My first job outside of babysitting for a few dollars and helping out with the little league snack shack was as a lifeguard. I took some classes at a community college and earned my Red Cross Lifeguard card and then a Water Safety Instructor card.
I was reminded of this when I read an article by one of my favorite economists, Walter Williams. He talks about minimum wage jobs and how important they are for the economy and for developing and teaching skills. During my time as a lifeguard, I needed to be responsible for a pool full of children swimming. I also learned how to plan a lesson and deliver it in a meaningful way when I was teaching swim lessons. Williams makes the point that a lot of people would not want to have a job at McDonalds, Wal-mart, or even as a lifeguard (believe me, it isn't as glamorous as Baywatch makes it seem. It's actually quite boring.), but the jobs help people develop. He then goes on to list a number of famous or successful people that got their start working at McDonalds.
What was your first job? Did you find that it provided you with a strong foundation for what you are doing now?
Wednesday, November 30, 2005
Google Shares Drop
I beginning to find that Google is a popular topic on this blog. I think I am drawn to it because of its semi-unconventional way of doing things. I also like the way the company is attacking major competitors (Microsoft for one) with relatively little advertising for itself. In fact, Google has never advertised, at least in the traditional sense. Word spreads on websites and on webpages. I remember I was in college the first time I heard about Google. I thought the name was stupid, but when I finally got around to looking at it, I never went back (I had been an Excite or Yahoo! search engine user previously).
Yesterday, Google's shares dropped 4.7%. People think it is because of the "poor" start to the Christmas shopping orgy, but I'm beginning to think that Google might be a part of a bubble.
When you look at Google's P/E ratio, you see quite a high number. This is not normally a good sign. Today, the number is right around 80. Last week it was about 100. What is a P/E ratio? At the basic level it is the price of the stock divided by the earnings per share. What does that mean for you, the investor? It would take 100 years for Google to be able to create the earnings that its shares are trading at. Is this a rare occurance? No. Growth stocks or new companies with a lot of potential for growth often have higher multiples. The stock's price reflects the potential future earnings (remember a stocks price can be determined by the present value of all of the future dividends). But sometimes, people get excited about stocks and bid the price higher than what the company can produce, even at an accelerated growth rate. Sooner or later, as history has shown (just look at the stockmarket crash/recession of 2001) the price comes down. I'll explore this idea a little more in my next post.
Yesterday, Google's shares dropped 4.7%. People think it is because of the "poor" start to the Christmas shopping orgy, but I'm beginning to think that Google might be a part of a bubble.
When you look at Google's P/E ratio, you see quite a high number. This is not normally a good sign. Today, the number is right around 80. Last week it was about 100. What is a P/E ratio? At the basic level it is the price of the stock divided by the earnings per share. What does that mean for you, the investor? It would take 100 years for Google to be able to create the earnings that its shares are trading at. Is this a rare occurance? No. Growth stocks or new companies with a lot of potential for growth often have higher multiples. The stock's price reflects the potential future earnings (remember a stocks price can be determined by the present value of all of the future dividends). But sometimes, people get excited about stocks and bid the price higher than what the company can produce, even at an accelerated growth rate. Sooner or later, as history has shown (just look at the stockmarket crash/recession of 2001) the price comes down. I'll explore this idea a little more in my next post.
Monday, November 28, 2005
Capital Gains Tax Set to Increase
A lot of the reasons why people have been investing in the stock market lately is that in 2003, the capital gains tax, originally set at 35% was lowered to 15%. Some have credited this tax cut with saving the economy and causing the post 9-11 recession to be a lot less of an impact on our economy than it could have been. Unfortunately, the tax is scheduled to revert to 35% in 2008.
Dividend income and estate taxes are also scheduled to revert to their pre-2003 levels in the next few years. "What? A few years?" Yes, I know there is still some time, but even with only a few years away, the effect that a tax rise is imminent will have negative effects on the market, most likely causing a number of investors to sell their stocks to take advantage of a lower tax rate.
Read this article at Tech Central Station for more information.
Dividend income and estate taxes are also scheduled to revert to their pre-2003 levels in the next few years. "What? A few years?" Yes, I know there is still some time, but even with only a few years away, the effect that a tax rise is imminent will have negative effects on the market, most likely causing a number of investors to sell their stocks to take advantage of a lower tax rate.
Read this article at Tech Central Station for more information.
Xbox360 Tries to Knock Sony Off its Pedestal
A great article here from the Economist about the gaming industry, a $20 billion a year market. You may have heard that the Xbox 360 was released last week to lines of people and even some social unrest (when customers at a Wal-mart attacked the manager after he changed the rules for getting one of the entertainment consoles).
The article goes into some detail about the video game industry, especially the strategy behind the big three players (Sony, Nintendo, and Microsoft). Microsoft is in second place, but the jump needed to take first is formidable.
One factor I thought interesting, was that the manufacturers usually sell the consoles at a loss hoping to recoup their investment through the sales of peripheral devices. Another interesting fact is that the fight over standards (blu-ray or HD-DVD for example) seems to be what is really initiating Microsoft's forays into this market.
The article goes into some detail about the video game industry, especially the strategy behind the big three players (Sony, Nintendo, and Microsoft). Microsoft is in second place, but the jump needed to take first is formidable.
One factor I thought interesting, was that the manufacturers usually sell the consoles at a loss hoping to recoup their investment through the sales of peripheral devices. Another interesting fact is that the fight over standards (blu-ray or HD-DVD for example) seems to be what is really initiating Microsoft's forays into this market.
The Current Income Tax Hurts the US Economy
An article speculates that the income tax Americans pay costs them $500 billion in time and money just to come up with the money.
Put another way in the article, it takes 5.8 billion hours for Americans to figure out how much they owe and ensure it is delivered by April 15th. That time, when looking at the opportunity cost, is worth the equivalent of 2.77 million people quiting the work force. That's right. 2.77 million people working a regular work week with vacations during the year is equal to 5.8 billion hours of wasted time!
Why do we have to shoulder this burden? Businesses (included in the above numbers) have to make decisions, not based on what it good for the business, but also whether there are any tax benefits or penalties to those decisions. Again, if we look at opportunity cost, we can see that this burden is costing the business time and money and potentially higher growth rates because it has to consider tax implications.
Moreover, the article claims, that businesses pass on the burden to the consumer. Of every dollar spent, 22 cents is, on average, used for paying the business' taxes.
John Linder (R - GA), has proposed the Fair Tax (H.R. 25) in order to remedy some of these uneccessary burdens. Read about the Fair Tax here.
Put another way in the article, it takes 5.8 billion hours for Americans to figure out how much they owe and ensure it is delivered by April 15th. That time, when looking at the opportunity cost, is worth the equivalent of 2.77 million people quiting the work force. That's right. 2.77 million people working a regular work week with vacations during the year is equal to 5.8 billion hours of wasted time!
Why do we have to shoulder this burden? Businesses (included in the above numbers) have to make decisions, not based on what it good for the business, but also whether there are any tax benefits or penalties to those decisions. Again, if we look at opportunity cost, we can see that this burden is costing the business time and money and potentially higher growth rates because it has to consider tax implications.
Moreover, the article claims, that businesses pass on the burden to the consumer. Of every dollar spent, 22 cents is, on average, used for paying the business' taxes.
John Linder (R - GA), has proposed the Fair Tax (H.R. 25) in order to remedy some of these uneccessary burdens. Read about the Fair Tax here.
The Other Beta
The promise and perils of "beta" in a technology product's lifecycle, profiled here. Also in the comments.
"I deplore it as a consumer; I admire it as a marketing professional," said Peter Sealey, a marketing professor at the University of California at Berkeley and former chief marketing officer at Coca-Cola Co. "I can't come up with anything else in the entire marketing world where marketers knowingly introduce a flawed or inadequate product [and] it helps grow your user base."
"I deplore it as a consumer; I admire it as a marketing professional," said Peter Sealey, a marketing professor at the University of California at Berkeley and former chief marketing officer at Coca-Cola Co. "I can't come up with anything else in the entire marketing world where marketers knowingly introduce a flawed or inadequate product [and] it helps grow your user base."
The Other P/E
Sometimes it cracks me up to read or watch the "pros" as they attempt to predict where the market is heading. Strike that: it always cracks me up.
I like to think that I don't walk around with my head completely in the sand, but I have long ago stopped paying much attention to the various indicators and gauges that supposedly tell me what to do with my money. Seldom are they right, often are they contradictory (let's play a game... you give me one pundit's outlook on the market, and I'll find a diametrically opposing view in 30 seconds or less or will buy you a lottery ticket), and always are they carefully constructed: pulling just the right information over just the right period of time, to support just the right outlook the pundit's firm is marketing to their client base at the time.
Here's a new one I've never run across: Citigroup's Panic/Euphoria Model, or "The Other P/E". Read it and post where you think the market is heading between now and the end of the year. Up, down, or even. Your guess is as good as anyone else's, I'm sure.
I like to think that I don't walk around with my head completely in the sand, but I have long ago stopped paying much attention to the various indicators and gauges that supposedly tell me what to do with my money. Seldom are they right, often are they contradictory (let's play a game... you give me one pundit's outlook on the market, and I'll find a diametrically opposing view in 30 seconds or less or will buy you a lottery ticket), and always are they carefully constructed: pulling just the right information over just the right period of time, to support just the right outlook the pundit's firm is marketing to their client base at the time.
Here's a new one I've never run across: Citigroup's Panic/Euphoria Model, or "The Other P/E". Read it and post where you think the market is heading between now and the end of the year. Up, down, or even. Your guess is as good as anyone else's, I'm sure.
Tuesday, November 22, 2005
Start Thinking About Taxes
I know. It isn't April yet, but in order to make sure that we aren't over-taxed by the government, we should be thinking about taxes and ways we can avoid unnecessary taxation throughout the year. I came across the Anderson Financial Group's webpage with a wealth of information about taxes and different ways to shelter money from taxes, including retirement tools such as the 401(k) and IRA, to the educational savings account or creating a corporation.
Visit the site and click on the "Tax Center" link in order to read about the different options available to you. Let me know what you think, too.
Visit the site and click on the "Tax Center" link in order to read about the different options available to you. Let me know what you think, too.
Managing Personal Wealth Quiz
I'm currently taking an accelerated class in personal wealth management. Every week, the instructor sends out a quiz. I thought I would post the questions and my answers here in order to share the financial information. Most of the questions and answers are vague, but if you have any questions about the topics, please post them in the comments and I'll try to be more specific.
1. BRIEFLY, why do I prefer "don't be poor in retirement"rather than "maximize your wealth" as the primary overall objective in Wealth Management?
Don't be poor in retirement is an obtainable goal. Maximizing wealth is nigh on impossible unless you make every right decision and buy and sell at the exact right moments. Obviously by not being poor and meeting that goal, you can then set higher goals, but it is good "not to be poor."
2. We have several levers to work with in managing personal wealth -- asset allocation, tax structures, etc. Which lever (or 2 levers) are the most under our control and, in that sense, the most powerful.
The two most powerful levers under our control are income and expenses. Of all the things we can control, these two we can control directly. By cutting expenses, we can increase the amount of money we can set aside for reitrement or other financial goals. By increasing income (through moving to a different job) we can also gain additional money for our financial goals.
3. Why do we care about relatively small differences in costs in wealth management?
Unfortunately, a small cost, like 1% of all assets managed can add up considerably over time. Because personal wealth takes a long-term view, 1% can be the difference between thousands of dollars by the time you retire or meet your financial goals.
4. What are the advantages of bond mutual funds? What are the disadvantages?
The advantage of a bond mutual fund is that it provides diversification to someone who wants a wide variety of investments. The disadvantages are that it could carry more risk due to the manager facing the pressure to beat the market. They are also not very liquid. An additional risk is that they are more susceptible to interest rate changes, because there is not necessarily a consistent start/end date for the bonds within the fund.
5. Briefly, what is the advantage of a Roth IRA compared with a traditional IRA?
Roth IRA: Able to invest after-tax dollars. The contribution limits are relatively high for a middle class investor. Can withdraw money for large purchases. Probably the greatest advantage is that you don't pay taxes on the money when you do withdraw it.Traditional IRA: Must contribute before-tax dollars (set up through the employer). Must pay taxes on the income when it is withdrawn. The same contribution limits that apply to a Roth IRA also apply to the IRA.
6. What are the disadvantages of a tax-deferred annuity (TDA)?
Extremely high costs due to the age of the insurance company (bureaucracy). Fees are generally in the form of a % of holdings. When compared with an index fund, the index tends to return more (mostly because of fees on the TDA).
Wednesday, November 16, 2005
Follow up: Wal-mart's profits help people
John Stossel, of ABC's 20/20, wrote an op-ed piece here about Wal-mart and the benefits that it provides for all of society, let alone its own workers.
We can debate again the virtues or vices of Wal-mart but what struck me from the article as being particularly interesting was Mr. Stossel's reference to 1900's "Robber Barons" and their perceived problems. Being neither robbers or barons, these people (Vanderbilt and Rockefeller) contributed to society and made people's lives better, all the while getting rich for their trouble.
Another interesting part of the article I picked up on was the reference to Gordon Gecko's speach from Wall Street. He says that business is a zero-sum game: There are winners and losers in every transaction. But when you stop and think about it for a minute you can see from real-world examples and the example with the milk that Stossel provides that this is not true. Businesses create wealth, not only for themselves but for their customers and in turn for society.
Ayn Rand's book, Atlas Shrugged, wholeheartedly subscribes to this business philosophy and her heroes describe this detail at times within the story. I posted an example of one monologue and you can find it here.
We can debate again the virtues or vices of Wal-mart but what struck me from the article as being particularly interesting was Mr. Stossel's reference to 1900's "Robber Barons" and their perceived problems. Being neither robbers or barons, these people (Vanderbilt and Rockefeller) contributed to society and made people's lives better, all the while getting rich for their trouble.
Another interesting part of the article I picked up on was the reference to Gordon Gecko's speach from Wall Street. He says that business is a zero-sum game: There are winners and losers in every transaction. But when you stop and think about it for a minute you can see from real-world examples and the example with the milk that Stossel provides that this is not true. Businesses create wealth, not only for themselves but for their customers and in turn for society.
Ayn Rand's book, Atlas Shrugged, wholeheartedly subscribes to this business philosophy and her heroes describe this detail at times within the story. I posted an example of one monologue and you can find it here.
Get LinkedIn
A friend of mine, Jacob Schenkel, introduced me to this on-line service called "LinkedIn." It is a "networking" site that helps you keep track of the people you know and what they do. It adds power by keeping track of the connections between all of these people. This allows you as a user to search this network to find people in a job field you might be interested in or maybe find someone who offers a service you (or your company) are interested in securing.
By posting a mini-resume, people you've worked with or you know can give you feedback and "endorsements" of your work. LinkedIn is also connected to major job search engines like Monster.com and CareerBuilder.com. If you find a job on either of these sites, you can search your network for people that might work in the company you are applying to. They are also expanding "linking" LinkedIn with other sites.
From their own site:
Check it out and send me an email, so I can join your network!
By posting a mini-resume, people you've worked with or you know can give you feedback and "endorsements" of your work. LinkedIn is also connected to major job search engines like Monster.com and CareerBuilder.com. If you find a job on either of these sites, you can search your network for people that might work in the company you are applying to. They are also expanding "linking" LinkedIn with other sites.
From their own site:
LinkedIn Announces Relationship with the AESCIt seems to me that the site works hard to make keeping track of people, finding a job, and just staying in touch a lot easier for anybody. The more people you have in your network, the better (just make sure they are high-quality contacts). Also blog here has posted etiquette for networking on LinkedIn. Some interesting tips are included.
The Association of Executive Search Consultants is the global professional organization for retained executive search firms, representing over 4,000 search professionals in more than 70 countries. Make your information available to AESC member search consultants via the BlueSteps.com executive career management system.
Check it out and send me an email, so I can join your network!
Google launches new service
Google Base has been launched today. It offers the opportunity for people to post anything they want to a large, searchable database. Certain large, on-line retailers, auction sites, and job search companies are beginning to feel the heat and potential pressure of a competitor (*cough* E-bay *cough* Careerbuilder *cough* etc.).
Google's stock is trading just under $400 next to its all-time high of 398$ a share. Will this behemoth ever stop expanding or growing? I hope not.
Google's stock is trading just under $400 next to its all-time high of 398$ a share. Will this behemoth ever stop expanding or growing? I hope not.
Causes of inflation: The US Government
Inflation numbers were released today that show inflation is lower than many had first suspected and better than September (last month). A previous post by myself explains inflation and traditional ways of combating it here.
A great article by Walter Williams talks about the causes of inflation. He theorizes that inflation is only caused by an increased supply of money. This, in turn, causes prices to rise. He then asks where the money comes from? The U.S. Government or more precisely, the Federal Reserve board, the organization that controls the production of money and interest rates.
He then goes on to show that the government acutally likes some inflation, because it helps it pay off debt faster. This portion is great:
A great article by Walter Williams talks about the causes of inflation. He theorizes that inflation is only caused by an increased supply of money. This, in turn, causes prices to rise. He then asks where the money comes from? The U.S. Government or more precisely, the Federal Reserve board, the organization that controls the production of money and interest rates.
He then goes on to show that the government acutally likes some inflation, because it helps it pay off debt faster. This portion is great:
When inflation is unanticipated, as it so often is, there's a redistribution of wealth from creditors to debtors. If you lend me $100, and over the term of the loan the Federal Reserve increases the money supply in a way that causes inflation, I pay you back with dollars with reduced purchasing power. Since inflation redistributes (steals) wealth from creditors to debtors, it helps us identify inflation's primary beneficiary. That identification is easy if you ask: Who is the nation's largest debtor? If you said, "It's the U.S. government," go to the head of the class.
Tuesday, November 08, 2005
Thursday, November 03, 2005
Bush's Tax Reform Announced. Is This a Step Forward?
President Bush's panel on Tax Reform released their recommendations on November 1. This has caused a number of different groups to respond (some of which I've listed below) in a variety of ways.
Remember, nothing has been implemented yet. These are only suggestions following President Bush' s guidelines of finding an easier way to collect taxes (simplify), and without raising taxes while continuing to collect the same amount. He specified that charitable giving and investments should also be encouraged.
Essentially, what they have suggested seems to be positive (in my own opinion). 75% of tax payers will fall into the lowest bracket which appears to be a %15 income tax. I myself would benefit tremendously as I now pay about 23%.
They have recommended getting rid of the AMT or Alternative Minimum Tax. What this does is force some people to pay a higher tax even if they have deductions on their standard income tax return. This has become a burden for more and more people as they earn more income.
Unfortunately, many deductions would be eliminated. I rent so I wouldn't be affected by this, but mortgage interest would not be a deduction anymore. Instead, you would have deductions based on charitable giving and family size. You would also lose deductions for state taxes.
If you invest your money in housing or the stock market, they would also be lowering capital gains tax and dividend taxes to 15%. This would have a significant effect on encouraging people to invest their money rather than spend it. Related to this, 401(k), IRA's and other pre-tax savings tools would be consolodated into three different accounts, each with a higher cap, effectively providing more incentive for people to plan for the future and save money.
The panel also have decided to forego the suggestion of a national sales tax. I posted a few months ago about this issue and feel that it might still be a better solution, but overall the ideas of the Panel should cut in half the amount we, the citizens, spend on tax software or tax preparers. All this saved money could be invested or used to better our standard of living.
Corporations are also rewarded in the proposal with a decrease in tax rate from 35% to 31.5%. This could have the effect of allowing companies to reinvest the money otherwise spent on taxes.
A great article here produced by the Tax Foundation goes into far more detail on pros and cons and their likely effects.
The Heritage Foundation has also released a critique of the suggestions where they grade each of the individual proposals based on an ideal, business and consumer friendly model. Give it a read.
Robert Novak, a conservative pundit, thinks the plan is dead in the water and is not afraid to tell people here. He believes the people on the commission did not consider all of the options because of their prior political leanings.
Remember, nothing has been implemented yet. These are only suggestions following President Bush' s guidelines of finding an easier way to collect taxes (simplify), and without raising taxes while continuing to collect the same amount. He specified that charitable giving and investments should also be encouraged.
Essentially, what they have suggested seems to be positive (in my own opinion). 75% of tax payers will fall into the lowest bracket which appears to be a %15 income tax. I myself would benefit tremendously as I now pay about 23%.
They have recommended getting rid of the AMT or Alternative Minimum Tax. What this does is force some people to pay a higher tax even if they have deductions on their standard income tax return. This has become a burden for more and more people as they earn more income.
Unfortunately, many deductions would be eliminated. I rent so I wouldn't be affected by this, but mortgage interest would not be a deduction anymore. Instead, you would have deductions based on charitable giving and family size. You would also lose deductions for state taxes.
If you invest your money in housing or the stock market, they would also be lowering capital gains tax and dividend taxes to 15%. This would have a significant effect on encouraging people to invest their money rather than spend it. Related to this, 401(k), IRA's and other pre-tax savings tools would be consolodated into three different accounts, each with a higher cap, effectively providing more incentive for people to plan for the future and save money.
The panel also have decided to forego the suggestion of a national sales tax. I posted a few months ago about this issue and feel that it might still be a better solution, but overall the ideas of the Panel should cut in half the amount we, the citizens, spend on tax software or tax preparers. All this saved money could be invested or used to better our standard of living.
Corporations are also rewarded in the proposal with a decrease in tax rate from 35% to 31.5%. This could have the effect of allowing companies to reinvest the money otherwise spent on taxes.
A great article here produced by the Tax Foundation goes into far more detail on pros and cons and their likely effects.
The Heritage Foundation has also released a critique of the suggestions where they grade each of the individual proposals based on an ideal, business and consumer friendly model. Give it a read.
Robert Novak, a conservative pundit, thinks the plan is dead in the water and is not afraid to tell people here. He believes the people on the commission did not consider all of the options because of their prior political leanings.
Google Starts Book Search Service
Google today launched their "Google Print" search service which searches books the company has scanned. It is causing a bit of controversy due to copyright law, but for the moment, Google has only scanned public domain books.
I've tried the service out and it seems that this is going to be really nice. Google's stock is currently trading at an all time high of $384 a share and has risen 1.34% today.
I've tried the service out and it seems that this is going to be really nice. Google's stock is currently trading at an all time high of $384 a share and has risen 1.34% today.
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