Greath Wealth -Investment Information & Services

Risk and the Weather

Recently, while meeting with a married couple who are prospective new clients, I asked them a question I always ask prospective new clients:  ”How would you define risk?”  Her first answer was driving on the freeway, which is a very good answer, which was followed up by another answer, which is the weather.  What’s even better about the answers is that she had no background or experience with investments.

Weather.  That’s good.  People are always talking about the unpredictability, or uncertainty, of the weather.  That’s how I hope investors think.  Risk is uncertainty, and we can quantify uncertainty.  Yes, not wanting to disappoint anyone, we did briefly discuss bell curves and standard deviation.  Risk = uncertainty = standard deviation.  No, it’s not a perfect analogy, but it’s the best industry and academics have found.

Living in Houston, I also liked the “driving on the freeway” description of risk.  Driving on a Houston freeway, especially during rush hour, is an uncertain experience.  It’s uncertain from both a safety standpoint and from a time required standpoint.

Although I often refer to Nobel Prize level tools and tactics, I do like to keep things, especially investment concepts, simple.  We’re all more likely to remember and understand simple explanations.  Besides, simple solutions usually work the best.  That’s what we want:  things that work the best.

Stay tuned.

Thanks,

Rod

What is Money?

What exactly is money?  Is it paper?  Is it coins?  Is it something you can exchange for a certain amount of gold?  What exactly is it?  We talk about and use money constantly, but have you ever stopped to ask yourrself:  ”What exactly is money?”

I remember grappling with this question in a class when I was a graduate student at Duke many, many years ago.  But I got a better angle on it, as you might guess, when I went to a round-the-fireplace discussion with J.B. Fuqua, the businessman who donated $14 million in the mid-1980s to Duke’s graduate school of business and thus had his name placed on it.

J.B. grew up on a Virginia tobacco farm and didn’t have any formal education beyond 7th or 8th grade.  However, he developed a kind spot in his heart for Duke University when the school loaned him books through the mail.  And boy, did it ever pay off for Duke.  But on to J.B. and the question about money.

One of the things I remember J.B. asking us in front of the fireplace if we had read The Wealth of Nations and going on to say that he read the book every five years.  Almost immediately, I went to the bookstore and purchased my copy of The Wealth of Nations and began reading it.

As you might imagine, it’s dry and confusing.  What exactly is it?  Adam Smith’s The Wealth of Nations is to capitalism what Lenin’s Capital is to communism.  Basically, from what I remember, The Wealth of Nations is Adam Smith’s observations about what he was seeing in the British economy in the 18th century.  In short, it’s sometimes referred to as the foundation of modern economics.

Of the things I remember from the book, one thing stands out:  Money is a representation of labor. A true Adam Smith scholar would likely grill me for the inexactness of this, but to me it makes a lot of sense.

$100 will buy you a certain amount of a gardener’s time, another amount of a physicians time and still another amount of third world labor time.  Money is labor.

But what about manufacturing?  When you boil it down, manufacturing is really a service, too.  That $100 buys you a given amount of factory time to transform raw materials, which came to the factory via someone’s…..labor.  Yes, even gold comes from someone’s labor at digging up enough dirt in a given location to extract a certain amount of gold.

What do you think of all this?  Does it make any sense?  I look forward to hearing your thoughts.

Thanks,

Rod

Today is a Good Day for Capitalism

Because of what’s happening in Chicago, today is a good day for capitalism.  What’s happening in Chicago today?  Based on what I’ve seen in the media, all Chicago city workers, with the exception of the police, firemen and paramedics, are having to take a day off without pay.  Why?  The city is out of money.

Am I wishing bad things on Chicago city workers or anarchy in the Windy City?  No, absolutely not.  I had a college roommate from Chicago and I love the city.  However, every person and every organization must learn to live within their means.  Unfortunately, Chicago’s leadership didn’t learn to live within its means, so the city, which put them in power, is paying the price.

What will happen now?  My guess is that days like today (and there’s another two or three furlough days scheduled for 2009) will force the city’s leadership to start realizing they have limited means.

They can keep raising taxes, but it won’t likely raise any revenue as people and businesses will just move away.  Hence, they, or someone who ultimately rises to power in Chicago, will ultimately learn that hard decisions have to be made.  Money ultimately represents labor (more on this tomorrow) and they have to learn that they have a limited amount of labor.

It would be interesting to visit Chicago today to see if everyone in the city is taking the day off and going hungry.  My guess is that everyone but the government employees is going about finding a way to do business as usual, without the thousands of bureaucrats.  Maybe, just maybe, someone in Chicago will ask:  ”Do we really need all these city employees?”

A couple of decades ago corporate America went through a gut wrenching “reengineering” period as corporations learned they couldn’t have 20 layers of management where 5 layers would do.  Yes, it was painful for everyone involved, but corporations, shareholders and ultimately consumers benefitted.

Corporations had to look around and ask:  ”What are our customers really willing to pay for?”  At some point, the many layers of government will have to do the same.  It’s unfortunate the government entities didn’t learn by watching; however, it’s near certain that they’ll have to learn at some point.

Capitalism thrives on efficiency improvements, which ultimately raises everyone’s standard of living.  Now it’s time for the government entities to step up to the efficiency plate.  And as they do, ever so slowly, you can bet that consumers, and ultimately the economy, will benefit.  Yes, today will go down as a good day for capitalism.

Kids, Money and TV

I’m a finance and engineering guy, not a child psychologist.  Also, I like to blog about investing, and I realize that’s what you expect to read about from me.  Nevertheless, the above three topics converged at the Schulz home earlier this summer.  And because we found something that has worked very well with our situation, I thought I’d diverge from my usual blog and share our situation and solution with you.

Our children, two girls ages 5 and 7, would watch TV 12 hours a day if we let them. No, we don’t let them do that, but it’s a draw that we were constantly fighting and I didn’t like the amount of time they were spending in front of the TV. Do you ever deal with this situation?

Then, after returning from a week at family camp in June I had a major clash with my 7 year old about watching TV instead of doing what I had asked (helping unload the SUV).  As a result, I banned both children from the TV for a week, both as punishment and to give me time to think about the situation.

While I thought about the situation I considered four things:

1) Modifying our approach to TV management
2) Banning the TV for the summer
3) Banning the TV period, except for family DVDs
4) Dropping our TV satellite subscription

Pam strongly disliked 2-4, as she uses the TV to sometimes keep their attention while fixing dinner or doing other household chores. If it were up to me, I would have pursued option number 4. I don’t like the TV and I really don’t like writing a check to the satellite company every month. No, we’re not going broke, but I have no value for 99% of what’s on TV.

In addition to thinking about it personally, I consulted several of the elder members of our church for their thoughts on the situation. What did we come up with, and more importantly, how well has it worked? Bottom line: it’s worked beautifully, better than both Pam and I would have expected. It’s very simple, cheap and everyone is happy.  Yes, I realize that the same thing doesn’t work for everyone and every situation, but since this has worked so well and since it concerns money, I thought I’d share it with you.

What did we do? We told our girls that if they made their beds and picked up their room by 10:00 a.m. in the morning we’d pay them 50 cents. Additionally, they could earn 50 cents, and possibly a bit more, every day of the summer by applying themselves at the daily learning time. For example, Megan, our 7 year old, generally gets a penny for every math problem she does.

However, if they want to watch TV, they pay me 50 cents for a half hour program, with a limit of two programs a day.  Wow, did it ever create the behavior we wanted.

Almost every day now they’re quick in the morning for me to inspect their room.  (Yes, although we have a four bedroom house, we’re making them share a room at this point in their lives to encourage sharing and getting along skills.)  After the inspection I pay them each 50 cents, assuming they’ve done their job.

Then, later in the day, when they want to watch TV, they get me or Pam and dutifully pay us 50 cents for a half hour slot.  And since they know they’re limited to two 30 minute slots a day, they’re careful about how and when they spend their limited resources.  Hence, they’re also learning about limited resources and sacrifices.

Of course, I was hoping they’d forego TV and keep their ~$1 a day.  I’ve got the 7 year old to think about this and the number of dollars she could save in a month makes her head spin.  However, she can’t yet resist the daily temptation to watch her two programs.  But she occasionally gives serious thought to the saving idea.

It has also been neat to see how truthful they are about the 30 minutes and not trying to bend or argue with the rules.  We’re far from perfect parents, but Pam has done a yeoman’s work here.

As we move through parenthood I’m finding that parenting is like investing in equities:  two steps forward and one step back, while also being fun, rewarding and work.  Hence, I just thought I’d share this with you since it does concern the topic of  money.

What do you think of our situation and solution?  I’m interested to hear what you think.  I’m also interested to hear your thoughts about this occasional divergence from the normal investing topic.

Thank you for your comments, and please have a super weekend!

Rod

What if the U.S. Government Goes Broke?

A few days ago a client called who had been rattled by a doomsday friend of his. From what I remember, his friend’s primary concern was that the U.S. government is going broke and that the market will go to zero as a result, or something very near that.

No, I’m not a blind optimist and I do agree that it may not be good for the U.S. government to go broke, as it is ~20 percent of the U.S. economy. And no, I don’t want to trivialize the possibility.

However, we just need to look around at the states to see what would happen if the U.S. government “goes broke”. In California (CA), is Apple Computer going broke along with the CA government? No, quite the opposite. Apple is turning in record profits.

What about in Pennsylvania (PA), where 77,000 state workers have been over a month without a pay check because the politicians are at loggerheads because they can’t agree on a budget? Well, Pam and the girls are in PA now, and when I asked Pam how Friday night was at a regional family owned amusement park Pam replied: “It was more packed than I’ve ever seen it…” I know that’s pretty unscientific, but it’s a valid anecdote that the people of central PA are definitely not starving. To the contrary, everyone but the government workers are probably relieved that one element of the state government finally stood up and said: “No New Taxes!”

Even more in support of the marginal impact of the U.S. government is an article in today’s Wall Street Journal by Zachary Karabell. Mr. Karabell argued that because the world economy is so intertwined that fewer and fewer American companies need a strong domestic economy for their earnings to grow. Yes, that’s bad for the U.S. citizens looking for a job and it’s bad for the out-of-control tax hungry U.S. government, but it’s great news for the global investor.

Yes, the U.S. government may get desperate and may print too many dollars and drive U.S. inflation through the roof. However, as we witnessed in the 1980s, at some point the currency will come under control and the market will regain its losses, either through U.S. business or through business from abroad. Yes, the American citizen will feel the pain from the situation, but the global investor will survive, and ultimately, thrive.

We don’t sail around the world in wood ships any more, and with or without the U.S. government, the world economy will march forward.

Thanks,

Rod

PS: Pam is on vacation for two weeks, ending this Wednesday, and she’ll be commenting on everyone’s site again regularly after she returns.

PS 2: Let me know if anyone is interested in our web guy’s services. He’s a good kid (30 something), easy to work with, knows his SEO stuff and as you can see, does good work.

The Strength of Markets

This post is NOT about politics, but rather about an example of how people think and the strength of markets.

Last week, on the drive to Pine Cove Family Camp, Pam and I began talking about the possible socialization of the American health care industry.  My stance was simply:  The government can do what it wants, but there will always be some who are wealthier than the masses and you can bet that they’ll find good health care, and the best of the physicians and other professionals will migrate to serving the wealthier crowd.

To this, Pam replied:  “What if the government makes it illegal to practice medicine privately, as it is in Canada?”  We thought a minute, and then Pam said:  “Do you remember the mercy ships we’ve heard about that provide health care for undeveloped countries by pulling a health care laden ship into their ports and serve the ultra-poor by bringing them on board the ship?  Some enterprising individual can do that, pull a boat for the wealthy into a U.S. port, take it out 12 nautical miles into international waters, provide the necessary medical procedures, and then pull back into port that evening or the next day.  There’s nothing the U.S. government can do about what happens in international waters.  Ships do it for gambling.  They can do it for health care.”

A few days later we were having breakfast with a couple of physicians and the health care situation came up.  With a solution similar to Pam’s medical ship idea, one of the physicians said:  ”Yes, if they socialize the industry and make it illegal for private practice, you can bet physicians will be setting up shop in Mexico and offering package deals that include the flight, accommodations, meals, the medical procedure and the return trip home.”  He’s absolutely right.  We’ll see the best and brightest physicians, along with the world’s best medical centers, move to Mexico and the professionals will live like kings without worrying about defensive medicine, being sued, and all the other headaches that come along with our highly regulated industry, which is about to be regulated even more.

Even more interesting is that this physician went on to say the average new physician is entering the market with $250,000 – $400,000 in debt associated with medical school and training.  Wow!  That’s staggering.  Who, in the right state of mind, would go through ~12 years of school and training, take on $250,000 – $400,000 in debt and then settle for a government paid job?  That’s definitely no way to attract the best and brightest.

So what’s the bottom line in all of this?  Markets move, and they move with more power and smarts that any government has ever dreamed of having.  Hence, when you’re thinking of “outsmarting” the market, you may want to think again.  There’s millions of people out there, and when it comes to publicly traded companies, you can bet that others are thinking the same thing.

Once again, markets are efficient.

Thanks,

Rod