Extending my Time Horizon

I have been on my new work out regimen for about 3.5 months.  In this time I have increased my sustained energy (cardio) output by 40%, and can now bench press more than my own weight.  With a mix of strength and interval training I have begun morphing my body and my metabolism from a out-of-shape to somewhat in shape.  I expect to continue making continuing gains for about 2-3 months, at which point I expect my fitness to begin slowly plateauing.

Frankly, I hope to continue exercising — in one form or another — for the rest of my life.  According to my research, the level of exercise I am performing can, in the mean, extend my lifetime by about 3 years.  This, of course, means my financial planning needs to be adjusted accordingly.

Mostly these minor adjustment mean a slight increase in savings and a small increase in risk-asset allocation.

There is seldom a benefit without a cost.  My share of the cost for the family gym membership is about $60/month. I have also paid a short-term $1100 for 21 weeks of one-hour, one-on-one personal training.  After the initial period, I plan on going to a once-per-month personal training program.  This works out to about $1400 per year for the gym membership and monthly personal training.

However the benefits of physical fitness, both personal and financial are tremendous.  The most striking example is type 2 diabetes, which a largely preventable and potentially devastating disease affection millions of Americans.  According to this website, type 2 diabetes affects over 25% of people 65 years old and older.  Preventing this one disease alone, in my opinion, is worth the financial and time costs of maintaining and improving physical fitness.

Improved fitness helps prevent other diseases such as stroke and heart attacks.  Whereas fitness (and proper diet) are virtually guaranteed to prevent type 2 diabetes, improved physical fitness reduces the odds of, say, the devastating affects of stroke. But just like reducing the risk of a financial loss is valuable, so is reducing the risk of various diseases.

The Purpose of Investing

The purpose of individual investing boils down to two important objectives: 1) Being more confident in your financial future, 2) Attaining a bright financial future.  In terms of well-being the first objective makes one feel more secure and happier today, while the second causes one to be more secure and hopefully happier in the future.

In essence the purpose of investing derives from the goals of security, freedom, and happiness.  It is these goals that have got me hooked on “exercise religion”.  In the case of financial matters, I continue to save today, for a brighter tomorrow.  As regards fitness, I am similarly making investments of time and money to bolster my future health.

What I’m saying is that exercise is a form of savings — saving future cost of medical expenses, missed work, and unhappiness.  I’ve put a lot of work into building my financial future, and I will do what I have to live to see it.

Best Way for a Twelve-Year-Old to Learn Finance: My Paperboy Job

By the time I was 12 years old I knew more about finance and budgeting than most 20-year-olds.  I had started delivering papers at age 11 and had accumulated a lot of experience by the time I turned 12.  One of the older kids in the neighborhood had out-grown the paper route job, and my friend Alan I and I decided to share his route when the older kid “retired” from the newspaper business.  Alan was 12 and I was just 11 — making me one of the youngest paper boys in town.

The route was long, spanning about 4-5 miles, and hence came with a long-distance premium paid every month.  Alan and I alternated delivery weeks which included afternoon delivery Monday through Friday and early morning delivery on Sundays.

The best part of the job was afternoon delivery in the summer months.  I seldom minded the heat and I enjoyed riding my bike around the neighborhoods.  The worst part of the job was collections.  Most subscribers paid by mail, but some paid directly to the delivery boys.  For them, I would have to knock on their doors and ask for their monthly subscription fee.  Since many paid in cash I had to make sure to have enough cash on hand to make change.  I found that some people were very prepared to pay, while others said they did not have the money and “could I come back tomorrow?”.   The worst was when tomorrow never came.  The missing money temporarily came out of me and my partner’s pay.  Only when the adults in billing got involved and the situation was rectified did Alan and I get our missing pay — and this could take a couple weeks. We pre-teen kids served as the bank floating interest-free loans to the newspaper!

A bundle of about 50-60 papers was dropped off at Alan’s house every afternoon (or Sunday morning).  On rare occasions there would be one too few papers dropped off.  This meant that I had ride an extra two-mile round trip to the nearest store to buy a copy to replace the missing paper.  I would report the missing paper and get reimbursed for the cost of the paper — but not for riding an extra two miles.   Another lesson — sometime you just have to take on extra work to keep your customers happy.

I was getting first hand exposure to revenue, earnings, “one-off” financial events, and accounts receivable.  I learned that some customers paid on time and others were often tardy.  Occasionally some were generous and even tipped!   Those that paid my mail would sometimes leave a tip, especially around Christmas time.  All of that had to be accounted for because Alan I shared the tips.  Sometime the tips were gifts, rather than cash.  Alan and I divided the cash, be kept the non-cash gifts we were given.  We were both very fastidious about our finances, and I don’t recall ever having a conflict or dispute between us.  We were honest and meticulous and it paid off in a good working relationship.

I had a savings account and interest rates were around 5 percent.  I was eager to get my money in the back to start earning interest on it, and I’d go with my Mom to the bank to make deposits.  (I think her main reason to go to the bank was to deposit my Dad’s paychecks).  I was fascinated with the idea that after two months I would earn interest on interest (in addition to interest on my savings).  After three months I’d earn interest on my interest’s interest’s interest (even though that amount might be less than one penny).  I was paid interest monthly and always looked forward to my monthly bank statements.  I also wondered about the possibility of daily interest, hourly interest, etc.  I only learned later that my musings had touched on the mathematics of fundamental financial concepts such as compound interest, continuous interest, opportunity costs, and discounted future cash flows.

Looking back, I see that my paper route taught me a great deal about money and business.  It also helped me develop a strong work ethic. In many ways it is a shame that the job of paper boy or paper girl is pretty much a relic of the past.  So many lessons not being learned.  It seems that there are fewer and fewer opportunities for younger kids to work, earn money and learn important life skills at an early stage.  Nonetheless there are some young entrepreneurs who are finding real information-economy jobs on the internet, for example.  Times change and so do opportunities to learn and grow.  And that rate of change appears to be accelerating.  We live in interesting times.

 

Houses

I find myself in the interesting position of owning 3 residential properties:  1) Our new “dream” house, 2) Our “old” starter home, 3) our rental property.

My wife and I decided to do things differently.  Most homeowners looking to upgrade either make an offer contingent on the sale of the first home, or sell first and buy later.  I decided that was not the optimal strategy for us.  I decided it was best to buy in the upgraded segment before the higher-end markets heated up, and to sell our starter home in a seller’s market.  Part one was buying and moving in to the new house.

The strategy worked very well.  Our “old” home resides in a market where contracts are signed in days, not weeks, and multiple competing offers were becoming common.  Our plan also allowed us to stage the old house without occupying it.   We laid down fresh mulch and 12 tons of rock.  This gave the house tremendous curb appeal.  We also put days of effort into making  sure the house was “white glove” clean from floor to ceiling — even the basement.  We left some furniture and most of the artwork behind (temporarily) for staging.  The place looked spectacular inside and out.

We listed it on a Thursday night, and by Friday night we had had 13 showings and multiple offers.  Saturday morning we discussed the pros and cons of each offer, and made a decision.  We accepted the offer that was $9000 over our asking price.

Before we started the whole process we negotiated a deal with our real-estate agent.  She’d receive the standard 3% on our new home purchase, but only 2% on the old home sale.  This meant paying 5% on the sale, rather than 6%.  This saved us over $2500 in commissions.

So far we are pleased with our new home.  It appraised for more than our negotiated price.  And even though it is about 50% larger than our previous home, our first month’s utility bills are significantly cheaper than our old home built in the 1970s.  Our new home is “high-efficiency”, with a HERS Index of 60.  We anticipate saving $800 to $1000 per year on utilities.  Moreover, we obtained a 3 percent, 15-year mortgage with a negative 1.65 points, which even after 0.5 points of origination, resulted in less than $1000 of closing costs.

All the while, the rental property continues to provide monthly “dividends”.

2013 Tax Bill: Who *Really* Gets Hit

Drum roll please:

3. Anyone (the 53%) who pays federal income taxes.
2. Single No kids (SNOKs).
1. DINKs:  Dual-Income No Kids.

The 2013 tax compromise hits everyone who files because of the change in Social Security tax.  From the very first dollar rates go from 4.2% to 6.2% for Social Security.  Compared to 2012, virtually everyone pays more taxes in 2013.

Having no kids really hits taxpayers.  Don’t miss my message… children are expensive to raise, and having children will not save you money!  But having children will reduce your tax bill due to myriad credits from the child tax credit, to extra exemptions, to 529 college savings plans.

Having no children hits single taxpayers some, but DINKs get hit harder for total incomes above the 15% tax bracket (approx $71,000).  Married couples making $248,000 per year — not quite Obama-rich — will pay $4548 more in Social Security taxes alone than they did in 2013 if the partners make similar incomes.  If, however, another couple with a single wage earners (SINK: single income no kids), SocSec tax would be half, $2274 due to the $113,700 Social Security cap, which is assessed per person, not per couple.

The marriage penalty, which never fully went away, is back with a vengeance in 2013.  The higher the income, the greater the marriage penalty.  The more equal the incomes, the greater the penalty.  It is almost like the tax code is telling married women to stay home and get pregnant.  It is hard to believe it is 2013, because it feels like the tax code is still written with a 1950’s mentality.

 

Financial Life 2.0

Three quarters of the way through another busy year.  I married my girlfriend of six years, and we are thriving despite the dismal economy.    I have a rewarding electrical engineering job, working on some of the most advanced technology on the planet.  My wife has her own successful business, and based on current projections, she has a good chance of  passing me in earned income this year.

My wife and I are compatible in many, many ways — but finance has historically not been one.  At heart, I am a saver, and she is a spender.   That is one reason we have a prenuptial agreement.

When we met my wife was in debt.  In contrast I was looking for new ways to invest my money.  Those ways included paying off my home  mortgage in full, starting several small businesses, and purchasing my first income (rental) property.  With lots of coaching and encouragement (and no out-of-pocket money), I helped her become debt free.  It was very important to me that she do it on her own, because early on I did believe she was the one for me.  On the flip side, I knew that there would be too much tension between us if she could not get here finances together.  Luckily, she listened and adapted.

I have my flaws, but discipline with money is not one of them.  Over time, I have become less frugal.  That has always been part of my plan.  Save and grow wealth early; spend and enjoy later.  We are living well, and putting away money for the future.  I have little doubt that before I turn 40, we will be a millionaire household.  Depending on how one counts, we are already.  Having at least one million dollars in (reasonably) liquid assets is a goal.

My dreams are bigger than this.  I have created a financial portfolio software business I believe has the potential to be worth tens or hundreds of millions of dollars.  It is because of this software,and the ideas built into it, that I have largely stopped blogging here.  The software simply has a better business model.  The prospects of Balhiser.com, as a financial blog, making even $100,000 a year are very small.   It just took me a while to swallow that truth.  I haven’t given up on this website, I’ve just put it on the back burner.

Anyhow, back to wedded bliss.  There is one truth that mars our bliss: the marriage penalty.  Simply put — when we got married our taxes went up.  Just for kicks we ran the numbers both ways: single and married.  The difference was over a $1000 marriage penalty.  And the way things are going, the tax penalty is only going to get worse.

All in all, though, I am happy to be married to my lovely wife.

Wishing my readers all the best.  When in doubt, diversify – at least in matters of finance.  (Probably best not to diversify in matters of fiancée(s))

 

 

 

 

Making Money

When I last updated my “play money” (Crazy Ivan) account info it was worth $25,953.  As of market close yesterday it is worth $28,174.  Equity and ETF positions have changed slightly. Then now include DTN, INTC, IVV, JNK, PBP, SPLV and XLE.   I like all of these positions, however XLE has been a short-term disappointment.  I hold XLE as only a hedge against rising gas prices.

All in all not bad performance for an account valued at $15,784 in October 2005.  (There have been no deposits or withdrawals  during the whole time.)  This is about 11.2% annualized performance.

High-Tech Portfolios

When I think about the phrase “high-tech portfolio”, I don’t think tech stocks.  Instead I think about using technology to build a smarter portfolio.   Most actively-managed portfolios are constructed, in full or part, using 50-year-old “modern portfolio theory” methods.  I’m working to change this by bringing superior portfolio technology to market.

So, while writing for this financial blog remains a passion of mine, I will likely be spending much more time refining software and building a financial software business.  Much of that effort will be off-line at first.  Occasionally, however, I will provide business and software updates on the Sigma1 Financial Software Blog.

Developing portfolio-optimization software combines two of my long-term passions:  software development and finance.

Rest assured, that I will keep this blog up and going.  I think it contains some hidden gems that are worth discovering.  I will also continue to blog here when inspiration strikes.

Top 6 Investment Innovations in Recent Decades

These are my top picks for innovations that most benefit personal investors.

#6:  Decimal pricing.    Do you remember when stocks were priced in fractions?  Like 23 and 3/8?  This was not cool.  Not only was it clunky, but it meant that bid/ask spreads were usually stuck at 1/8 of a dollar per share, or 12.5 cents per share.  Luckily, today most investments are priced in decimals.  Some exceptions include bonds and the interest rates on most mortgages.  How archaic!

#5: Free online investment info.   Information used to largely come in paper form, and cost money.  Or you could pay tons of money for Quotron… really not practical.

#4: Discount online brokers.   My Dad used to pay $50-$100 per stock trade — over the phone with a broker.  Today some of my ETF trades are free, many of my trades average about $1, and my most expensive trades cost $8.

#3: Exchange-Traded Funds (ETFs).  ETFs fix most of the problems with mutual funds such as high(er) expenses and lack of intra-day trading.  ETFs also open up a wide variety of investment options including access to commodities, leveraged funds, and precious metals.

#2: Index investing.  Index investing brings two huge advantages.  First, incredibly low costs.  Second, maximum diversification.  Index investing has, and continues to revolutionize the investing playing field.

#1: 401(k)s (and IRAs).   Named after a once-obscure IRS code, 401(k)s, or 401Ks, offer investors decades of tax-deferred growth opportunity.  IRAs offer a similar advantage.  Finally Roth IRAs offer similar tax-deferral opportunities where the tax benefit is back-loaded.

Stock Beta Computation, 6 Closing Thoughts

When I wrote about computing stock betas in 2010, I had no idea it would be this blog’s third most popular topic. I wrote a handful of blog posts about stock beta, but my heart wasn’t in them.  Today, driving home from the airport, I was inspired to blog about beta for perhaps the last time.  Previously I held back and focused on the mechanics of beta computation, and the discrepancies I was seeing between various website’s beta values.  This time I provide an example beta-computation spreadsheet and don’t hold back on the math or the theory.  Before I launch into this final word on beta, here a few highlights.

  1. Beta is easy to find online.  Not all sites agreed on value, but the delta seems less than it was 2 years ago.   Why compute beta when you can simple look it up?
  2. Beta is less useful if it has a low R-squared.  Luckily, sites like Yahoo! Finance provide R-squared values.
  3. Even with a high R-squared, beta is not a very useful risk measure.  Standard deviation is better in many ways.
  4. In theory high-beta stocks (>3) should go up dramatically when the market goes up.  In practice this is often not the case.
  5. In theory low-beta stocks (<0.5) should be “safer” than the market.  Again not so true.
  6. In theory low-beta stocks (<0.5) should “under-perform.”  Not necessarily.

If you are still interested in beta, simply click to read the full-beta blog.

Naked Capitalism in Las Vegas

Here I am in Las Vegas, staying at the Encore.  I’ve lost $297 today at the craps tables.  I’ve been using my “comp” card and out of curiosity asked the “casino services” representative why is a small-timer such as me even bothering to use my comp card at the tables.  He said that every player can get a comp, even if it is just a cup of coffee… all the way up to a private jet ride home.  I handed him my card and asked, “so if I keep playing like this for 3 days where do I fit on that spectrum”.   His answer:  “a cup of coffee… but please use the card.”

Hot dice!

Lady Luck?

The folks at the Wynn/Encore are exceedingly polite and professional.  Their job is to 1) make money for the casino, and 2) provide a positive experience for the customer while doing so.

So no private jet for me!  That said, I think I will quit using my comp card.  What’s in it for me?… nada.

I understand very well the rationale of the casino.  First, table games are expensive to operate… craps takes 4 dealers to run.  Second, the way I play is least favorable to the house.  I place pass line and come bets, and place odds bets on the points.  Other than tips, that’s it.  No “field”, no placed bets, nothing.  Given a thousand people like me the casino probably, on average, breaks even after expenses.

So why do they want my data?   My hunch is that players like me still fill a role.   We  seed the tables and have fun.  Some high rollers like that.   The guy next to me at one craps table walked away with $16,000 and change.  He mentioned that at one point he had $25,000, but he had lost a bit.  Still, he said, he was up overall.   I assume this guy rolled in comps.  He is the gambler casinos covet.   He tipped generously, perhaps $500/hour.

I have decided that my privacy is worth more than a cup of coffee.  (Perhaps I would have settled for a room-service breakfast for two).  I will try to keep a lower profile, but in Vegas that is a difficult game.  Cameras, RFID-enabled chips, facial-recognition software… good luck keeping a secret here.  But I’m gonna make them work that much harder, because that’s how I roll.

Stay tuned if you want to learn some of the worst craps advice I’ve heard in a while.  Until, then, best of luck!

Update:  The terrible craps advice?  To use “placed” bets rather than pure “odds” bets on numbers in order to get more “comps” and more “comps action”.  Follow this advice and you will see your $10 bet on “4” pay back $18 instead of $20.  The $2 fee will get you about 2 cents worth of comps!  Plus you’ll get less action than you think because you’ll lose your money faster.