Archive for January, 2009
Rolling Over Your 401(k) into an IRA
Posted by: Todd Metheny in Retirement on January 31st, 2009
Lots of Americans are finding themselves out of work or looking for jobs. 100,000 jobs were lost this week alone. Losing your job is a big event. Hopefully this doesn’t happen to you. If it does, hang in there. I got this email from a reader on Friday:
Todd,
My company has stopped their 401K match. I was previously putting 3% each check (I make about 40k/yr) and they were matching with an additional 3%, I have now reduced this to 0%. My investments have been performing poorly. What should I do? In the past I wasn’t that concerned because with the match I could afford to lose some. Now that there is no match and I may be out of work soon (my company is downsizing and my division seems to be on the block) I’m wondering if I should make some changes. Over the past year I have had 100% in an aggressive portfolio as I didn’t have much to lose. Do you think I should change this? I’m not contributing now but I want to protect what I have (I’m 28 years old). Maybe I should leave the % as is and wait?
Thanks,
Advice Seeker
That sucks that they cancelled your match…it’s nice to be making that guaranteed 100% on your money. Since you’ll likely be leaving your company, I would roll the 401(k) over into an IRA – you could wait until you leave to do this. You’ll have more control over your investments and more investment options. I would check one of the lower cost mutual fund brokerages, like Vanguard, Fidelity, T Rowe Price, etc. and see what their minimums are for rollovers. You can roll it over without a penalty. It should be fairly easy, just talk to one of their reps. Another thing you might consider are incentive packages. I know that some brokerages (TD Ameritrade comes to mind) will give you some amount of money to convert your 401(k) to an IRA with them – sometimes people will give as much as $500. This way, if your company goes down or contracts, you know where your money is and can easily make changes to your investments.
You could even convert to a Roth, but Roth IRAs are funded by after tax money and reg IRAs and 401(k)s are pre-tax money. If you chose to do this you would have to go ahead and pay taxes on the money currently in your 401(k). This might be a good move, anyway, though, to go ahead and go with the Roth, because right now you are likely in the lowest tax bracket you’ll be in for the rest of your life. You’re certainly (hopefully, rather) in a lower one now than you likely will be when you start making withdrawals (in your 60s). If you decide to roll over into this option, I would set up an automatic contribution to your new Roth with the money you’re contributing now. When you finally do make withdrawals from a Roth, you don’t pay a cent of taxes on the gains or the contributions (whereas you’d be taxed at your regular rate with a 401(k) or regular IRA). Plus, by that time, who knows what the tax rate will be?
As far as protecting your money, you have several tools at your disposal. You have a long time horizon, dollar cost averaging, and rebalancing. Because of your long time horizon, I wouldn’t stop contributing as long as you are able to. The stock market sucks now, but all that matters in terms of your retirement account is where it will be when you start making withdrawals. You have 30+ years to come back. Plus, while prices are low, you’ll be buying more shares with your normal contribution.
Dollar cost averaging is just what you’re already doing, making set monthly contributions. This ensures you buy fewer shares when the market is high and more when the market is low. It doesn’t make your returns better but it protects you from buying in too high. It slightly mitigates the risk in stocks.
Rebalancing simply puts your allocation back where it belongs. If you decide to go 80% stocks and 20% bonds, for example, and the stock market has big gains – your new allocation might be 90/10. You would then sell until you were back at the 80/20 mark. This forces you to take some gains when the market is high and mitigates risk. You would only rebalance once every 6-12 months or so.
If you don’t want to mess with rebalancing yourself, you could invest in a target date retirement fund – and they automatically rebalance for you. They also make your allocation more conservative as you get older. So, if you’re at 75/25 (stocks/bonds) when you’re 25, they might change it to 70/30 by the time you’re 30. By the time you retire, you’d have a very conservative balance – heavily weighted towards bonds and fixed income investments.
If you wanted to rebalance yourself, that’s not too hard to do, either. Target date funds are just a way to put it on autopilot. The key, no matter what you invest in, is keeping your costs low. Some mutual funds have fees as high as 3% – we want to avoid those at all cost. And index fund with Fidelity or Vanguard will perform just as well and only cost you 0.2% or so – and 71% of actively managed mutual funds don’t beat indexes, (in part because a majority of people sell when the market is plummeting, forcing managers to sell when they don’t want to or shouldn’t….like now). It’s the conundrum money managers face with the old “buy low sell high” mandate.
As for your asset allocation, determining that depends on your specific risk profile. There are a lot of resources out there to determine this – here’s a risk calculation tool that I found in a Google search. More than anything though, determining your tolerance for risk is something you’ll have to find over time. Ask yourself the question, how would I react if my portfolio lost 50% of its value in one year? Would I buy more? Sell it all? Stop investing? The market fluctuations going on right now have been a good gut check for a lot of people. Some people that thought they had a high risk tolerance have backed off from that stance.
Check out this article as well, and this one, and maybe this one, too. Also see my article about retirement accounts in general for a brief overview. There are a lot of great resources out there for people looking to move. I hope this helps. Let me know if you have any problems. Thanks for reading.
The 5 Best Economics Blogs
Posted by: Todd Metheny in Economics on January 30th, 2009
The news buzz today was all about the passage (or possible lack thereof) of the stimulus package. Martin Feldstein, a conservative economist (and Harvard professor), actually agrees that economic stimulus is indeed necessary. However, he found multiple problems with the particulars of this bill. I heard a report on NPR on my way home today that indicated that many Republicans are unhappy with a lack of bipartisan negotiation with regard to the bill. I think a lot of Republicans honestly like Obama (at the very least they pay him lip service), but do not like the way this bill was written. Feldstein ended up saying that passing this bill would be an “$800 billion mistake.”
Of course, Feldstein is but one (albeit educated) voice in a sea of opinions. The question becomes, for people like me, where do I get worthwhile information that I can use to form a sound opinion? I think the answer lies in the blogosphere. There are lots of fantastic econ blogs out there. In my experience, I’ve found most blogs on the subject of economics to be short on bells and whistles but long on good content and analysis. For obvious reasons, many economics blogs are kept by academics and professors. These educated chaps know their stuff, but the reading can get kind of dry out there from time to time. Because of this, I’ve compiled a short list of blogs that might interest your average Joe (or Jane). This list consists of the “big time” blogs. I’ll do a follow up list at a later date with some smaller, lesser known, more individual blogs. Here you go:
- Freakonomics Blog – This blog was inspired by the hit book, Freakonomics. The NY Times liked it so much, they decided to give the authors of the book, Stephen Dubner and Steven Levitt, a forum to continue pointing out the intersection between economics and all the little funny things in life that catch Levitt’s attention. He’s a brilliant guy, and he’s done statistical studies on all kinds of things you probably hadn’t considered. Don’t expect to find an analysis of whether or not the current bill will stimulate the economy on this site, but be ready for a bevy of interesting articles and tidbits, with recent titles such as Do Uncommon Names Turn Kids Into Criminals? Lots of food for thought here, with the data to back it up. If you don’t already read it, check it out.
- The Becker-Posner Blog - The writers of this blog are economic and academic giants – Gary Becker, who wrote the seminal work on crime and economics (and inspired my R&W in law school), and Richard Posner, a judge of the 8th Circuit and arguably one of the greatest legal minds of our time. This is a great place to go to hear two brilliant workings who really understand economic theory discuss bailouts and stimulus packages. Good stuff.
- The Undercover Economist Blog - I guess you would call this the British equivalent of the NY Times Freakonomics blog. Harford wrote a great book called The Undercover Economist that I read sometime after Freakonomics. It wasn’t quite as big (read – popular) of a book, but it was a great read nonetheless. The blog is part of the Financial Times website. He answers general ”Dear Economist” letters from the perspective of, you guessed it, an economist. Very cool blog, check it out.
- Free Exchange - Maybe you think it’s kind of weak to go with these big publication blogs. Regardless, this one’s pretty good, too. The Economist is a great magazine for all things economics.
- RGE Monitor – Nouriel Roubini has been in the news a lot in recent months. I don’t know what his latest prediction is…probably something bad. He’s a well known NYU professor who seems to like the limelight. Check out his blog.
There are hundreds (or more) of economics-centric blogs. Let me know if you have a good one or know of one I should be reading. We’ll try to stay informed together. Thanks for reading.
Zecco.com – Review
Posted by: Todd Metheny in Reviews on January 29th, 2009
Update: On Friday, January 30th, Zecco announced that they would no longer offer $0 commission trades for investors with less than $25,000 invested. See a great list of low cost alternatives here.
Online trading is a relatively new phenomenon. Based on the information I can find, the first online trade took place in 1983, through what is now known as E-Trade. Since then, online trading has experienced explosive growth. Before that, if you wanted to buy stock, you had to do so through a broker. Since it’s inception, trading stocks online has gotten cheaper and cheaper. For the small trader (like me), minimizing cost is an essential part of making money. That’s why index funds are all the craze. You keep your costs low, and you have a better chance of outperforming. If you’re making large trades, it’s easier for your trading cost to seem small. Hopefully that’s the case for me sometime soon;)
I personally have been using TradeKing for the last couple years and have been pretty satisfied with it overall. Trades are just $4.95 apiece and option contracts are $0.65 each. Most of you know that you can do better than that now. It isn’t new, and anyone making online trades has probably already heard of Zecco (ZEro Cost Commission). Here’s the scoop, you get 10 free trades a month as long as you keep a balance of at least $2,500. It sounds too good to be true, but as far as I can tell, this is completely on the up and up. It’s been in operation since 2006. It looks like a great company – the ultimate discount brokerage, and the first one to take the price of a trade all the way to zero. (Of course they aren’t the only one, Bank of America offers free trades for customers who have at least 25k in their BAC accounts)
According to their site, Zecco makes their money from the trades you make above and beyond their 10 free ones, on their option trades, when people borrow on margin, on the cash balance you keep in your account, on their advanced tools and a bit off of advertising on their site. To me it seems pretty legitimate, and I know a lot of people that have been very happy with Zecco. By the way, Zecco would be a great place to buy ETFs if you’re buying them to keep your cost low.
It seems that not everyone has been satsfied with their customer service. Check out this article by Seeking Alpha (can you tell I like this blog?). Here’s another article, written shortly after Zecco unveiled their zero commission model, predicting that Zecco would fall on their face. I guess they still might, but it’s not looking good for that prediction as of right now. I actually plan on opening an account with Zecco in the near future. I’m keeping my TradeKing account, because it’s comfortable and I know it’ll be a hassle to move. If you use Zecco, or know of another zero commission broker, let me know the scoop by email or in the comments. Thanks for reading.
The 25 Best Business Movies of All Time
Posted by: Todd Metheny in Uncategorized on January 28th, 2009
I’ve always been struck by the lack of a great business movie. My idea of the perfect business movie is a rags-to-riches story – encompassed by Taylor Caldwell’s book, The Captains and the Kings, about a young immigrant who starts with nothing and then claws his way to the top. Unfortunately, I don’t think that movie exists. Business people typically do have an important role in movies…as the villian. It’s usually the guy the girl is with after she leaves the jilted, lovable protagonist who believes art triumphs over money. Come to think of it, money is villified in movies as well. The bad guys are rich and the good guys are poor.
I think there are multiple reasons for this. We, as moviegoers, can relate better to a protagonist that is something of an underdog. We like regular guys, not guys that already have it all together. We like movies that encourage us to believe that we can rise out of mediocrity and conquer the challenges that face us, whether it’s stealing the girl we love from the rich, jerk lawyer/wall streeter/doctor/trust fund baby or leaving a job we hate to pursue our true passion. That’s one of the great things about movies, the hope they offer. So it makes sense that there aren’t a lot of super business-centric movies. That being said, I sort of wish there were. I think business can add some spice to a movie.
Before you read the list, a brief note about the rankings. I gave recent (post 1980) movies a preference over older, classic movies. Several movies on the list were made before 1980, but I went with a majority of newer movies. I also gave a preference to movies for “business movieness,” meaning a better movie might have a worse ranking than a lesser movie but the lesser movie is more on point with the list. Finally, I went with movies I enjoyed, or had a different take on a particular business issue, or covered a niche better than any other movie available. Obviously I’m going to miss some of the best. Let me know when I do. I’ll make sure I see them if I haven’t already.
The List:
25. Rogue Trader – Ewan McGregor’s character is based on Nick Leeson, a derivatives trader who gambled away enough money to bring down Barings Bank. I really like Obi-wan, er McGregor, but the movie is just okay as it builds towards the fall of the main character. Warren Buffett has referred to derivatives as “financial weapons of mass destruction.” Leeson would probably agree.
24. Boiler Room – The stories’ protagonist leaves behind his illegal blackjack game to work for a fraudulent brokerage firm that was artificially creating a market for stocks and pushing them through cold calls to unknowing investors. The movie has pushy sales, a little bit of entrepreneurship, and a lot of dishonesty.
23. August – Two brothers and a startup that initially makes big money. The old rise and fall business movie.
22. Lost in Translation – This movie is for anyone who has been stuck in a foreign country on business. You’ve gotta love Bill Murray and Scarlett Johansson.
21. Pretty Woman – Why is this a business movie? Because she’s an entrenpreneur of sorts and he is dealing with being a corporate raider. Deal with it.
20. For Love or Money and The Secret to My Success – I grouped these because (a) they’re both Michael J. Fox movies and (b) I always have trouble remembering which one is which. I like For Love better, with Fox as a concierge who can get anything and aspires to own his own hotel. The Secret is one of those deceiving everyone into thinking you’re an executive when you aren’t (i.e. Big, Working Girl, etc.)
19. There Will Be Blood – “I’m an oil man.” About a man so driven and competitive that he sees everyone as a competitor, even, at one point, his own son. Enough said.
18. Working Girl – Melanie Griffith poses as the big boss, and eventually becomes one.
17. Glengarry Glen Ross - The ultimate sales movie. Always be closing!
16. Risky Business and The Girl Next Door – The Girl Next Door is an updated version of Risky Business in which the oldest profession is replaced by sex ed. Both movies feature entrepreneurship under extreme circumstances.
15. In Good Company – This movie is for any old bull with lots of wisdom and experience who has lost his job to a smug young bull only to have that young bull start dating his daughter. No, that happens. Really.
14. Baby Boom – Diane Keaton directs her keen business sense toward feeding babies. Great entrepreneurship movie.
13. Forrest Gump – This took a hit for its lack of business-movieness, but Bubba Gump shrimp was still a great business and Cap’n Dan was still a great investor.
12. Back to School - The scene where Rodney Dangerfield shows up his business professor is a great example of the gap between theory and practice.
11. Office Space – All those boring jobs need to be done, but this movie is inspiration for any cubicle dweller who wants to take their life back.
10. Goodfellas – All mob movies are business movies. They give insight into the essence of competition, family business relations and team dynamics.
9. The Aviator - Howard Hughes was the consumate entrepreneur, driven by his big, hairy audacious goals. Obsessed with his vision. Plus, it’s a pretty entertaining movie.
8. American Gangster – Denzel Washington’s character understands competitive advantages. He obtains a product that is better than his competitors and that they are unable to duplicate. Unfortunately for him, it’s also illegal. Lots of team dynamics in this movie. Notice that we’re low enough on business movies that many of the movies on this list involve mobsters and illegal activities.
7. Trading Places – Back on the lighter side…apparently anyone can be a commodities trader. I wouldn’t know.
6. It’s a Wonderful Life – This movie has your basic business villian against the small town, ethical, small businessman of the people. It’s a story of good versus pure business evil.
5. Jerry Maguire – Remember (especially now) that losing your job can be an opportunity to pursue something more satisfying. Pursue something you really believe in. People matter in business.
4. Citizen Kane – Another classic. This one is commonly listed amongst the greatest movies of all time. On my list it’s number four. What do I know?
3. Wall Street – Gordon Gekko’s character is allegedly a combination of Ivan Boesky, Carl Icahn, and Oliver Stone himself. Reportedly a sequel is in the works. Hopefully it will find a place on this list.
2. The Godfather Pt. II - How to build a business, Sicilian style. Keep in mind that it can be hard on your family. Poor, sweet Fredo.
1. The Pursuit of Happyness - A surprise number one. I told you I like rags to riches stories. Based on a true story, the text book Will Smith studies for his test is none other than Security Analysis by Benjamin Graham.
Also considered: Swimming with the Sharks, Network, Other People’s Money, The Insider, Startup.com, The Pirates of Silicon Valley, Michael Clayton, Sabrina, Erin Brockovich, Hudsucker Proxy, A Lot Like Love, and The Devil Wears Prada. What’d I miss? Feel free to weigh in. Thanks for reading.
Robert Kiyosaki
Posted by: Todd Metheny in Business Profiles, Reviews on January 27th, 2009
Robert Kiyosaki is a controversial fellow, and I know a lot of people feel very strongly about him one way or another. Despite the fact that this issue has been argued by people on both sides to exhaustion, I thought I would briefly weigh in with my thoughts on the topic. For anyone who doesn’t know, Kiyosaki wrote a New York Times Bestseller called Rich Dad, Poor Dad, as well as multiple other follow up books and spin-off products.
Amongst Kiyosaki’s best known critics is real estate author and commentator John T. Reed. I am currently reading one of Reed’s books (I got it from my wife for my birthday – thanks honey), How to Buy Real Estate for at Least 20% Below Market Value Vol. I (I may review this when I finish, if there is sufficient interest). Reed is most famous for his real estate “guru” reviews. A quick note about Reed is merited. Reed (a Harvard Business School grad) comes off as an extremely judgmental, arrogant and angry man. That being said, I usually agree with his assessments as being honest and accurate. He’s been criticized for slamming authors whose books pose direct competition to his. That may be the case, but I don’t believe I’ve found anything Reed says on his site to be something he doesn’t actually believe. I think he really does feel like he’s policing an industry full of con-artists, and I think that’s a noble undertaking.
Reed has consistently slammed Kiyosaki on every front. Reed is a researcher and fact checker (two things I would also say about myself), and he goes through and checks the veracity of pretty much every assertion Kiyosaki makes in his book. Check out his lengthy and thorough review here. Many other bloggers have weighed as well, on both sides of the coin.
I will say there are a couple of positives about Kiyosaki’s book. For one, it gets people thinking about their financial health, their goals, and who they want to be. It’s inspirational, even if the inspiration is driven by a desire to get rich quickly and easily. He also makes the distinction between assets and liabilities and advocates the purchase of assets. As a person, he’s been a very successful marketer of his books and products. Selling books is a business, and it’s one that he has been very successful at. I think the positives end somewhere around there.
Reed points out various ways where Kiyosaki twists, manipulates or replaces the truth. I’ll let you read about that on Reed’s site. Much of the book contradicts sound financial advice. Kiyosaki disparages education, explaining how educated his “poor” dad is and how uneducated but successful his “rich” dad was. This idea would appeal to anyone lacking in education. However, the statistics don’t support this assertion. More educated people, on average, earn higher wages and have lower unemployment rates. See the stats here. That’s not to say that people who don’t go to school can’t be wildly successful. They can. They often are – but Kiyosaki seems to suggest that anyone chasing education is wasting their time.
Kiyosaki also brags about the possessions he owns. He brags about his flashy lifestyle. A lifestyle of lavish spending – boats, sports cars, Rolex watches (and other various big brand names). That is not the lifestyle I advocate on this site. I don’t think it’s a character flaw to value those things, I just personally do not. Kiyosaki does.
He also seems to suggest that people who are not entrepreneurs have less value than those that are. I admire entrepreneurs…I would say that I am an aspiring entrepreneur. Owning my own small law firm is in my long term plans/goals. However, owning your own business isn’t for everyone. In fact, everyone can’t do it. If they could, there would be 7 billion (or so) solo practitioners, and no company could grow beyond what one person is capable of doing alone. How would you manufacture anything? Won’t the best companies still put the worst out of business? You get the point, but I just don’t think that the advice in the book is sound in this regard, either.
His active voice as a writer is also incredibly arrogant. I’ve seen him on television and his arrogance and bad advice carried over to that forum as well. Overall, I was not impressed and I do not recommend his books, products or services to any of my readers. I’m sure some people will disagree. This is only my opinion. I don’t know everything…certainly not about real estate investment. I have, however, always been pretty good at sniffing out B.S. If you decide to pick up any of Kiyosaki’s books, please be a filter, not a sponge. Thanks for reading.
Investing (Exactly) Like the Best Investors in the World
Posted by: Todd Metheny in Business Profiles, Value Investing on January 26th, 2009
While I was growing up, I was something of a music snob. I refused to like music that I had decided was “mainstream.” That is, if it was something everyone else liked, I convinced myself not to like it – even if I actually liked the lyrics or sound of a particular band/artist. You know the kind of person I’m talking about. Think John Cusack in High Fidelity: ”Books, movies, music…these things matter,” or “It’s what you like, not what you are like.” On some level, I must have been insecure about something or other, because as you get older you kind of just like whatever you like. You don’t apologize for it. You don’t try to tailor your taste to the undiscovered. Something original that the masses haven’t discovered yet isn’t necessarily better (but it was easier to like back then for some reason). Luckily, this level of foolish pride hasn’t crossed over into my investing beliefs.
This post is about generating investment ideas. There seems to be a myth that you have to be the first person on the scene to succeed investing. That’s just not true. I’ve said on this site before that investing in large cap stocks is typically a tough game. It’s much tougher to find pricing inefficiencies in those big, well known stocks, because you have 250 analysts looking at those stocks as a full time job. Even if you were doing this full time, and were very good, you’d have a lot of competition. When inefficiencies do exist in the big stocks, the big institutional investors make sure they don’t last long, as long as enough liquidity exists in the market (an exception that probably exists right now). I think this makes what Warren Buffett has done in large caps even more amazing. I’m not, of course, saying that you can’t make money in large cap stocks, because I know you can. Lots of people do. What I am saying, is that the most blatant market inefficiencies a value investor can find tend to be in smaller companies.
Smaller companies usually don’t have 250 analysts following them. They grab fewer headlines. They usually aren’t household names. Small cap investing is a totally different ball game. It’s not the Peter Lynch “invest in what you know” philosophy that so many people know and love. For many value investors (see this post for a brief explanation of value investing), however, it’s the best way to earn superior returns. The problem you’re likely to encounter with a small cap strategy is coming up with investing ideas. That’s the inspiration for this post. If you’re interested in do-it-yourself small cap investing, I think you should consider stealing ideas from investors whose strategies you admire and understand.
Pirating ideas from other investors poses several peg leg-like challenges. If you’re a value investor, you’ll want to have a fair value estimate with regard to the stock you’re investing in. Having your own fair value estimate gives you a sell point, and selling tends to be one of the hardest gambits in investing. You also don’t know what price the investor you’re emulating got into the stock at. You don’t know when they’ll sell (although you can find out after the fact from their SEC filings). You don’t know the original reason they invested, or whether the premise underlying the investment still holds true. Keep those risks in mind if you decide to try these strategies.
There are multiple ways to get information regarding what your favorite investment pros are investing in. Before we get into those, I would encourage you to learn a thing or two about the people you might be emulating. What is their investing philosophy? What have their historical returns been like? Does their appetite for risk match yours? For instance, if you’re risk averse, and every true value investor likely is, you might like an investor like Seth Klarman, who typically beats the market overall even though he often keeps almost half of his portfolio in cash. I recommend Klarman, Michael Price, Marty Whitman, Joel Greenblatt and of course Warren Buffet as good starting places for any value investor who wants to steal good ideas. Price and Klarman, in particular, tend to focus on small caps.
Anyway, after much ado, here’s how you find the goods:
- Call a fund managed by a manager you’re interested in and request a prospectus (this probably won’t work with a hedge fund). Find a site for the fund online, click on investor relations, and simply call the number and request a prospectus.
- Keep an eye on portfolio updates on sites like Seeking Alpha and Tech Ticker.
- Guru focus is actually a site devoted to this very idea. Check them out as well. They have blurbs on lots of famous investors, as well as keeping up with the latest news and portfolio changes with regard to the investors they follow. Tickerspy.com is another similar resource.
- SEC filings – EDGAR…this is what most investors use as one of their primary sources of information.
- Clubs. Make sure the members have some credibility. If you’ve got the chops, apply to the very selective Value Investors Club.
- Newspapers and magazines can be a great source of ideas as well. Check out the Value Line Investment Survey or, of course, The Wall Street Journal.
If you have other ideas, please email me or share them in the comments. I’d like to make one final comment about this approach. Get your ideas anywhere you can, but do your own research. Pick and choose. Trust yourself, don’t invest in anything that doesn’t make sense to you. If you don’t know your way around a financial statement, check out The Interpretation of Financial Statements by the father of value investing, Benjamin Graham. Or, if you have time, take a financial accounting class at night. If you know how they’re prepared, they’re easier to wade through. Send your best ideas to me and I’ll dance at your wedding. Thanks for reading.
New Ideas from Dead Economists – Pt. 2 (Thomas Malthus)
Posted by: Todd Metheny in Economics, Reviews on January 24th, 2009
Prognosticators often make bold predictions in order to gain notoriety. Peter Schiff is a great current example. Meredith Whitney is another. Both made predictions that turned out to be correct and have capitalized on the fame that brought. If you make a call that ends up being right, you gain lots of credibility. On the other hand, if the prediction is bold enough, and you actually end up being wrong, it permanently taints your legacy. Many economists avoid making the really bold, extreme predictions for this very reason. You’ll always be associated with that one big wrong prediction (a real Munson, Buckner, Merkle, or Bartman). You might say that’s been the case for the next economist on our list, Thomas Malthus. See the first part of the series here.
When you hear about a Malthusian prediction, it invariably means, at the very least, that the prediction is pessimistic. Malthus’ theory was that at the rate the population was expanding, the food supply would not be enough to support all of the people in the world. His logic was sound based on the numbers – he had evidence that the average village doubled every 25 years. Although he had no evidence with regard to the growth of the food supply, he was confident that the food supply couldn’t possibly grow so quickly. It makes sense, because at the time, most people’s resources were devoted to growing enough food to sustain life.
Luckily for us, he was wrong. Although the population continued to grow for a variety of reasons, he failed to account for innovation in the field of agriculture. Crop rotation, fertilizer, seed selection, better tools, use of horses and machines are a few of the contributing factors. The percentage of the population needed to feed the world has been reduced dramatically for this reason. Currently, in the United States, a very small percentage of the population produces enough food to ship millions of tons of food abroad.
Although his original prediction did not come to pass, over time Malthusian predictions have gained momentum with cult followings from time to time, including a period during the 60s and 70s. Now, some supporters point to global warming as the true effect of what Malthus would call rampant population growth. Malthus remains an interesting character, despite the fact that his name has become synonymous with gloom, doom, and being overly pessimistic. One of his major contributions to economics seems to have been the inspiration people had to prove him wrong. Personally, I’m glad they did. Short post today, enjoy the weekend. Thanks for reading.
Best Credit Cards Deals & Rewards
Posted by: Todd Metheny in Uncategorized on January 23rd, 2009
I’ve mentioned before that I’m attending the Berkshire Hathaway (BRK-B) shareholder’s meeting in Omaha, NE on May 2nd. Because Kansas City is relatively close to Omaha, my wife and I are making the journey by car. I paid for my hotel room completely in Marriott rewards points. Overall it shouldn’t cost us much out of our pocket. It’s a busy weekend, so all the prices are jacked up, and it cost me quite a few points, but I think it’s worth it. I don’t really travel that much, and I’ve wanted to go to this meeting and hear Warren Buffet speak for several years. The point is there are credit cards out there tailored to your particular needs. The blogosphere is a great resource for finding the right one. Whether you want hotel points, airline miles (I would actually avoid these unless you fly a lot – the deals aren’t as good as in some other areas), magazine subscriptions, dining gift cards, or just straight cash back – there’s probably a card out there that pays you more than you’re currently getting.
Credit Philosophy
I’d like to start out by saying that people have very different ideas of how credit should be used. Some people passionately insist that every purchase should be made in cash. One such site is No Credit Needed - check it out. I think for some people this makes a lot of sense. Some people can’t handle the power that comes with credit. I know people like that – if they have the credit, they utilize it. For me, I think its wise to use credit as long as you have the cash to back it up, you don’t carry a balance from month to month, and you get something in return.
Credit Card Blogs
If you are in the market for a card, there are some great sites out there to give you the low down on the best cards. I think with any card you need to consider the reward, whether there’s an annual fee, and what the APR is – in case you ever happen to carry a balance. I’ve seen several articles suggesting that credit card rewards are on the decline. Keep that in mind as you shop for one. I think Credit Addict is a great resource for finding a credit card. Credit Card Lowdown is a carnival blog with lots of credit card information as well.
Credit Card Arbitrage
While we’re on the topic of credit cards, I thought I might say a brief word on credit card arbitrage. If you are good at paying your bills on time and have a good handle on your finances, this might be a good strategy for you. Here’s how it works: Open a card with an introductory 0% APR. Charge purchases to that card. As you charge these purchases, instead of paying the card off in full each month, like you would with a normal credit card, make the minimum payment and place the remainder of the balance in an interest earning account – such as a money market account (shop for the best rate on a money market at Bank Deals). Make sure that the balance in your money market is always at least at the level of your credit card balance. Then right before your introductory period ends, pay off the balance in full, pocketing the interest you earned along the way. Hopefully you found these resources helpful, if you have others, please leave them in the comments or send me an email. Thanks for reading.
How to File your Income Tax Returns in 2009
Posted by: Todd Metheny in Uncategorized on January 22nd, 2009
I openly solicit my friends and readers of my blog for post ideas. The topic of this post was an email suggestion from my friend Josh. Thanks buddy. I was further inspired to go ahead and roll this out now by a question asked in the comments over at The Simple Dollar. The question was, basically, whether it’s difficult to prepare your own tax returns. I hope this helps.
Benjamin Franklin is famous for (amongst other things) having once said:
Certainty? In this world nothing is certain but death and taxes.
One way or another, you have to pay your taxes. If you don’t, the IRS will eventually “get” you. For frugality reasons, I would think that many readers of a personal finance blog already do their own taxes. Doing your own taxes is a good way to save eighty bucks or so if you have a relatively straightforward return. Plus, with all the question and answer style software programs available, it’s easy. I personally have used TaxAct for the last two years because that particular program was recommended by a friend of mine who’s a tax attorney. TaxAct is free to prepare and file federal taxes but charges a nominal fee for the filing of your state income tax return.
There are a bevy of others at little or no cost as well, including: IRS free file (directly through the IRS, plus they claim you get a faster refund), TurboTax, TaxCut, TaxBrain, CompleteTax, TaxSlayer, and FreeTaxUSA/TaxHawk. I can’t say that one is better than the other, of course, as I haven’t used them all. I can say that these programs make it incredibly easy to do it yourself, plus it’s satisfying. I highly recommend this option. You can, however, possibly get an even better deal.
There are several programs available that offer completely free tax prep, no strings attached. So not only can you avoid lifting a finger to prepare your own taxes…it might be cheaper than doing it yourself. VITA (Volunteer Income Tax Assistance) programs prepare tax returns for low to moderate income families (generally 42k or less). Tax Counseling for the Elderly (TCE) offers free tax prep for people aged 60 or older with straightforward returns. In addition to these sources of help, military personnel are eligible to receive tax prep through VITA programs and the AFTC (Armed Forces Tax Counsel). See information at all three here. During my law school years, I know that the law school offered VITA services during tax season (almost all the volunteers were law students). If you don’t live in Kansas City, you’re on your own to find where they do it. If you live near KC and are interested, drop me a line and I can tell you exactly where to go.
My suggestion would be to do it yourself if you are able. For about 15 bucks you can file your state and federal income taxes with TaxAct. If you can get it done for free and have the time to wait in a line, then do that. If you make too much money for one of those programs or think your return is too complex (it may be), then you can probably afford to hire someone to take care of it for you. Hire a lawyer or a CPA and bank on it being done right. Thanks for reading.
Inaugural Address – Thoughts from a Personal Finance Blogger
Posted by: Todd Metheny in Uncategorized on January 21st, 2009
I don’t care for partisan politics. My political pendulum has swung in both directions over the course of my life. I honestly don’t know exactly where it sits at this time. I do know that I hate how politics divides us. I hate that the parties are set up so that their members will feel disdain for one another. I think I understand why in terms of marketing. As long as you feel contempt for the other party, you will have tremendous brand loyalty to the party which you belong to, regardless of whether the man that party runs for a public office happens to be a scoundrel. It makes sense, but I don’t have to like it. Perhaps I’m being too cynical.
This blog has been more current event centric lately than I would like it to be. However, the inauguration of the 44th president of the United States is just too big of an event for me to ignore. I’ve seen articles all over the internet advocating one investment or another based on the fact that we have a new president. I generally don’t think this is a sound basis for making investment decisions, but there will be money to be made for the enterprising investor if Obama follows through on some of his promises. However, each stock will still have to be individually analyzed for value, as any information we have could (and likely is) already be built into the price of the stock (or asset).
I’d like to take this opportunity to comment on just a few things that I noticed in the inaugural address that relates specifically to finance and investing. I’d like to start in Obama’s own words:
…a nagging fear America’s decline is inevitable, that the next generation must lower its sights…
I like this quote because it’s a nagging fear of mine. As a culture, can America still compete? Have we become too lazy based on our incredibly high standard of living and history of success? I think Americans are as intelligent as anyone else, but many other cultures seem hungrier than we are. Of course, I still see strengths in America – our diversity, our capitalistic (although some see this changing) approach to problems, our agriculture (a nation that produces its own food is always in better shape than one that doesn’t).
Obama’s approach to stimulating the economy by re-building infrastructure is one that I like. It likely will create jobs in the near term and improve America’s bridges, roads, etc. I think this is a better approach than giving people money. Plus, it’s something that needs to be done anyway. It makes sense. Of course, the scary part of this is that we’re throwing money at a problem that we don’t have. We’re not balancing the budget – we’re engaging in deficit spending. If this were a business, I would say that we looked to be on the road to bankruptcy. At the very least, this action is likely to devalue our currency in the future. So what investments might flourish under this strategy? Builders, construction companies, raw materials suppliers, and those that ship the necessary raw materials. Perhaps others.
Obama’s speech also focused on the importance of turning to renewable and alternative energy sources. I couldn’t agree more. The ability to produce the energy we need is vital to the stength of our economy. I am not an engineer, or a scientist, nor do I have a technical background. I can’t predict what the most reasonable alternative energy source is. However, I think we should consider any source that is economically viable. Being able to produce one’s own energy is vital to the economic health of a country. Investments in the next big thing in energy have been all the rage for some time now, but many energy stocks have plummeted. If you guess right, make sure to send me half of your profits.
Obama also mentions a “new era of peace” in his speech. I don’t know if that will come to fruition. As soon as we move on from one conflict, another seems to follow not far behind. There’s fighting in the middle east as we speak. Will the US become entangled in that conflict? Or another? More than one? Perhaps all of the above. In any case, I wouldn’t downgrade munitions makers too far on Obama’s new era of peace. I hope I’m wrong. I hope the entire world will wake up and realize that diplomacy trumps war. Unfortunately, history has not shown that to be the case. It’s a scary world, and as of now I can’t envision a time when we aren’t building weapons at a frantic pace. Going forward, Obama’s message for the militant was this:
Your people will judge you on what you can build, not what you destroy.
I hope he’s right. And I hope the world can hear him. Thanks for reading.
