Archive for January, 2009

By now, you might have read that some credit card banks are scrutinizing the spending patterns of their customers and lowering credit limits based on where and how a customer is shopping.

In one scenario, I can imagine a bank looking at a person charging a few hundred dollars at a divorce attorney’s office and assume that the customer’s marriage is in trouble and the credit lines need to be pulled.

In another scenario, I can imagine a bank looking at a person charging a few bucks for resume or placement services and assume that the person is unemployed and pull credit lines.

The real damage however is consumer over-reaction to these policies that force credit card users to simply stop using their cards for fear of lowered credit lines which result in lower credit scores which in turn sets another cycle of lowered credit limits or increase in APR’s in a vicious downward spiral.

The net result is more damage to an already fragile economy as consumers stop spending for fear of having their credit scores decimated.

I’ve been a critic of Dave Ramsey a few times on my blog and I vowed not to speak of him again BUT I am beginning to come around to his world view on credit cards.   The credit scoring industry simply wields too much convoluted power in the grand scheme of things and at this point, the banks & credit scoring philosophy is damaging consumption and the economy.

Credit card banks and credit scoring agencies are completely powerless when consumers pay with cash.   There is no record or “trace” of where, how, when, and why consumers are shopping and that may be part of what we need to get this economy going again: fearless consumers.

With plenty of free time lately, I’ve been doing odd jobs around the house. Things that have been on a perpetual to do list for ages. One of the things I installed recently were motion detector flood lights. These are lights that activate when the sensor detects movement. I have four installed around the perimeter of our home but some of the bulbs had gone out in the lights so that when the lights came on they didn’t provide a great deal of lighting.

I went to Home Depot to pick up the bulbs and was shocked to find out each little bulb costs around $8.00. So purchasing three of these little bulbs cost nearly $30.00!  The manufacturer will make more money off the bulbs than the actual security appliance.   The motion sensor flood lights cost about $38 and the bulbs cost nearly as much!   This is similar to ink jet printers that cost $99 but whose ink costs $30+ every few months of use.

I have a business idea for a saavy entrepreneur out there, build a web system that shows the true cost of ownership for things like security lights and ink jet printer.    I envision a flash page where you select the printer or security light or appliance and the ancillary components and replaceable parts are listed along with the energy usage to display the true cost ownership.

Our fridge has a replaceable filter than I’ve come to find out cost over $20 to replace.   These appliances and gadgets are nickel and diming me to death!

I went to a place called the “city library” and found an amazing treasure trove of books, dvds, magazines, journals, internet and other stuff for FREE!  Since I’m now unemployed and preserving all cash possible, I decided to go with the kids to the library.  Actually, my wife suggested I take them to the library to return some books they had borrowed a few weeks ago.

I was actually amazed at how clean and friendly the place was for a government run facility.   The only thing missing were coffee machines and it would have been as nice as Barnes and Noble.   The last time I used a public library was in college and I still have bad memories of the cheezy 70’s furniture (note I was in college in the 90s), the bad smell from all the grad students who slept in the library, and the antiquated books and journals in the building.

The library is only about 1/2 a mile from my house but I wish more libraries were as clean and friendly as this one.  I’ll be hanging out there more often and might explore some other libraries in the future.

So I’m looking into the whole “frugal” lifestyle now that I’m unemployed. On Sunday I bought the newspaper and browsed through all the coupons to “save” a whole bunch of money when I went grocery shopping. As I flipped through the 30 or so pages of the coupon booklets I found ONE single coupon I could use.

Most of the coupons were for pet food (I have no pets), junk food (I don’t buy junk food), credit card fliers, variety of deodorizing products or plugins and other items I have little or no use for as an unemployed person.

So perhaps I missed something but I thought clipping coupons was suppose to save a great deal of money? How? Is there a secret stash of coupons that I’m missing? I would have been better off spending the hour I used up looking at the coupons in detail doing something else like reading the new Project Management Standard v4 book that just came out a month ago.

The single coupon I cut was for $1.00 off of two boxes of Post cereal. The cereal in question was indeed junk food but my kids really like it so I bought it anyway. Oh well, I guess I’ll take that $1 and buy a lottery ticket with it. 😉

I had the privilege of conducting a brief Q&A interview with Wade Slome, author of How I Managed $20,000,000,000 by Age 32 (available at www.Sidoxia.com). Please feel free to ask questions throughout the day as Wade will provide commentary. A random drawing will be held for a free copy of Wade’s new book, to enter simply leave a comment or question to enter the drawing.

Question: Wade, managing 20 billion by the age of 32 is fairly impressive, your extensive training and education is equally impressive, can you tell us what you feel were three most important experiences that got you to the point of managing such a large pool of money and brought you so much success?

Answer: There were a number of influences, but undoubtedly family encouragement along with the importance placed on education played a major role in my success. Beyond that, a quote that rings true for me comes from philosopher Albert Schweitzer who stated, “Success is not the key to happiness. Happiness is the key to success.” If you are passionate about your professional pursuits, then I strongly believe success will accrue to that individual over time. Fortunately for me, I found my passion in investing.

Question: It seems there is a great deal of advice to avoid the media and talking heads on TV lately, what alternative resources would you recommend today’s investor seek out to achieve better returns?

Answer: The society we live in today is geared towards instant gratification and short-termism. The “Cramer-ization” of America with the get-rich-quick trading strategies only hinders wealth creation and delays retirement. The best media sources come from individuals that have invested money, for long periods of time, and have been successful throughout economic cycles. It’s entertaining to listen to all the intellectuals opining about imminent Armageddon, but if you truly listen to the seasoned pros like Warren Buffett, Jeremy Siegel, Bill Ackman, Howard Marks, and other veterans, you quickly realize that periods like these are great for investing. Your audience would be much better served by reading a good investing book (no plug intended) rather than listening to a talking head spewing the headlines of the hour. Irrespective of investment style, the achievement of long-term superior returns comes from independent thinking, going against the herd, and as Warren Buffett says, “buying fear and selling greed.”

Question: There are still autopsies being performed on the cause of the current economic calamity but do you feel that more government regulation is needed to prevent future banking and economic crisis? If not, then what will help change the way Wall Street does business

Answer: Yes, heightened regulation is necessary, and we have already seen dramatic changes in our financial system. The fact that investment banks (i.e., Bear Stearns, Lehman Brothers, Merrill Lynch) that existed for generations evaporated in a blink of an eye is clear evidence regarding the need for increased transparency and regulation. Over history, the sentiment pendulum of government regulation swings from one end to the other, and we are clearly coming out of a period where regulation was sorely lacking.

Fear and greed have existed as long as humans have existed. For example, rampant speculation and manipulation took place in the “Roaring 1920s,” accompanied by margin lending going off the chart. The massive banking collapses occurring in the late ‘20s and early ‘30s led to constructive regulation, such as the Glass Steagall banking act of 1933 (separated commercial and investment banks) and the establishment of the FDIC (Federal Deposit Insurance Corporation for insuring bank depositors’ money).

More recently, over the last decade or so, we have seen a number of large schemes and frauds perpetrated (Enron, WorldCom, Canary Capital, rogue traders Nick Leeson [Barings Bank] and Jerome Kerviel’s [Societe Generale], etc.), and now you can add the Bernie Madoff scheme to the list. I can guarantee you, this will not be the last securities fraud or scheme we see or hear about. Greed and fear will always be a part of our financial markets and white-collar crimes will persist. Eventually, these scams are uncovered, people go to jail, lessons are learned, and productive regulation is implemented.

Question: Your new book offers advice on asking critical questions before selecting a financial adviser. Can you give us a sneak peek by sharing with us one thing a person should ask when selecting a financial adviser in today’s tough market conditions?

Answer: The most important question has three answers: fees, fees, and fees. If you are buying high ticket items like automobiles and homes, most people shop around and are not bashful when asking about price. So if you are potentially paying thousands in fees for an adviser’s services, then why not shop around? Unfortunately, you almost need to go to law school to read and understand the masses of fine print in brokerage statements and prospectuses. Make your adviser explain ALL fees in terms you understand, and if you get unclear or evasive responses, then I encourage investors to move on.
Your average broker may be charging you multiple load fees, management fees, 12-b1 fees, surrender charges, administrative charges, excessive trading commissions, etc. The less you spend on fees, the more you keep, the earlier you retire, and the more vacations and toys you can buy. The industry trend is shifting towards “Fee-only” advising. I’m obviously not the only “Fee-only” adviser around, but the transparency and clarity around this fee-structure is vastly superior in my opinion. Unlike most brokers, as a “Fee-only” adviser, I have no products to sell and no inherent conflict of interests in the portfolio management process. Under the “Fee-only” structure if the investor portfolio depreciates in value, then the adviser’s paycheck goes down in sympathy. Therefore, both the client and adviser have an incentive to create wealth. On the other hand, most brokers are commission-based, and therefore they collect their commissions up-front. As a result, brokers can tuck away commission and use them for cruises and sports cars whether the client portfolio tanks in value, or not.
Rich, I think you struck a chord with that question!

Question: Wade, I appreciate the time you’ve taken to answer these questions on your virtual blog tour. Do you feel that bloggers can fulfill the need for alternative media and provide a better forum for investment ideas, investor education and information exchange?
Absolutely. Just like stocks, in the blogosphere there will be a lot of dogs, but there are plenty of hidden gems. The difficult part for the average investor is separating the wheat from chaff. As I mentioned earlier, I am partial to those bloggers that have invested their own money, suffered from their own battle scars, and have a true passion for investing.

What do you think might be the potential pitfalls with relying on bloggers
for financial advice?

Answer: Everybody’s financial situation is unique, and has the potential of getting tremendously complex when you introduce such things as retirement planning, tax planning, estate planning, insurance strategies, education planning, etc. Certain bloggers will be more educated and equipped in providing answers to difficult questions, while others will not. Readers need to educate themselves and continually ask questions. Investing is both an art and a science, so readers have to be skeptical in their consumption of blogger advice.
If you haven’t seen the movie, “Super Size Me,” it’s a documentary that follows an individual who voluntarily decides to eat McDonald’s fast food for breakfast, lunch and dinner for 30 days. What you soon realize is that his health rapidly deteriorates due to the barrage of greasy Big Macs and fried Apple turnovers. The same principles apply to financial bloggers – subjecting yourself to trashy information will be harmful to your investing health. Fortunately Rich, your blog has nothing to worry about!

Question: Wade, we’re excited about your new book and I’m sure Get Rich Slick readers will be eager to read it but can you give us a sneak peak at what your next big project might be?

Answer: Right now I’m having a blast with my book tour and doing quite a few speaking engagements to better educate investors on the pitfalls and opportunities in investing. The next step, who knows? Maybe I’ll start my next book . . . How I Managed $40,000,000,000.00 by Age 42?!!

author-wade-slome

Wade W. Slome, CFA, CFP®
Sidoxia Capital Management, LLC (www.Sidoxia.com)
Plan. Invest. Prosper.

Special guest, Wade Slome, author of How I Managed $20,000,000,000 by Age 32 will be stopping by on a virtual blog tour tomorrow. Please be sure to stop by and visit for a brief interview and discussion with Wade. Readers posting a comment or asking a question will be entered in a random drawing to win a free copy of Wade’s book.

We all know that the financial markets are in uncharted territory at this time.
That’s why people are looking for someone who understands what’s happening – to give them solid advice.

how-i-managed-book-cover

If you’d like to get a sneak preview, visit Wade’s site over at www.Sidoxia.com

To order Wade’s book from Amazon, click here.

As the job layoffs continue to mount, some economists are predicting 2 million more jobs will be lost. If we assume that each job carries with it $1,400/month health insurance premium that goes to a health insurance company somewhere in America then that is a loss of $2.8 billion in lost revenue MONTHLY.

Looking ahead, economists predicted a net loss of at least 2 million jobs _ possibly more _ this year even if President Barack Obama’s $825 billion package of increased government spending and tax cuts is enacted. Last year, the economy lost a net 2.6 million jobs, the most since 1945, though the labor force has grown significantly since then.

Over the course of a year, that will amount to $33.6 billion in lost revenue annually to the health insurance industry. If we factor the 2.6 million jobs lost last year then we’re talking about another $30 billion lost already! Of course, not every person has health insurance and pays this premium so you can do your own due diligence and try to figure out health insurance losses.

The point of the post is to say that the health insurance industry may be in for some serious losses this year. Insurance companies typically take their premiums and invest them somewhere but returns have been abysmal in this market. It is possible that some health insurance companies may go under if the job losses and lost premiums continue to mount. After this happens, then hospitals and hospital networks will go down in flames as well.

I was considering a career move into the health care industry but those jobs may not be as safe as everyone assumes.

Just got word that my brother got sacked just a week after I was sacked.  He lives about 400 miles from me, works in a totally different industry and other family members (different industries) are concerned too that they may be sacked soon.   He got severance that pays him through April so it’s not all bad but finding another job as the job losses mount is going to be tough.

We are looking stepping closer into the abyss and I am shocked that so many people are still in denial.   SAVE! SAVE! SAVE!   Any unnecessary expense should now be avoided at all costs.

Sadly, I see a pattern: anyone anywhere can lose their job.   I counseled that having the right education, training and certifications would make you less vulnerable but that’s out the window at this point.  The net result of these problems is going to be massive salary deflation across the nation and a cascading spiral of deflation and depression.    The Fed is completely powerless.

The economy is in a gutter and deteriorating rapidly. There is no question about it if you’ve been following the economic data, currency fluctuations, treasury rates and other stats coming out lately. The trillion dollar question is what will spur people into spending and I can’t answer that question, I can answer what would spur ME into spending and here’s what I came up with:

1. I am NOT spending money because I continue to worry about bank failures. That whole “it’s FDIC insured” nonsense is just that, nonsense. FDIC doesn’t have enough cash to handle big bank failures which is why there have been so many shell games being played with these shotgun bank marriages lately. My money is locked up in Treasuries, cash (across multiple banks) and under my mattress. The solution at this point is to nationalize (completely) one or two of these major banks or just create a new Federal bank insured by the taxpayer not a questionably insolvent FDIC.

2. I am NOT spending nor investing money because I have no confidence in the stock market. I could be making about $3000 per month right now using ETF Covered Call strategy but I won’t budge on investing cash because I get the sense that as soon as I make a trade, the government (SEC) will jump in and change the rules of the games: No shorting? No call selling? No put buying? New tax regulations? Capital gains changes? Up until losing my job recently, I had just about given up on my 401k plan altogether and the only way to fix this problem, at least for me, is to change the draconian rules to allow 401k owners to invest ANY WAY they want rather than a small limited list of mutual funds that most companies offer in partnership with financial firms. I should be able to invest in ETFs, precious metals, real estate, treasures, etc DIRECTLY not just through a mutual fund company.

3. I would spend if I had a fixed low interest rate loan locked up. Everyone in America is on to the credit card game: teaser rate at 1.99% for 12 months then 29.99% thereafter, this type of immoral usury needs to end. If banks can’t make a profit at 9% interest rates then they need to cease existing. The defaulting problem can easily be solved by limiting credit lines. If mortgage rates hit 4%, rest assured, I’ll be buying a second home that’s priced reasonably. So if Uncle Sam wants to spend 1 trillion on projects, loan me a 100k at 3% and I’ll be sure to invest it and spend it wisely.

4. FIX Health care!  Health care costs are crippling individuals, families, small businesses, large corporations and pretty much everyone else.   You need to look no further than the plight of GM or Ford to understand the burden of health care on businesses.   Here is my three point plan:

a. Children from 0 to 18 get free health care.   Preventing and fixing problems when people are young can help eliminate many future costs.

b. After a person turns 18, they are put on a free base health care plan (mostly preventive medicine, exams, etc); this can be a nominal tax everyone pays as part of their payroll burden.

c. Allow for penalties and rewards in any supplemental health insurance plan.  If you’re fit you get a 5% discount, if you’re unfit you pay a 5% penalty.   If you smoke, you pay 5% extra on your health insurance plan.   If you visit the gym 3 times a week, you get a 5% discount.    The auto insurance industry isn’t out of control like the health insurance industry and part of the reason is that there are rewards and penalties for a person’s behavior.   Get too many speeding tickets, you’re insurance rate goes up; go to a defensive driving class and you’re insurance rate goes down.

If these things can be fixed then the economy might return to normal and people may be willing to spend.   As of today, I’m not spending a single dime on anything other than the bare necessities and I’ve been advising everyone to do the same.   When I return to work, I will NOT contribute to a 401k plan as my new plan is to simply horde cash.

So it’s been a week since I’ve been termed and the week went fast, so fast that I just realized I need to do something about health insurance. I received notice that if I want to continue my health insurance plan on COBRA, I can kindly cough up $1,400 per month for the privelage of being “insured” against some potential health problems.

So what does $1,400 mean to me? Well, that is more money than my mortgage even when I hadn’t paid any of it down. The monthly payment on a $240,000 home financed at 6% for 30 years would be $1,438. Would you rather have a home or have health insurance.

This would be the equivalent of THREE new car payments of $466.67.

If I took $1,400 a month and invested it at 6% for 30 years, I would have $1.4 million at the end of 30 years.

We’ll likely go on my wife’s insurance plan but it doesn’t escape me that we may suddenly become part of the millions of uninsured people out there if she loses her job. I wonder what would happen if corporations stood up to the health insurance industry and simply said, “we’re not paying these insurance premiums anymore!”

I would imagine most health insurance companies would immediately go bankrupt. I would imagine that health care costs would deflate rapidly as well. Those $12 bottle of aspirin would suddenly compete with $0.99 Walgreens generic brand.

Someone needs to do something, we need change. If only we had leadership that could change this mess.