Only Half… of our Income?

I was having lunch and one of my friends said that something was troubling him.  He said that he worked out the numbers and, by his calculations, he needed to save 25% of his gross income for retirement.  And taxes took another 25%.  So, that meant he only got to use half of his income.  Only half!  Only half?   Were his calculations wrong?

My first reaction, was no, his computations sound about right.  But, I said, “Please tell me more. Maybe I’m missing something too?”

He explained that his projections were 8% return while he is saving, and then 5% while in retirement mode.  He explained that he had talked with his parents and other retired folks to estimate what their expenses are.

I asked him about how inflation factored into his calculations.  He said that he was estimating about 3-4% for inflation.

So, yes, his estimates made sense.  Knowing his age, and assets, etc, made me think that he had it about right.

So he confided, yeah, but I also have a mortgage and property taxes and insurance?  That takes, more, maybe another 30%.  So that leaves me with, like, 20%.  How am I supposed to do anything with that?!   My income is whittled down to almost nothing!

I could only sympathize.  Yes, I said.  You’ve sussed it out.  I hope that nonetheless you are enjoying your life.   Living responsibly for your future is not easy.  You and your family will, hopefully, thank you later.  The twin tyrannies, taxes and inflation, are the saver’s ever-present adversaries.  Facing them taxes the soul.  The intelligent saver faces them nonetheless, perseveres, and is better for it.

That was the best advice I could offer. It is the advice I give myself. It is unsatisfying, it is adult, it is realist. Are taxes and inflation such tyrants, such a drain? Historic facts say yes. It is the harsh truth. The wise face that truth, and succeed in spite of it. Best wishes, and hang in there. You can do it.

U.S. Armed Forces kill Osama Bin Laden

President Obama and other sources confirm that Osama Bin Laden is dead.  Reports say he was killed by Navy SEALs working closely with CIA agents, and DNA tests confirm that the body is indeed OBL.

The impact of this news on U.S. and global markets is yet to be seen, but the Nikkei’s performance is positive — up about 1.5%.

The impact of the 9/11 attacks had a traumatic multi-year impact on the U.S. economy, and a proportionally lesser, but nonetheless dramatic, impact on the world economy.

What can I add, but that this is very good news, both financially and in general.

Financial Baseball and the Finance of Baseball

If I was asked to investigate buying a (Major League) baseball team, I’d start by building a mental model of the finance of baseball.  I’d start by observing that a team consists of 1) a roster of players, 2) an collection of player contract and player and pick options, 3) a management and coaching team, 4) a stadium and stadium support staff, 5) league contracts and obligations,  6) marketing, television, and media rights and contracts, 7) financial assets and liabilities,(8) ball park ticket and concessions sales.   Well, that’s a start anyhow.

I’d then consider the competitive environment.  It consists of other ball clubs and is played about half of the time on other ball fields.  Naturally AL vs NL is an important consideration.   Generally, wins lead to more revenue, and better (more expensive) players contribute to more wins.  However, that is not always the case.

A baseball team aptly called a baseball franchise.  It exists as a privately owned piece of a larger governing organization.    That larger organization makes all sorts of rules that effect everything from the buying and selling of franchises to the “luxury tax” paid by high-payroll teams such as the Yankees.

I’d love to get my hands on a MLB franchise’s income statements and balance sheet, say for the Chicago Cubs.  I wonder if they made or lost money in the last decade?  I’d be curious to see what correlation there was between their revenue and their win/loss record for each season.  I’d wager that the Chicago Cub’s win/loss-to-revenue correlation is much less than that of most other MLB teams… simply because the Cubs fan base is more forgiving of (or simply more used to) losing.

So, an MLB baseball team is a privately-held franchise of the larger MLB organization.  Similar to a McDonald’s franchise being part of the the larger McDonald’s Corporation.  A key difference being that MCD is publicly traded whereas MLB is not.  (And, of course, a baseball franchise is way more expensive that a McDonald’s franchise.)

Switching gears, consider the derivatives market surrounding baseball (and other sports).  I’m referring to sports betting.    In Nevada alone, sports betting exceeds 2 billion dollars per year.  Many sports bets are analogous to binary options… they either pay nothing or 2X (less the vig) depending on the outcome of a game (and the point spread).

Safest Possible Investments?

I was talking with a friend the other day, about, what else, investing.  He said he had lost about $100,000 on dot com investments.  He said he had some cash lying around and wondered what was a very conservative investment.

I thought some, and mentioned that, for me, paying down the mortgage is a nice, safe investment.  It certainly  beats earning between 0 and 1 percent in a savings account.  I look at the difference between short-term rates and one’s mortgage rate.  That difference could be 4+ percent.

There is no way this type of investing will pop and make you rich overnight.  But it is a safe, sensible option.  And it is likely to improve your credit score.

The Thrill is Gone, but the Love (of Finance) Remains

When I was born, my birthday gifts included US savings bonds ($50 dollar face value, I believe).  I’ve had a savings account since about age 7, and started reading brokerage account statements at around age 9.  My brokerage college fund started with $1000 and nicely grew to about $4000 by the time I started college at the tender age of 17.

Before the age of 10, I was enthralled by the concept of compound interest.   I was curious about the difference between monthly, weekly, daily, hourly, and by-the-second, even instantaneous compounding.  Little did I know at the time that this concept lead to the mathematical concepts of limits, calculus, and the number e, Euler’s  number.

Needless to say, I love math and finance.  But I first experienced a truly heart-pounding thrill when I started online trading sometime in the late 90’s.  I could see the bid and ask constantly moving, and tried limit orders.  The asks kept rising, and I kept inching up my bid.  Eventually my bid got hit and I was an owner of my first online stock.  This was different than buying mutual funds on the phone from Vanguard, and getting quarterly paper statements.  This was in real time and it was exciting.

I’ve read a lot about Peter Lynch, including his books, and I’ve learned some lessons good and bad.  The bad lesson, as I read his words, was “Don’t buy bonds unless they paying at least 8 or 10 percent.”  The good lessons were “Don’t buy what you don’t understand.” and “boring investments are good… boring names, unsexy, but solid investments are good.”

My next financial thrill revolved around options sales and purchases.  I even recall making a 20-option spread trade that was scary, but ended up netting me about $3000 in a very short time.

I have also has some thrill involving real-estate offers, counter-offers, counter-counter offers, and purchases.   Mostly, tension and anxiety are better descriptors than excitement.  Mild disappointment mostly describes failed attempted real-estate purchases.  Moderate to exuberant happiness describes my successful real-estate bids.

In the last year or two, my trades have not elicited an significant cardiac or endocrine event.   While almost always cerebral and well-considered, my trades have occasionally made my heart go pitter-patter and my endocrine system give me a pleasant rush.  But lately the trill is gone.  My pulse is steady and the motions are vaguely methodical and systematic.

My love of research, introspection, and contemplation remains.  Trading, for me, is just a means to an end.   Increasingly dispassionate.   In the end I hope and believe this makes me a better trader.  As always, time will tell.

Softball, Baseball, Gold and Taxes

I’ve been rather unmotivated to update this financial blog lately.  The reason?  Taxes!  I generally like to keep the tone of this blog upbeat, and when taxes are on my mind my tone tends to be closer to beat up.  Speaking of… my tax payment checks are going in the mail today.  My property tax checks will be going out next month.

However, baseball season is now underway, and that is good.  And my softball league will start up next month… one of the highlights of summer for me.  I wonder how much complicated MLB player’s taxes are and how many states they have to file in?  Also US military personnel.  If I made the rules, US soldiers would not have to pay single cent of tax on their wages while in combat tours.

Whoops, I’ve done it again!  Thinking about taxes and spoiling the prospect of a good mood.  So on to the topic of gold.  I can’t seem to go anywhere with out seeing or hearing either “We buy Gold!” or buy physical gold from us because someone thinks gold will go to $2000 per (troy) ounce.

If I had some gold trinkets or coins sitting a drawer somewhere — gold items that didn’t have any sentimental value to me — I’d get some local cash quotes, pick the highest, and sell.  But as for buying gold… nah… I’d rather buy index funds or black gold, in the form of ETFs XLE and/or VDE.  In fact I currently own XLE, VDE, SPY, VTI, SCHB to name a few.

Well, I’ve got to cut off this financial/baseball/gold/taxes blog post early, as I’ve got to run the dog to advance canine training class.  Best investing wishes, and may taxes not bite too deeply this year.