Monday, March 30, 2009

Yes...Financial Planning can be Boring (but it doesn't have to be)!




Yes, financial planning can be boring! There... I said it. Although I happen to enjoy the topic and can discuss it for hours, most people find the issues both confusing and once again - boring.

We live in a world of instant gratification. Sad, but true. So, planning for anything several years into the future is going to be a challenge for most people. It is often said, individuals will spend more time planning a vacation then planning for their retirement. Unfortunately, the reality is one will last about a week and the other for 30 years!

It doesn't have to be this way. Planning starts with the first step - as in life. A fairly new concept in the planning world pertains to "Lifestyle Planning". Matching your personal beliefs & goals with your lifestyle. Finding enjoyment in each and every day through yourself and your surroundings is a key component. This reminds me of the old adage, "Wherever you go, there your are." Happiness & fulfillment start with you!

We often turn to financial publications for guidance. However, sometimes it's easier to get inspiration from a non-finance book. Both fiction and non-fiction books will have real life correlations. Sometimes a simple thought gets us to visualize our future goals.

As I read the book "This I Believe - The Personal Philosophies of Remarkable Men and Women" edited by Jay Allison and Dan Gediman, I am drawn to the individual stories and philosophies. The editors challenged the general public to write a few hundred words expressing the core principals that guide their life - their personal credo some would say (some writers are famous, others are not).

Here are a few excerpts:
  • If I have one operating philosophy about life, it is this: 'Be cool to the pizza delivery dude; it's good luck.'" - Sarah Adams
  • "I believe in the pursuit of happiness. Not it's attainment, nor its final definition, but its pursuit." - Andrew Sullivan
  • "I believe that what we often call survival skills is simply creativity at work." - Frank X. Walker
  • "I've always been an optimist, and I suppose that is rooted in my belief that the power of creativity and intelligence can make the world a better place." - Bill Gates

What's your "This I Believe" statement? Basically, what's important in your life? Use this as a starting point for your financial future. Education, family, love, career, sense of self, integrity & honesty are all good character traits. Remember, the first step is the hardest. You have to crawl before you walk and walk before you run. But, it all starts with the first step.



Wednesday, March 25, 2009

"The Millionaire Next Door"



"These people cannot be millionaires! They don't look like millionaires, they don't dress like millionaires, they don't eat like millionaires, they don't act like millionaires - the don't even have millionaire names. Where are the millionaires who look like millionaires?" Bank Trust Manager

Most people have it all wrong when it comes to how you become wealthy in America. The classic book, "The Millionaire Next Door" by Thomas J. Stanley and William D. Danko outlines the common denominators of America's wealthy. For many, it's hard to believe it is seldom inheritance, advanced degrees or even intelligence that builds wealth, but rather hard work, diligent savings and the ability to live below your means.

The seven common denominators amongst the wealthy include:

  1. They live well below their means.


  2. The allocate their time, energy, and money efficiently, in ways conducive to building wealth.


  3. The believe that financial independence is more important than displaying high social status.


  4. Their parents did not provide economic outpatient care.


  5. Their children are economically self-sufficient.


  6. They are proficient in targeting market opportunities.


  7. They chose the right occupation.




Who is the typical American millionaire? Here are some facts:


  • I am a 57 year old Male, married with 3 children. About 70 percent of us earn 80 percent or more of our household's income.

  • About one in five of us is retired. About two-thirds of us who are working are self-employed. Interestingly, self-employed people make up less than 20% of the workers in America, but account for two-thirds of the millionaires. Also, three out of four of us who are self-employed consider ourselves to be entrepreneurs. Most of the others are self-employed professionals, such as doctors and accountants.

  • Many of the types of business we are in could be classified as dull-normal. We are welding contractors, auctioneers, rice farmers, owners of mobile-home parks, pest controllers, coin and stamp dealers and paving contractors.

  • About half of our wives do not work outside the home. The number one occupation for those wives who do work is teacher.

  • Most of us us (97%) are homeowners. We live in homes currently valued at an average of $320,000. About half of us have occupied the same home for more than twenty years. Thus, we have enjoyed significant increases in the value of our homes.

  • We live below our means. We wear inexpensive suits and rive American-made cars. Only a minority of us drive the current-model-year automobile. Only a minority ever lease our motor vehicles.

  • As a group, we believe that education is extremely important for ourselves, our children, and our grandchildren. We spend heavily for the educations of our offspring.

  • We are fastidious investors. On average, we invest nearly 20 percent of our household realized income each year. Most of us invest at least 15 percent. Seventy-nine percent of us have at least one account with a brokerage company. But, we make our own decisions.

  • We hold nearly 20 percent of our household's wealth in transaction securities such as publicly traded stocks and mutual funds. But we rarely sell our equity investments. We hold even more in our pension plans. On average, 21 percent of our household's wealth is in our private businesses.

  • Most of us have never felt at a disadvantage because we did not receive any inheritance. About 80 percent of us are first-generation affluent.


Tuesday, March 17, 2009

AIG - Enough is Enough













I'm a capitalist at heart - always have been, always will be. However, I must admit this AIG news about bonuses being paid to senior management is disturbing.

Most executives have contracts and thus should get paid as per their agreement(s). Plain and simple. Major league baseball players receive their agreed up upon salaries whether they have a good year or not. However, they certainly don't get paid the incentive related compensation for not reaching certain goals (i.e. RBIs, home runs, playoffs, MVP, etc.). But, bonuses, incentives, stock options, etc. should be issued as a reward for a job well done. If AIG wasn't bailed out by the U.S. Government, the company would be bankrupt.

What's with the bonuses at AIG? The company didn't reach the playoffs. They're lucky the US Government bailed them out. The only losers in this whole scenario is the shareholder and the taxpayer. Something is drastically wrong with this scenario. The Board of Directors should have taken a stand and simply put their foot down and said any bonuses and/or incentive packages for 2008 will not be issued. End of story. No questions asked.

President Obama and NY Attorney General Andrew Cuomo are exploring 'legal avenues' as to how to rescind the bonus money. "The whole concept of a performance bonus is oxymoronic when it comes to AIG," Cuomo said. "It's adding insult to injury. Enough is enough."

In Washington, President Obama has similar sentiments. "This is a corporation that finds itself in financial distress due to recklessness and greed. Under these circumstances, it's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay, " Obama said.

"How do they justify this outrage to the taxpayers who are keeping the company afloat?" he demanded.

To put things in perspective, here's some stock market history on AIG. The stock traded as high as $70 in 2007. As of March 16, 2009, the stock is trading at $0.83. So, some quick math reveals a 99% decrease in that time frame. Once again, how does this type of performance warrant bonuses?


American capitalism is alive and well; however, AIG is not one of the shining stars.



Wednesday, March 11, 2009

Bernard Madoff: The Final Hours


Bernard Madoff could be facing his final hours of freedom. The disgraced money manager who is responsible for the multi-billion dollar ponzi scheme is apparently going to plead guilty today in a Manhattan District Court to 11 felony counts, including securities fraud & perjury. This could result in a 150 year jail sentence.

Wearing a bullet pro0f vest, Madoff appeared in court yesterday for the first time in two months. He conveniently waited for several hours in a conference room to avoid confronting angry investors while appearing before District Court Judge, Denny Chin, for what was to be considered a routine hearing.
Chin, will rule on the guilty plea Thursday and decide if Madoff should remain free on bail pending sentencing in a few months.

At least 25 Madoff investors have asked to speak Thursday under provisions allowing victims of crime to appear at a plea hearing. "There is no plea bargain here. Those victims who objected to a plea bargain no longer have a reason to object," Chin said.

This entire process is both fascinating and astounding.

Fascinating for the fact Madoff pulled off the largest securities fraud case in the history of the United States. Some will continue to argue he couldn't have done this alone. Time will tell if anyone else was involved and to what degree.

This case is also astounding for the simple fact Madoff remains under house arrest! Are you kidding me? How can someone accused (and now guilty) of stealing more than $50 billion dollars not be in jail? This could change tomorrow. But, there seems to be a double standard between blue & white collar criminals. I don't get it. The negative repercussions will be felt throughout the financial services industry for a long, long time. Regaining investor trust & confidence is no easy task.

Tuesday, March 3, 2009

Warren Buffet 2008 Letter to Shareholders

Well, once again the "Sage of Omaha" has spoken in his 2008 letter to shareholders. Always educational and insightful, Mr. Buffet cuts through the technical commentary to update shareholders on company developments and annual performance.

Here are the highlights (in my opinion) from his 2008 letter:

As the year progressed, a series of life-threatening problems within many of the world’s great financial institutions was unveiled. This led to a dysfunctional credit market that in important respects soon turned non-functional. The watchword throughout the country became the creed I saw on restaurant walls when I was young: “In God we trust; all others pay cash.”

By the fourth quarter, the credit crisis, coupled with tumbling home and stock prices, had produced aparalyzing fear that engulfed the country. A free fall in business activity ensued, accelerating at a pace that I have never before witnessed. The U.S. – and much of the world – became trapped in a vicious negative-feedback cycle. Fear led to business contraction, and that in turn led to even greater fear.

This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation. Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.

Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown. Had one occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.

Amid this bad news, however, never forget that our country has faced far worse travails in the past. In the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 211⁄2% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of challenges.

Without fail, however, we’ve overcome them. In the face of those obstacles – and many others – the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.

Take a look again at the 44-year table on page 2. In 75% of those years, the S&P stocks recorded a gain. I would guess that a roughly similar percentage of years will be positive in the next 44. But neither Charlie Munger, my partner in running Berkshire, nor I can predict the winning and losing years in advance. (In our usual opinionated view, we don’t think anyone else can either.) We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall.


In good years and bad, Charlie and I simply focus on four goals:

(1) maintaining Berkshire’s Gibraltar-like financial position, which features huge amounts of excess liquidity, near-term obligations that are modest, and dozens of sources of earnings and cash;

(2) widening the “moats” around our operating businesses that give them durable competitive advantages;

(3) acquiring and developing new and varied streams of earnings;

(4) expanding and nurturing the cadre of outstanding operating managers who, over the years, have delivered Berkshire exceptional results.

Thank you Mr. Buffet.... well said!