition credit

On the other end of the spectrum there are tax breaks for old people and blind people and disabled people.  All well and good if you have a lot of kids or are old or blind or disabled but not for you.

You don't get any of these and you pay for Social Security and Medicare which you may, emphasis on may, get some back in about 45 years.  That assumes the system is not bankrupt.  And most of you assume you will not see any Social Security money because, in a poll, the majority of 20 somethings thought they had a better chance of going to the moon then seeing any of their money from Social Security.   

And Social Security is projected to go bankrupt mid-century and the only way to avoid bankruptcy is to 1) reduce benefits or 2) raise Social Security taxes.  And go try and find a politician that is going to vote to reduce benefits.

But anyway, why belabor this stuff?  Only to illustrate that tax systems and government benefit programs are not run purely for financial reasons but also largely for political reasons.  Or more cynically, social reengineering purposes.

Take the tax system.  The purpose of the tax system is to raise funds to fund government so government can provide the services not provided by the private sector, primarily defense and interstate commerce, ie., roads.  But the tax system does more than that because the government, at the will of Congress, does a lot more than defense and roads and most of that badly. 

And who pays for it?  You do.  Which is the social engineering part.  Also, called income redistribution.  Or wealth transfer.  Or, more simply, take from the rich and, supposedly, give to the poor.  And you are the rich.  Don't think so?  The government does.  If you are single and make $29,050  you pay about 9% of that in federal taxes.  But if you make $29,051 you will pay 25% tax on that extra $1.  Along with Social Security taxes, Medicare taxes, state taxes, and local taxes, if any.   

Yeah, so what?  Most tax crusaders would now, here, go into an impassioned plea for a flat tax.  Good idea?  You bet.  Gonna happen?  No way.

Or an impassioned plea for Social Security reform.  Gonna happen?  George tried and look what happened.  Nothing thanks to a bunch of politicians on both sides scared to death of your grandparents. 

Or Medicare.  For reform, see Social Security reform above.

So what to do?  When faced with problems that are out of your hands, try and find things in your hands that you can control and they are:

Max out your 401(k) because if you're making over $29,050 and can shelter any of that you are immediately picking up 25% plus the return on the investment.  No 401(k)?  Do a traditional IRA or Roth IRA.

Buy a house.  Didn't I rail against that the other day?  Maybe in San Francisco but if you can find a deal, the IRS gives this subsidized industry a break by allowing you to deduct mortgage interest and property taxes.

But the big one is starting your own business, either full time or part time.  We will discuss those tax breaks tomorrow since we are closing in on April 17th.

How You Can Make A Million

Money isn't sex but if you are a personal finance magazine you have to make it sound like it.  The headlines that really annoy me are around tax time with screamers like "Slash Your Tax Bill 40%."  Open it up and read about getting a tax credit or deduction for buying a hybrid or replacing your windows.  Not what I want.  I want a tax scheme that is perfectly legal, totally liquid  and in a place like Bermuda so I can visit my money while on vacation, hopefully tax deductible.  Now there is an article I would read.  No such luck.

So I have become pretty skeptical when looking at magazines.  And have been cutting back on magazines as there is better content on the net and those stupid renewal forms don't fall out of your computer like they do out of magazines.  Have let Money expire especially after that lame issue about blogs.  Congratulations to all that got in there but that guy didn't do a lot of investigative reporting.  Hope that doesn't sound like sour grapes but you know what I mean.

Got Kiplinger's on Monday.  Headline-"How You Can Make A Million--We Reveal the secrets and step-by-step strategies of 12 who struck it rich" 

Oh, boy.  Story blurb--"You could marry rich, win the lottery, or, like these 12 people, have a goal and a plan for getting there."  Great buzz words like goal and plan.  Got the goal, what's the plan? 

The first profile was a lady in Dallas with a hi tech temp business.  Tip Number 1-Seize An Opportunity.  When the tech industry tanked and her company "was almost down to a liquidation plan," Nina Vaca bought out her partner and reinvigorated the business by changing its focus. 

I don't know a lot about tech and I don't want to get "almost down to a liquidation plan" but the next opportunity that walks by will get seized.  Just not sure I will know it when I see it.

The next of the 12 was actually four guys who started a web site and are making "big bucks operating an online repository for tasteless videos, silly digital pictures and sophomoric commentary, contributed mostly by college students."  The headline is "We Worked In Our Underwear."  Tip Number 2-Have a fallback.  Josh Abramson and Ricky Van Veen started their college-humor Web site while still in school.  "If you fail, you just go back to being students," say Van Veen.

Thanks for the tip, Ricky.  Just go back to school.  I'm sure my wife will go for that one.

Five down and seven to go.

At least this guy is interesting, at least to me.  52, techie contract worker, stressed out, loves trees.  The headline is "You Can Reach Any Goal."  A Dale Carnegie graduate, I believe.  Starts growing trees, makes a million in tech stocks, loses a million when the bubble bursts, makes another million off his trees.  There's a lesson in there somewhere.  Tip Number 3-Learn from your experience.  Dave Grotz's losses on tech stocks taught him a lesson about diversifying that helped get his tree business off the ground. 

Seems he could have read a better article about stock diversification in some magazine and not have had to go the tree route.  But he likes trees so that is ok.  The take away for me?  I'll have to think about that a little more.

Person number 4 is a song writer.  And a good one.  1,600 songs sung by the likes of Cher, LeAnne Rimes and people I've never heard of.  Seems this lady wrote songs, sold them to an agency and they paid her $300 while raking in millions for themselves.  So she started her own agency and kept the money.  The headline is "I Could Not Ask For More."  Should be "Cut Out The Middle Man."

Tip Number 4--Take a chance.  Diane Warren, a Grammy-winning songwriter who has composed dozens of top-ten tunes, maximized her earning potential by forgoing a salary and striking out on her own.

Take a chance, got it.  Or does she have a lot of talent that maybe most people don't have?  But the advice is forego a salary and strike out on your own.  That's not much of a plan.

The next guy is one of those Asian success stories.  Don't speak English but start a electronics company when you are four and sell it to Lucent and then watch Lucent go bankrupt.  Buy a sports franchise as a hobby.  Piece of cake.  Headline is "I tend to say less and do more."   

Tip Number 5--Forget stereotypes.  "I'm not a natural businessman, and I'm not motivated by money," says Jeong Kim, who sold his telecommunications company for $1.1 billion.  The key to success is "having a goal and the motivation to do something significant."

Of course he's not motivated by money.  He sold his company for $1.1 billion.  Actually I like stories like this but they don't enlighten me much as my sole knowledge of electronics is changing a light bulb and sometimes I have trouble with that.  But I will remember to get a "goal" and find the "motivation to do something significant."

The next headline is actually helpful.  "Trust In The Stock Market"  And these people actually have jobs.  Paul Cloud is an ex-engineer and now banker at JPMorgan Chase in Houston.  His wife, Doris, is a project manager for Hewitt Associates.  Two kids.  Have a portfolio in excess of $1 million.

Tip Number 6--Simple ideas work.  Investing regulary and living below their means helped Paul and Doris Cloud amass a million dollar portfolio before they were 50.

They did it by making it "a habit to save a portion of every paycheck, automatically funding their 401k retirement plans and adding an extra $1,000 a month to their mortgage payment. 

What?  No Goals, No Motivation, No Fallback, No Going For It?  These two are pretty smart and pretty boring.  And this is the first bit of good advice in the whole article.

The next couple run a coffeehouse in Chicago competing against Starbucks.  Something about finding your niche. 

I'll pass.  I'm still thinking about those smart people in Houston.

California Nightmare

I'm stumped.  Can't figure it out, never have figured it out, most likely never will figure it out.  It is California real estate. 

I have a sister, a good friend from high school, my investment advisor, and other colleagues that live in the San Francisco area.  I know nobody that lives in the Los Angeles area.  Well, a couple but one is so rich it doesn't matter and the other rents and two is not a very good statistical sample.  So we will concentrate on the Bay Area. 

My high school buddy, when asked about possible topics to cover, said "How about young people coming to grips with a million dollar mortgage?  A million dollar mortgage on a 1,600 square foot house, totally renovated but still 1,600 square feet for a million dollars.  And it sold."

First for the numbers.  A million dollar mortgage at 6.5% for thirty years is $6,320 a month.  Wow.  But get an ARM,  the realtor says.  Ok, a 5/1 is about 5.7% which is $5,804.  No, the bad voice whispers, go for interest only at 2.5% which makes a million dollar mortgage ONLY $3,951 a month. 

But no loan is going to be 2.5% for long and interest only loans are interest only for...I don't know.  Went to a couple of mortgage web sites and tried to find out but I'm probably not very good at this kind of thing or the answer is not readily available.  Probably a combination.  But one rule of finance--when you can't figure out the answer easily, you're not going to like the answer.   

So let's just say you pay interest only for a few years and then something happens.  The contract says now you have to pay full freight and you have to catch up.  Catch up means to make extra payments because you paid only interest before and now you have to start paying principal as well and to fit this all into a 30 year time horizon you have to pay additional prinicpal. 

And, by the way, interest rates are now at 9% for a 30 year conventional mortgage.  No way, you say, 9%, this ain't Argentina, you know.  Well, guess again because the historic rate is around 9%.  And don't fight history. 

Your payment is now $8,046 per month.  Not really, sorry.  The payment is actually $8,392 because you had the interest only for, let's assume five years, so now you have to pay back the loan in 25 years. 

Your payment went from $3,951 to $8,392.  Hope you got that big raise. 

And property taxes.  Proposition 13, which basically ruined the California school stystem, capped the property tax at 1% of assessed value.  So if you buy a house for a million dollars I guess your property tax is 1% of a million which is $10,000 a year so your monthly payment is now $9,225, or $110,704 a year.

Let's not even talk about insurance, or electricity, or water, or auto payments.  Or food.

But all is ok because you are living in San Francisco.

I told you at the beginning I don't understand this, this California real estate stuff.  I thought my sister was nuts for buying a house years ago in San Fransico, then nuts for selling that and buying a fixer upper in San Mateo and then nuts for buying a then rundown vacation home near Monteray and then...well, you get the picture.  And she made a lot of money.  Being a pretty good lawyer didn't hurt either.

Another argument for buying is that areas that have no more available land and are attractive to large numbers of inhabitants will continue to experience increases in house prices.  That may explain San Francisco.  It sure doesn't explain Las Vegas.

So, there you say, your sister made a lot of money so maybe that million dollar house will be worth two million in ten years, or next week.  And since there is no more available land, prices have to go up so buying makes sense.  Maybe.  I said I don't understand the market.  I admitted it.  What more do you want?

If you can afford a million dollar house, go for it. 

But if you can't, what do you do?  The traditional answers are rent, of course.  Or save up enough money so you can afford it.  If you do that then two things will happen.  The million dollar house will come down in price and you can afford it OR it will continue to go up in price and you will never afford it. 

Or you can move.

Maybe there is another answer out there.  The answer I always like is in Category 9-Buying A House Anytime For 30% Off.  I'm just not sure it applies to California.

I'm not sure that anything applies to California because I can't figure it out and that drives me nuts.  Not really because I don't live there.  But a problem without a solution drives me nuts so guess I have to remember what Sharon said--a problem without a solution is not a problem.  It is a fact. 

Nature Abhors A Vacuum

Program Note:   Carnival of Investing is up at Free Money Finance http://www.freemoneyfinance.com/2006/04/carnival_of_inv.html

Take a look.

I sang the praises of Forbes magazine last week but there is one edition I ignore--The Richest People In The World. 

Rich people don't fascinate me because I'm not going to be one and most of them made their money the hard way--they inherited it.  Or they made it in Singapore real estate.  Boring to me.  Also I can't fathom having a billion dollars.  It looks so small, a personal fortune of $1.2 billion.  That's it?  A measly $1.2 billion?

But I decided to experiment this year and see if I could find a billionaire I could like.  A guy or gal to sit down with, have a beer, shoot the breeze.  AND I found him.  James Dyson, the inventor of the Dyson vacuum cleaner.

First, I like inventors.  I was fascinated with Thomas Edison as a kid.  But having no talent for inventing things I dropped it.  Second, Dyson lived off his wife, an art teacher, while he came up with his first invention.  That takes real confidence because most men feel this need to plunge in and provide and thus end up in dead end jobs and tons of debt.  Old James sat back and took his time while the wife brought home the paycheck.  And I bet she doesn't regret it.  Third, he looks at the world in kind of a weird way like taking a product virtually unchanged since the Egyptians were building pyramids and making it better.

Because James Dyson's first invention was the wheelbarrow.  I mean I like the vacuum cleaner and glad it made it on 'Friends' and 'Will and Grace' but a wheelbarrow.  How cool is that?  And he got the idea from something that was bothering him which leads us to the old saying 'Necessity is the mother of invention.' 

The story is that James and his wife bought an old house and started fixing it up.  Been there.  And, of course, James got a wheelbarrow.  James is probably kind of uncoordinated because a wheelbarrow is a bit tricky but most people get the hang of it pretty quickly and just learn to live with the tire tracks and the occasional over turned load of cement or dirt or rocks.  Like I said the thing is basically unchanged since the days of the pharaohs.  But not good enough for James.  He didn't like that rut stuff or turning over stuff one bit and solved the problem by replacing the rubber wheel with a big plastic ball.  And he made the barrow part out of plastic instead of metal so concrete wouldn't stick.  And, of course, I said and millions of others said "Why didn't I think of that?"

Well, we didn't and it didn't seem to matter because the world ignored James.  Who needs a new wheelbarrow?  said the UK equivalent of Home Depot, Lowes and Garden Ridge.  Ho hum.  This is nothing new, it happens all the time.  You guys may be too young for Cabbage Patch dolls but it was a huge hit 25 years ago for some toy company but it wasn't for our toy company because our toy company turned it down.  Along with every other toy company in the Western world except for one.  And remember that guy at Decca records that turned down the Beatles.

James really has a great wife because then she footed the bill for newpaper ads, really cheesy ads, to sell the wheelbarrow directly to consumers.  Either she is great or was on drugs as you can hear the conversation.  James says "Let's take all our savings and borrow against the house and borrow from Mom and Dad and put ads in newspapers to sell wheelbarrows."  James wife says "Wonderful, dear, even after being turned down by every retail outlet in the British Empire I think it's a great idea."  She didn't even ask about how to put a wheelbarrow in the mail.  I would have. 

And James and Mrs. Dyson made a fortune.  Which led to another problem.  It seems making wheelbarrows creates a lot dust so James invented, all together now, a vacuum cleaner.

One thing leads to another.  If James and the wife hadn't bought the crummy old house and James hadn't gone nuts flipping the wheelbarrow he wouldn't have built a new one and created a lot of dust and then had to invent a vacuum cleaner.  And he wouldn't be on Forbes list of The Richest People In The World. 

So get out there and start doing stuff and getting one thing to lead to another. 

The whole story can be found at http://workingfromhome.allinfoabout.com/dyson_pt1.html