12/31/2009

My $380 shoes and why American manufacturing may not be dead


 

 

 

Recently, seemingly against all logic and reason, I purchased a pair of $380 shoes.  I had a gift certificate which helped a little, and I purchased them in tax free New Hampshire which helped a little more.  But the brunt of this purchase was taken by yours truly.  Now here’s the sentence you didn’t expect: these shoes were a tremendous value.

 

Those of you who know me personally know I have no fashion sense whatsoever.  I cannot recognize which brand names are in or out and I am usually a decade away from whatever is hip.  So why such a purchase?  One word:  quality.

 

I realize you think the shoe salesman took old Pete for a Kansas City Shuffle, tricking me into buying the priciest shoe in the store.  (It was actually the third priciest shoe in the store BTW.)  But truly, this brand of shoes will literally last me ten years.  (And since I am always a decade behind in fashion anyway this is the ideal fit for me.)  They’re real leather, hand stitched and most important to the point of this blog, made in the USA. 

 

Less than a year ago at the same store I purchased a pair of $85 shoes made in another country.  (I won’t say which but you can guess.)  And these “cheaper” shoes are already falling apart.  So you tell me, if I have to buy a new pair of these cheap sleds every year, which pair is really the better deal?

 

I’ve bought Wal-mart screw drivers and literally bent the metal on them.  Not bent the metal Uri Gellar style, I mean bent the metal trying to turn a screw.  The “price” of the screwdriver was terrific.  But was there any real value when it cannot do the job it was made for?  Ever bought a $65 DVD player that breaks after a 6 months?

 

America is not going to win in the cheap sandals price war.  But if manufactures can convince consumers that high quality and high price is actually a bargain, American manufacturing has a chance.  It’s not easy, but I hope this blog will help. 

12/15/2009

The Art of Microbudgeting

 

 

If you’ve used micro budgeting before it was probably on a long vacation.  Perhaps backpacking through Europe, perhaps a trek across country or maybe just a week long spring break venture.  Vacation or not, microbudeting is an excellent way to keep your spending under control.

 

Most folks create a monthly budget because most bills (electric bill, cell phone, rent and mortgage) are paid monthly.  But the monthly format is hardly set in stone.  Why not make a budget for a week?  Or a day?  Even a night of just a few hours?  This is the essence of microbudgeting. 

 

When I traveled to Viertnam I had a budget of about $100 per day.  Why not do the same in your every day life?  Set a daily budget be it $20 a day, $40 or whatever.  As you go throughout the day subtract in your head every time you buy a coffee, hit the vending machine, or take a cab home.  If you go over by $10 one day then next day’s budget is $10 less.  Or if you conserve on Thursday you are more than welcome to splurge on Friday.

 

Some folks make microbudgeting easy on themselves by leaving their house with their ID and the amount of their daily budget in cash.  No credit cards, no ATM cards.  When the cash is gone that’s it.  (Yeah yeah I know, what about emergencies?  Well doing this for a day or two isn’t going to kill you.  Before you do it, tell a coworker your plan and that if emergency breaks out you might need an emergency loan.)  Once you’ve weaned yourself off the plastic you can start carrying it again.

 

The key to budgeting is not writing it but sticking to it.  Sometimes trying to stick to a budget for a month is tough.  Try instead sticking to a budget for just a few hours and see how well you do.

11/14/2009

Buffet's Secret Motive

Buffet’s Secret Agenda

 

A short while ago when the Oracle Of Omaha purchased the remaining 77% stake in Burlington Northern Railroad, Buffet commented that the move was “an all-in wager on the economic future of the United States.”

 

I do hope so.

 

But look a little deeper and there is probably a backup bet in there (only in high finance could such a thing as a “backup bet” exist!)

 

Buffet may be worried about increased environmental regulation which could drive up the cost of fossil fuels.  (If that happens it’s more attractive to move people and stuff by rail.)  He may also be worried about inflation (and who isn’t besides the boys at the Fed?)  Inflation means higher oil prices (because as the value of the dollar goes down the price of “stuff” goes up.)  Higher oil again means railroads get more attractive.

 

There may be yet another reason and that is this new administration will increase economic incentives for environmentally friendly companies (there’s about $8 billion in the stimulus bill already for high speed rails, but to build high speed rails it’s nice if you already have the easements.  Now Buffet does.)    

 

Let’s all hope Buffet is right.  Let’s hope he makes money off his railroad because the economy starts humming again and people and businesses are buying more goods and raw materials and those goods and raw materials somehow need to get to the people and the businesses buying them.  (How’s that for a run on sentence?)

 

But this railroad purchase once again shows Buffet’s brilliance.  Even if he is wrong about the economy he may win again through tighter regulation, higher oil prices, and environmental incentives. 

10/30/2009

The ULTIMATE Inflation Hedge

In the financial world nothing is better than a good old fashion hedge.  Hedges are those financial moves you take just in case, oh I don’t know the market loses 40% of its value in one year.  Hedging usually consists of only limiting your downside risk; not eliminating it altogether.  Rare indeed is the chance to bet on both teams at the same time, but they do exist.  Permit me to outline one.

 

If I were to sum it up in two words I would say “silver coins.”  Silver coins, like all precious metals, are an inflation hedge.  Their price tag increases with inflation in two ways.  One happens because when inflation takes hold, dollars become worth less and less.   It takes more dollars to buy an ounce of silver than it did last month.  So the price rises.  But the value of the silver isn’t really going up; it’s more that the value of the dollar is going down. 

 

The other way silver climbs in price is through good old supply and demand.  When demand goes up prices usually go up, unless the economy can easily resupply the item.  We’re probably mining silver as fast as we can (and if we are not, what are we waiting for?)  So the problem cannot be solved on the supply side.  When people fear inflation (whether they are right or not) they usually try to convert their soon-to-be worth-less dollars into something with “intrinsic value.”  In short they purchase gold and silver.  So silver can provide the double whammy (whatever a whammy is) payoff by offering a return from both greater demand and plummeting dollars. 

 

But gold and real estate can do this as well, so why is silver the ULTIMATE inflation hedge?  It has to do with something that I rarely concern myself with in the investment world: price.  Price, except in a few cases, means almost nothing in the investment world.  What matters is value.  A stock priced at one penny could be a rip off, a $40 million home could be a bargain.  But the current price of silver (again forget for a moment about value) is such that it has a great investment hedge.  The reason? 

 

It can be given as a gift.

 

Say I buy a $15 silver coin right now (www.apmex.com allows modest investors to buy small amounts of coins.)   (No I don’t work for them.  No I’ve never had dinner with the CEO.  No I am not an affiliate.)  If inflation increases then my coin does well for reasons previously stated above.  But suppose it doesn’t?  Suppose the price of the silver coin drops to $10?  Most people would say I have two options:  sell it or hold it and hope it goes back up.  But the silver coin offers a third option.  Give it away.

 

A silver coin is an ideal gift for sons, daughters, graduates, newlyweds, nieces, nephews, anyone really.  If your speculation in silver goes the wrong way you’ve still saved yourself the time and trouble of shopping for a gift.  No need to tell the IRS either since gifts under $13,000 are exempt from reporting.  (And if you are giving your friends gifts over $13,000… let’s be friends!)

10/19/2009

The End of The Recession? Don’t Be So Sure.

 

There is little that delights a politician more than being able to state that a recession is over.  But much like trying to identify when a recession starts; it is difficult to determine when one ends.  Because many scales in the economy move in different directions, when one thing gets better, some other things remain stagnant or even get worse.

 

Everyone’s favorite yardstick is the US stock market.  Indeed the market has its fingers in many pies.  Stocks can be sold for cash or used as collateral for operational loans.  Stocks are where most Americans have sunk most of their retirement savings so when stocks rebound Americans get a bit more confident. In economics “confidence” is a code word for “more spending” and “more spending” means more people need to be hired to paint your nails, sell you a plasma TV and mow your lawn.  The market’s rebound then, offers a little to be excited about.


A little.

 

The thing to watch in this supposedly-soon-to-be-over-recession is unemployment.  High unemployment is a heavy ax that cuts into that ballooning confidence that an equities rebound creates.  If you don’t have a job you won’t spend much.  Even if you do have a job, high unemployment still scares you because that means there is a dude or a dudette out there who is willing to do your job for $5000 a year less.  So with your job hanging by a string, you hold onto your cash almost as much as your unemployed neighbor.

 

The message here is keep an eye on your spending and your long term commitments.  Save as much as you can (timeless advice even without a recession around.) 

 

 


 

09/20/2009

The Biggest Mistake People Make With Student Loans

The Biggest Mistake People Make With Student Loans

 

After giving over 60 presentations at colleges and universities across the country for the last 5 years, I’ve heard more than a few student loan horror stories.  While these tales of woe are sad (I mean what tale of woe isn’t) many student debt disasters can be avoided by paying attention to one simple number.

 

Students can tell me everything about their student loans except the most important thing.  They can tell me how much money they have borrowed.  They can tell me how much money they are short each semester.  Some of them can even tell me their interest rates.  But none of these are what I need to hear in order to help them.

 

Here it is folks, the most important number when it comes to student loans:  the monthly payment.  Quite frankly I don’t really care how much money you borrow.  (That’s only half; true but stick with me for a moment.)  The interest rates on most student loans are decent so that’s not much of a concern either.  What matters is whether or not you will be able to cover what you borrow on a month to month basis.  $20,000 in debt is essentially an imaginary number.  What affects your day to day financial life are those monthly payments.  Payments which will dictate which apartment you live in, which car you drive and even if you should switch majors.

 

Staying on top of this number is easy.  Simply visit the financial aid office every semester and ask this one question: “Based on the amount of money I have borrowed so far, what will my monthly payments be when I graduate?”  The financial aid office can easily calculate this.  When they reveal the magic number, be sure it is in line with your career choice.  If they tell you that you’re on the hook for $2000 a month and you’re studying to be a social worker, some adjustments need to be made.

08/25/2009

The One Piece Of Financial Advice No One Ever Tells You

 

I have read close to 500 books on personal finance and investing.  I’ve written two books on that very subject.  But never have I come across the piece of advice I am about to give you now.  It wasn’t it any of the books I read.  It was never told to me but any of the money management experts I interviewed.  You won’t even find this piece of advice in my books. 

 

Ready?

 

The advice is to save money for other peoples’ weddings.  I’d say I’ve blown an easy 10 grand on other peoples’ weddings.  I mean ya add the bachelor parties (from what I can remember) the tux rental if I was drafted to be in the wedding party (and I deliberately choose the word drafted) the airfare and hotels for destination weddings (those are brutal on the old wallet) and the gift (the cheap ones are always the first to go off the registry) I easily spent $10,000.  Women have it worse with dress purchases and the bridal shower.  (BTW someone write me back and tell me the TRUE difference between a bridal shower and bachelorette party.  Can’t we just combine them?)

 

But I never budgeted for a dime of it.  I knew to save for the big things like a car, a house, my retirement and perhaps my own wedding (though if Ivanka Trump ever returns my calls I won’t have to worry about that.)  But I never thought of saving for another person’s wedding.  Just one wedding is a small purchase so perhaps that is why you don’t think of it.  But add them all together and throw in a few Vegas bachelorette/bachelor parties and you’re spending a BMW lease payment every month on weddings (that are not yours!)

 

So if you are in late 20’s and early 30’s you want to put a little aside in the budget for other people’s perfect day, not just your own.  And perhaps part of that budget plan includes turning down a few offers.    

08/19/2009

The Best Way To Budget…EVER

People often ask me, “Haven’t I ever seen your picture in the post office?”

But people also often ask me, “What is the best way to do my budget?”  “How do you budget Pete?”

First let me answer the last question.  I like to keep my budget simple.  Budgeting for me is more difficult than most since, as a self employed person I get paid in various amounts.  Sometimes payments can be MONTHS overdue so I really need to plan ahead. 

Basically I like to take the old “eat that frog” strategy and do the tough stuff first.  So once I had $10,000 saved up in an emergency account, I begin every year by maxing out my retirement accounts as quick as I can.  Then I think about large purchases that I might HAVE to buy that year.  (For instance, a few years ago, Old Pete, never the diligent flosser, spent a bit too much time with his dentist.  About $1500 too much time.  My dentist told me in advance of the beating, so I had time to plan ahead.) 

Also in this economy I have a rental property that falls about $100 a month short of its mortgage.  While I could budget to pay the $100 every month I prefer at the start of the year to pay the full $1200 into the operating account and not have to worry about it the rest of the year. 

I do this because come say…April-ish I’ve wiped out almost all my big expenses so for the most part I can spend money like a drunken sailor.  Not a “wild turkey” drunken sailor (because I still have bills to pay) but kinda like an Amstel light drunken sailor.  It’s easy for me to have fun since the big stuff is already out of the way.  If speeches/book sales/go go dancing doesn’t bring in the money I hoped well I have less fun for the year but I have paid myself first. 

So that’s how I do it.  Now onto the other question (not the post office question, the other question.)  What is the best way?  Quickbooks?  Mint.com (shame on me I have YET to check these dudes out.  Write back and tell me what you think of them.)  Excel?  The old yellow paper and pencil (typically also yellow?) 

The short answer is, and I mean this, do what works for you.  That is the BEST way to budget whatever your system is.  I like to get all my big problems out of the way.  Not only is it easy for me it relieves a lot of stress throughout the year.  But others especially when money is tight, really need to do something month to month or even week to week.  Whether that is a software program an online program or just on paper, create a system that works for you and STICK TO IT! 

08/13/2009

Seriously Pete, how did Bear Stearns collapse so quickly?

 

I get this question a lot in my speeches.  How could a giant, multi-billion dollar company, run by smart people, with $18 billion in cash suddenly fall apart?  I mean who can burn through that kind of money (besides Elliot Spitzer at ½ price night at the Bunny Ranch?)

Permit me to reveal one of Wall Street’s dirty little secrets (and there are many.)  For the past 30 or so years, investment banks have been funding many of their operations with short term loans.  One such form of financing is the overnight “repo” market.  Here loans are backed by the firm’s own assets (it stocks, investments and cash.)  This overnight borrowing practice was huge, with firms like Bear Stearns borrowing $75 billion a day and borrowing it for only one day.  Literally Wall Street suits would hit the phones at 6:30 in the morning.  They’d ask big companies, like Fidelity Investments, to borrow say $6 billion, for just 24 hours.  They’d negotiate a daily rate and perhaps on one particular day, Bear Stearns would have to pledge more assets or pay a higher rate if the markets were down.  But for 30 years this worked just fine.

Until…

Well you can already see the danger.  Suppose a firm like Fidelity said, after 30 years of straight lending, “we’ll like to hold off for today.”  (Perhaps cause they heard a rumor two about Bear Stearns.  No proof, just rumors.)  Now it’s just one day, but it has a catastrophic effect.  The Bear Stearns dude who usually gets his $6 billion from Fidelity now has to call one of his other lenders, say maybe Federated Investors, and try to get an extra $6 billion from them.  Now if you answered the phone at Federated Investors and a Bear Stearns dude asked for an extra $6 billion, what’s the first question that would pop into your mind?  “Hmmmm…why does this guy need more money from me today?  It must mean that he couldn’t get it from someone else, which means someone might know something I don’t.  Which means I better be extra careful.  I’ll hold my funding for a day too just to investigate this a little more.”

Now if these were not overnight loans it really wouldn’t be a problem.  If the Fidelity dude said, “I can’t lend you the money,” then the Bear Stearns dude could say, “Let’s meet for $18 martinis, I’ll bring over our balance sheet and I can address all your concerns.”  But because it is overnight there is no time. 

Indeed Bear Stearns was a leader in underwriting mortgage backed securities.  These securities and their dwindling reputation may have been the match, but I’d argue it was the overnight lending that was the gasoline that lit the house on fire. 

 

08/10/2009

The Complexities of Tax Breaks

I could write something brilliant here, but someone else already did:


http://gregmankiw.blogspot.com/2007/03/barstool-tax-policy.html