Ask Uncle Bill

Don't Reinvent The Wheel

Note to Readers:  The blog world has spawned a bunch of 'carnivals' or accumulations of blogs on various subjects.  See the one below for a circus tent full of articles on investing, including mine. http://www.canadiancapitalist.com/2006/06/11/carnival-of-investing-26

Got this from George commenting on "Many Americans May Struggle In Retirement"

BEEN RETIRED FOR A LITTLE OVER 2 YEARS.$800.00 PENSION PLUS $12OO. FROM SOC SEC.1000 SQ FOOT HOUSE WE BUILT 5 YEARS AGO IS PAID FOR.WE MOVED OUT OF THE CITY HIGH TAX AND CRIME AND MOVED TO MOUNT AIRY NORTH CAROLINA,A SMALL TOWN IN THE MOUNTAINS.WE NEED VERY LITTLE TO LIVE A VERY NICE LIVING.WE GAVE UP THE COUNTRY CLUB BOAT BIG HOUSE AND HIGH LIVING.WE HAVE NO SAVINGS WE SPENT THAT ON THE SMALL HOUSE. WE HAVE MEDICARE FOR OUR HEALTH NEEDS AND A $200 DOLLAR A MONTH INS POLICY TO COVER OUR DRUGS.I CAN'T UNDERSTAND WHY PEOPLE SAY YOU CAN NOT LIVE HAPPY ON A LOW INCOME.WE LOVE IT

Let's dissect this thing.  Been retired for a little over two years.  Good for George and wife, I assume.  Been doing it for two years so the system is working for George.

The Georges are living, quite well it appears, on $24,000 a year.  If they can do it, you can do it. 

1,000 square foot house.  Kind of small but I've been in a lot of New York apartments that were smaller.  And smaller is the way houses are going (everybodys but mine).  Just go to the book store and check out the house section.  Small is the way to go.  Built the house five years ago so I guess the place is not going to fall in.

Doesn't sound like they miss the city.  Not sure which one but all cities have crime and high taxes so it doesn't matter. 

And relocated to wonderful Mount Airy, North Carolina.  Do people, young people, know or care about the Andy Griffith Show with Andy, Opie, Barney, Otis, Gomer, and Aunt Bee?  I still see it flipping the channels and it was pretty good but not sure if it is now well known.  Well, anyway, Mount Airy, NC was the model city for Mayberry.  I'm sure the town is not the same as it was 40 years ago but may be as George makes it sound pretty good.

"Gave up the country club, boat, big house, and high living."  Sounds like a line from the Green Acres song.

No savings but no mortgage either. 

Most of you guys don't qualify for Medicare but being young, you probably qualify for cheap, high deductible medical insurance.  If you ever catch yourself rationalizing staying at a job because of the "benefits" you better be terminally ill or seriously re-evaluate your priorities because 'benefits' are no reason to waste your life away.  Something can always be worked out. 

"I can't understand why people say you can not live happy on a low income.  We love it."  I know why.  Very few people feel they can go 'down' in life.  Many view it as a sign of defeat.  I don't think so and neither does George. 

If you are miserable in your job or your city, think about what George did.  You may not do it today but you should start planning for it today.  Tomorrow we'll start talking about how to change your life.

And the first step will be to find somebody like George.  George has done all the heavy lifting, just do what he did.  No reason to reinvent the wheel.

The Uncluttered Mind

Read a Money magazine article that was actually pretty good.  It was titled Hot Hands, Hot Picks which is actually a horrible title but most titles are horrible. 

I don't really care about the individuals but more the strategies for picking winning stocks.  Because if you can pick winning stocks, you can pick winning anythings because good decisions are based on logical thinking. 

So let's look at what the article has to say.

Ride Overseas Tailwinds.  In other words, global investing.  Not exactly earth shaking but, again, logical thinking is rarely earth shaking.  This manager looks for interntional companies that don't face a lot of obstacles like oil companies operating in Nigeria.  Also be realistic.  When I was starting out I asked a very wise treasurer why he allowed the company to operate in Latin America which was pretty volatile back then.  He told me he expected a 15% return from the Latin American division.  He usually got it but with some volatility like one country doing 100% and another losing 85% which generated his 15% return.  I didn't believe him at the time but after watching the market for about ten years and then being responsible for Latin America I came to agree with him.  He wanted 15% and wasn't overly concerned about how he got it.

Focus On A Few.  This isn't focus on a few companies.  It is focus on a few statistics, or metrics, that may, key word here, may reveal undervalued stocks.  The manager tries to find companies with high returns on capital (Return on Invested Capital ROIC) and high earnings yield which is profits divided by stock price.  Both statistics are easy to figure out.  Actually you don't have to figure out the first one as some company financial analyst does it for you.  Just go to the company website or financeyahoo.com and look up the company.  The other calculation is easy--divide 100 by the Price Earnings ratio.  If a company has a PE of 20 it has a yield of 5% which you can compare to other investments.  A PE of 15 is a yield of 6.7% and so on.  The PE ratio can be found on any financial website or the newspaper if you still read newspapers.  Beware--the two statistics are starting points, do more analysis after you figure out if the stock is worth looking at.

Know The Value Of Cash.  This is the most important one.  There are three financial statements that are critical--the balance sheet, the income statement, and the cash flow statement.  Everybody studies the first two but most people don't study the third which is the most important.  You can't fudge cash.  Well, you can but its harder than playing around with the income statement and balance sheet.  I asked an accountant that I respect (something wrong with that statement) if a really good analyst could have figured out the Enron scam from the cash flow statement.  He said yes but it wouldn't be easy.  But you could do it.  So study cash flow.  If you see a bunch of extraordinary items, stay away.

Go For Bargains.  Love this one.  I love trash and good deals.  Check them out but be sure you have all your financial skills honed.  Also your logic skills.  Some bargains are bargains because their product is our of favor in this rotation or they had a problem that has been resolved.  But some 'bargains' are cheap because they are rotten companies.  Figuring out the difference is the fun part.

Spot Growth Early.  Also known as figuring out the next big thing.  This is tough and everybody is trying it.  I like finding bargains.  But that's just me.  Young people gravitate to trend spotting since they always try new things.  So if you love a new sound product, restaurant, shop, cell phone, band, whatever, check it out and maybe get in early.  Buy what you like.  It worked for Peter Lynch.  If you don't know who Peter Lynch is, find out and read his books before you do anything.

I didn't like the last two pointers so will stop here.  It is enough.  It is all you need to start becoming a wealthy stock picker.

And always keep an uncluttered mind.  Good decisions cannot be made if you have overloaded on useless facts and statistics. 

Many Americans May Struggle In Retirement

That was the headline in the business section this morning.  No shock there, most Americans struggle in non-retirement as well.  I guess they mean financially.

So let's look at the article.  It says a 'study' reports that "almost one in two American families are headed toward years of financial struggle in retirement."  OK.  You could probably find one in two American families that say right now life is a financial struggle.  But anyway, the 'study' goes on to say that "workers are unprepared for cuts in pension and Social Security income."  I think it would be hard to find people that are not unprepared for cuts in anything.

"The Boston College study presumes that most people need to replace 65 percent to 85 percent of their annual income to stay secure in retirement.   But 43 percent of US households will fall at least 10% short of that goal."  Note:  Most retirement books and web sites assume you have to replace 80% of your preretirement income.  A recent Forbes article put the real number at less than 70%. 

But so what?  We all seem to be doomed to a retirement of tuna fish and Ramen noodles. 

Maybe not.  But first more bad news because the article goes on to say that "Baby boomers born between 1946 and 1964 are generally in better shape than members of Generation X, born between 1965 and 1972...That's primarily because younger workers face diminished Social Security income and fewer will have pensions." 

Generation X?  Who cares about them?  If they're going to get screwed, it can only be worse for you guys.  Because the report goes on to say--

"The Boston College report said the grim outlook is being driven by a variety of factors.

1) Social Security will replace a smaller share of people's pre-retirement income in the future.

2) Companies have abandoned costly traditional pensions, which guarantee monthly income for life, in favor of contributions to individual 401(k) plans overseen by the employees, which yield less.

3) People save too little.  Most of the working-age population saves virtually nothing outside of their employer sponsored pension plan, according to the report."

What a way to start a morning. 

First, I take exception to point 2.  A 401(k) that has grown untouched for 25 to 35 years will yield a lot, probably a lot more than a pension.  I do agree with the conclusion--unless you work for the government, pensions ain't going to be around. 

The report does hold out one glimmer of hope.  And here it is "Saving more can help a person's long-term outlook, particularly IF THE ADDED SAVINGS START WHEN A WORKER IS YOUNG.  If workers consistently set aside 6% of their paychecks (with a 3% employer match) invest prudently, and leave the money alone, they should have enough."

So we have to go through all that angst to get to the bottom line--save 6% and you will be ok. 

And they are right.  For more go to Category 12 Investments--All You Need To Know. 

But get going.  The clock is ticking.

When An Index Fund Is Not An Index Fund

Just when I thought I had it all figured out somebody comes along with something new, or a twist on something old.  Check out Category 12-Investments, All You Need To Know.  The portfolio that you set up is 75% S&P Index Fund, 15% Small Cap Index and 15% International Index.  And you are done for at least ten years.  Simple enough.

One thing has always bothered me a little bit about the portfolio-you are buying the losers along with the winners.  Over your time horizon (20 to 40 years) that really shouldn't matter as winners become losers and losers become winners or they disappear through merger or bankruptcy. 

And they work.  The Vanguard 500 Index has beaten 60% of the actively managed domestic stock funds over the last ten years which means the index has beaten 6 out of 10 smart people with MBA's  and big offices and big salaries.  Which is why index funds usually win--they have low expenses because they don't pay big salaries or spend a lot of money on research. 

But people can't leave a good thing alone and have come up with a thing called the Sector Neutral Index Fund.  Pay attention here.  A Sector Neutral fund tracks the Sector Weightings of the S&P 500 Index but not the individual stocks.  Huh?

Ok, say the automotive section of the S&P Index is 21% made up of 7% GM, 7% Ford and 7% Daimler Chrysler.  (Bad example already as Daimler Chyrsler isn't even in the Index being a German company but you get the idea.)  So the manager of the fund puts 21% of his/her money into the automotive sector but instead of buying the GM and Ford dogs he puts all the money into Daimler Chrysler.  He still has an index (21% of his money is in automotives) but he doesn't own the stocks he thinks are going to underperform, or possibly go bankrupt.

Another example is technology.  A very volatile sector but dominated by Microsoft because of the companies large market cap.  So a manager buys the sector (20% of the Index) but doesn't buy Microsoft which means he can buy a bunch of other companies in the index or even, with some funds, buy companies not big enough to be in the index.  In the end, the manager has 20% in technology but with a lot more volatility since Microsoft isn't in the mix.  Volatility means both up and down so this is a play on whether the manager knows what he is doing.

Which gets us back to the core idea of index funds.  Buying index funds means you don't know what stocks are going up but you believe the market will go up more than other asset classes because it has for the last 100 plus years.  Picking a Sector Neutral fund means you are betting the manager is a bit smarter than the market.

In your situation I wouldn't even bother.  Stick with the regular indexes.  But if you have some extra money check out

T Rowe Price Capital Opportunity

Turner Core Growth II

Pioneer Research-A

Vanguard Growth and Income-INV

Don't know much about any of them and you will pay more in fees but the funds may have a place in your portfolio.  Maybe not now, but maybe later.

 

Hurricane Alley and Insurance

Hmmm.  Hadn't thought of this.  A note from Chaney on Category 10--Insurance

Your blog provides very helpful information to those who are just beginning in life or those who have hit a slight bump in the road. However, your suggestion about not obtaining Renters Insurance could be costly especially if you live in areas where hurricanes and tornadoes are a part of life. Yes, your personal belongings of value may be limited, but at least you would not have to start over at the end of each storm season and it does provide some peace of mind. This coming from someone who is just starting out and happens to live in the heart of hurricane alley "Sunny South Florida"

Like I said, hadn't thought of that but my experience with hurricanes and tornadoes is somewhat limited though my car, with me in it, was reduced to looking like a golf ball due to a massive hail storm a few years ago. 

We were in Florida and Louisiana  in March and insurance did come to mind.  Like in "Who is paying for all this?"  The condo we were in was near Pensecola and pretty much knocked out in 2003, I think, and drove over to Biloxi which got knocked out by Katrina.  (Saw a cute little sign--You Loot, We Shoot)  In Florida, the construction was booming and in Biloxi the clean up was just about finished.

But back again to "Who is paying for this?"  because I don't know.  But I want to so if anyone has any insight let me know.  Most people I talked to assume that 'insurance' will pay for it.  Yeah, maybe once but I would think those insurance guys would be sitting there looking at all the money going out the door and someone would say "Hey, maybe insuring condos right on the beach, right in the line of a hurricane is not such a good idea!" 

Or then does some smart analyst pull out the hurricane forecasting machine and says 'There will not be another hurricane like this for a billion years so let's insure everything."  Or does somebody just raise rates to cover the damage.  Don't see how that can happen as the amount being paid out appears huge. 

Or, and I hate to think this but in the back of my mind a little voice is asking "Is the government paying for this?" or put more directly "Am I paying taxes so some clown can sit in his condo on the beach and if it gets wiped out by a hurricane, he gets bailed out by the government?"  Hope this is not the case but I can't figure out why any insurance company would take the risk.

Anybody know out there?

The Land of the Rising, Sinking, Rising Sun

You probably don't care about this but you should so I'll go into it.  Japan.  Back in the 1980's when you were just getting started you did not notice that the US was going down the tubes and Japan was going to rule the world.  It was like they won World War II. 

There was an oil crisis so little Japanese cars, like today, were the rage.  There were tons of books about Japanese quality and Japanese management techniques and culture that we, being the US, should emulate.  The Japanese love land since they have so little of it and they ended up paying huge amounts for Tokyo real estate along with Rockefeller Center in New York and the famous Pebble Beach golf course in Monterray.  Which was ok with us because most of our cities were going to turn to rust and blow away.  Starting in Chicago and moving east the industrial belt became the Rust Belt and doomed.  Or so we thought.

And it didn't happen because Japan imploded.  Real estate busted.  We bought back our real estate assets for pennies on the dollar.  Their stock market tanked and ours went up.  Ours went up because we did not emulate the Japanese methodology, we stole it and changed it and made it work, for the most part, for us.  We cut costs, improved quality, and outsourced.  Not all good and very painful but the Japanese forced our system to the wall and we reacted, finally.

They didn't.  The Japanese stock market went down about 75% and the economy shrank because their people started saving everything for a rainy day.  And their cost structure got out of whack because they had life time employment which means no new jobs for young people and stupid make work jobs for old people.

Finally, change is constant and Japan is changing for the better.  The Japanese growth rate is now near ours at over 5%, the central bank has raised rates from zero because there is some consumer demand, and unemployment is down meaning more jobs for young people who spend money.  The stock market is up 50% from a year ago but still more than 40% below its all time high.

One investment manager likes Japan because (and pay attention here) "he likens today's Japan more to the U.S. of 20 years ago than to Japan itself in the high growth years following World War II."

Hmmm.  Twenty years ago.  The US was in the tank 20 plus years ago.  And if you bought in to the US stock market then you would have had a 20 year upside run.

The lesson here is not so much about Japan but looking for markets that nobody is looking at.  They may not be such good markets but they may be changing for the good and they may be a bargain.  "Buy when the blood is running in the streets." 

You usually won't find a bargain at Nieman Marcus.  You may at Ross.  Stocks and investments are no diffferent.  Just look at Japan.

Taxes--Country by Country

There will be a lot of debate in the next few years over taxes.  Some tax cuts expire in 2010, I think, and two--the 15% tax on capital gains and 15% tax on dividends-- have been extended for at least two years.  People get all exercised about taxes with the fat cats not paying their share (actually 5% of the taxpayers pay about 50% of the taxes) or somebody yelling about taxes killing them.

So when things get complicated, I go looking for simplicity.  And found it.  I have long held the premise that the higher the tax rate, the lower the productivity.  And I am right--nine times out of ten.  Forbes (another unabashed commercial for the best business magazine) has compiled the Tax Misery and Reform Index.  Basically, it takes a countries various tax rates and adds them up.  The components are:

-Corporate Income Tax

-Personal Income Tax

-Wealth Tax

-Employer Social Security

-Employee Social Security

-Value Added Tax or Sales Tax

Obviously, the higher the number, the higher the misery index.  And the winner is FRANCE with a misery index of 166.8.  Rounding out the top ten are:

Belgium

Sweden

Italy

Spain

Argentina

Greece

Germany

Brazil

Not exactly economic powerhouses.  There is one surprise as the list above totals only to nine.  The country that is actually Number 2 in the Misery Index is, and this is a total surprise, is China.  Forbes says China is up there because 'of its extraordinry social security and pension rates.'  I don't want to appear too cynical but China may have high rates but, in reality, nobody pays them.  Just a guess.  But the bottom line is that the countries with the highest tax rates are pretty much economic basket cases.  One could argue about Sweden and, while certainly not a basket case, it is not an economic powerhouse.

So if the top ten in taxes are not economic powerhouses, one would think the bottom ten would be and so let's take a look.

The top ten, with number 1 having the lowest misery index, and then so on are:

-United Arab Emirates

-Hong Kong

-Singapore

-Russia

-Taiwan

-South Africa

-Indonesia

-India

-USA (Texas)

-South Korea

Some pretty good economies and some with real potential like Indonesia, South Africa and Russia.  Direct links between taxes and growth are difficult because there are a lot of other variables.  But as one of my bosses put it, if the numbers go your way, use them. 

And I will.  Lower taxes make for stronger economies. 

And one final note.  Please note that USA (Texas) is number 9 in lower taxes.  USA (New York) was number 13 in higher taxes.  Which means if you live in New York and want to lower your taxes, move.  Welcome to the Lone Star State.