Tuesday, May 29, 2018

Threshold of Pain Theory, Revisited

What is your financial threshold of pain, and does it change over time - and could it change suddenly?

In a very early post in this blog I discussed the threshold of pain theory.  I first learned about it while I'm talking with an engineer for what was then called Bell Atlantic which is now part of AT&T. He worked in the cell phone division and I was writing a patent application for cell phone technology.

I asked him why cell phone service wasn't better.  Bear in mind this was back in the 1990's when cell phones were still a new thing and mostly analog.  Hand-held cell phones were just becoming popular, replacing the built-in car phones we had only a few years before.  Smartphones and digital technology were still years away.  Texting was just starting to become a thing - and they charged extra for it - by the text!

Since the cell phone system was largely analog, it required a lot of bandwidth for voice communication.  And back then, there were not a lot of cell towers, even in major cities.  When you left major cities, service was pretty sparse.

"So, why don't you put in more cell towers?" I asked.  And he explained to me the threshold of pain theory.  The company could have installed more and more cell phone towers all over the city and indeed, even the countryside.  But people wouldn't necessarily appreciate the improved service, nor would they be willing to pay more for this improve service.

Unlike traditional landlines, which were what we called POTS or "plain old telephone service" back then, cell signals were weak and variable and dropped calls were very common.  And as the engineer explained to me, people expected this with cellular technology as it was basically Voodoo at that point.

When I grew up, nobody had a car phone much less a hand-held cell phone.  Only rich executives or special people had car phones in their cars.  I remember watching the movie Hellfighters with John Wayne, who played an oil well firefighter.  He had a car phone in his 66 Chevrolet Impala SS.  That was pretty slick stuff!  But every time you picked up the phone he had to hail an operator over the radio to make a call. Clearly there wasn't enough bandwidth for more than a few people to have car phones.

Once cellular telephones became popular, almost everyone could afford one - and eventually everyone would have one.  And the first time you made a call from inside your car or while walking down the street, it was like magic- because we were used to making phone calls from the only phone in the house - which was tethered to the wall in the kitchen.

So, back then, we were not amazed that cell service was so spotty and calls were dropped.  We were amazed the damn thing worked at all.   In fact we were ecstatic.  Our threshold of pain was very high and we were willing to tolerate dropped calls and poor service - something we would not have stood for with a landline.  The phone companies knew this and realized there was no point in putting up extra cell towers, as they would just be wasting money would have to raise their rates.  People were used to poor levels of service, and therefore the service didn't need to improve.

Of course, eventually it did.  When we moved to the island, there were only three cell towers on the island.  I had to erect an antenna on the roof of my house - a directional flat plane antenna - along with a line amplifier. This amplified the signal from my handheld cell phone to a full 4.5 watts and also enabled reception of the signal from the tower which I aimed to my antenna too.  For the first few years we lived here, I had to use such a contraption in order to get to make and receive cell phone calls on my old Motorola flip phone.

But a funny thing happened.  Within a few years, the cell phone companies reached an agreement with the island authority to erect cell phone antennas on the various water towers here on the island. And they didn't just put on one antenna, but rather dozens of antennas ringing the water towers as well as huge cables snaking down to the legs of the towers into enormous prefab buildings to house the equipment needed to generate all the signals necessary to run such a system.

I asked one of the engineers if all of the weight from those antennas wouldn't exceed the design load of the water tower.  He replied that they just lowered the water level in the tower by a corresponding amount to compensate for the additional weight of the antennas.

Well, needless to say, we get really good cell service now, and I took down my antenna, after it was inactive for several years - and finally threw it away (it was covered with moss and mildew). The line amplifier I think also got thrown away somewhere along the line as well.

What changed between now and back in the 1990's was that our threshold of pain was lowered.  We no longer tolerated having dropped calls, and as more and more cellular traffic became digital - in the form of texting data and even videos, we expected more from our cell phones.  People were willing to switch carriers to get increased bandwidth and better signal.  As the market matured, the competing companies had to sell quality as well as price point.

A similar thing happened in the television industry.  When I did work back in the 1990's for cable television equipment manufacturers, I learned a lot about video encoding and compression systems.  I also wrote a number of patents for VGA systems and types of video compression, including MPEG. And what the engineers told me regarding videos was the same as what the Bell Atlantic engineers told me regarding cell phones. They realized that most people don't notice minor defects in a picture. So there's little point in spending the time money effort bandwidth to improve the quality of a picture if people don't notice it.  Their threshold of pain with regard to video quality might be very high, and you can provide a pretty fuzzy picture and people will think it is acceptable.

In the early days of cable television and computers, low resolution images were acceptable, provided that certain portions of the images were in sharp focus - the portions that people are actually looking at.  Once you could figure out what those portions were, you could compress the hell out of a video signal without any video degradation that would be apparent to the eye.

But of course today, we have high definition video displays and even something called a 4K display .  Many people argue that most folks can't even discern the difference between regular, HD and 4K, but people pay extra for it, anyway.  The bandwidth necessary to transmit video signals at that high resolution is pretty staggering, and most of it is unnecessary.   But nevertheless, our threshold of pain with regard to video signals has dropped dramatically and we now demand much higher resolutions than in the past.  We are no longer content just to get 500 channels on Cable - now we want them in HD or preferably sent over an internet path, digitized.

The threshold of pain theory has other applications as well, including in economics and commerce. And getting back to cable television, that is a prime example where the threshold of pain has been raised continually.  But you can only raise the threshold of pain so far before it collapses and a catastrophic fashion - as predicted by catastrophe theory.

We like to watch old videos on YouTube. One of our favorites are reruns of "What's My Line?" - which was a game show which is broadcast for over 15 years from the 1950s through the mid-1960s. It was broadcast on Sunday night and was considered very sophisticated for the time.  Rather than celebrity panelists who were famous for being famous, they had columnist Dorothy Kilgallen, glamorous  and intelligent Broadway Arlene Francis, and publisher Bennett Cerf.  It's hard to believe that a publisher would be considered a celebrity today.  Most people don't even know what a publisher is - or a book is, for that matter.

But what is fascinating about the show is how few the commercial breaks were.  They had a primary sponsor for the program whose name would appear in front of the panel, and there would be a few commercial breaks for that sponsor as well as one for the "alternate sponsor."

Today, with many cable TV channels, the ratio of advertisements to programming is approaching or exceeding 50%. You watch five minutes of a History Channel "documentary" and then are treated to five minutes of advertisements. When the program comes back on, you were treated to a recap of what the previous five minutes of program were all about,so you can remember what the program was - or if you were channel surfing, parachute yourself into the middle of the program.

How did that happen? As a client of mine wants explained, it's like the boiling the frog theory.  He was a nice gentleman from Alabama and in a charming southern accent explain to me how, if you put a frog in a pot of boiling water, he'll immediately jump out.  But if you put a frog into a pot of cold water and slowly raise the temperature, he won't realize that he's being boiled to death, and thus will  just sit there contentedly until he's dead.

Now I mentioned the boiling frog theory before, and many people took me to task for that, pointing out that if you put the frog into the boiling water he be killed instantly and would not have a chance to jump out.  Whereas, if you put a frog in a pot of cold water, he will likely jump out immediately - and people have actually tested this.  I hate hearing comments like that, because they are such spoilsport. It's a goddamn metaphor people, just deal with it.

The point is, when you change something very slowly people might not notice, initially. Their threshold of pain increases over time and they will tolerate more and more discomfort.  That is, up to a point, but we should get to that later.

So over the years from the 1960s to the 1970s, the amount of ad time increased in television.  And as I noted in an earlier posting, I remember quite clearly the first time I was watching television and I saw an advertisement which was not for a product or service, but was an advertisement for more television.  I knew then that something was changing - they turned up the heat in the pot of water and at the threshold of pain had been raised.  Today, advertisements for television on television are as common as dirt.  But it one time such things simply did not exist.

My threshold of pain turned out to be pretty low.  I was pretty fed up with actually paying for television - something that had been free in years past.  Why paid to watch television and be shown advertisements?  Don't they get enough money from the advertisements to cover the cost of the thing? And of course, the answer is they want to make a shitload of money, which they did.

Eventually, the ad content kept ratcheting up to the point where I would change channels when the ads came on, knowing that there were at least five minutes of ads and it will allow me to see what else was playing.  I became one of the legions of "channel surfers" and ended up spending hours watching television but not actually seeing anything.  I became frustrated and decided not to watch cable television anymore, or any television for that matter - and that was back in the early 2000s if not before.

Some people have a much higher threshold of pain than I do and they continue to watch television even to this day.  Although I notice most of them just leave the television on as background noise. Some people call this the "talking lamp" which is present in nearly every household.  It's on all the time, even though nobody's watching it, or they so watch it, they only glance at it occasionally.  It's like a big subliminal advertisement.

Of course today, there's something called the cord-cutting movement.  It's slowly gathering steam but it will be awhile before it has a major impact on cable television.  But when that impact is felt it will appear to be very sudden.  An alternative to cable is emerging in the form of online streaming.  Even though it's been around for many years, it's still in its infant stages.  As I noted in earlier posting, I started online streaming by using a surplus laptop and plugging its VGA port into a flat screen TV that I purchased.  That was a decade ago, and today you could buy a television with a button on the remote that plugs you directly into Netflix.  You don't have to be a computer geek in order to stream things online, anymore.

While one can slowly increase their customer's threshold of pain, there eventually reaches a point where something breaks and they all leave at once.  And this is true in politics as well. We're watching this happen in real-time in Venezuela as we speak. The economy in that country is slowly melting down due to mismanagement by the communist government.  It is the inevitable end of all communist governments - mismanagement, corruption, and insider dealing are the norm.  People have no incentive to work because they're not being paid - and the entire economy collapses.

And of course, the communist leaders always blaming outside forces for their predicament, and use this excuse to prop up their governments for years on end.  But eventually people's threshold of pain reaches a limit and they can't stand anymore and a new revolution occurs, and the old order is thrown out.  But often that threshold of pain has to be very, very high and it takes awhile for people to finally get fed up.

People are starting to starve in Venezuela and people are dying from lack of medicine.  It's unclear as to how long they can hold up under these circumstances before they finally snap.  But when it does happen, it will be very sudden, I think.

What is this have to do with your personal finances?  I think threshold of pain theory can also be applied there as well.  It's very easy, as you progress in life, to incur more and more debts and spend more and more money, often on frivolous or trivial things.  You get used to a certain amount of debt load and a certain amount of monthly payments which neatly dovetail with your monthly income.  You start to think this is normal, and your threshold of financial pain increases accordingly.

Over time, of course, you aren't actually getting ahead, you just spending money faster than you're making it, robbing Peter to pay Paul in order to have things today that you'll pay for tomorrow. Your threshold of pain - in this case the pain being debt - increases over time, until you start to think of hundreds of thousands of dollars of debt as being a normal condition in life.  You start to hear things from your neighbors and friends such as  "debt is a normal part of life!" or "I'll never pay off my mortgage!" or "student loans are inevitable - like a mortgage on life!"

These statements are akin to the man on the torture rack convincing himself, "Hey, it isn't so bad, after all!"

Wen you say these things to yourself or hear them from your neighbor, you're just acclimatizing yourself to the new level of pain that you were experiencing.  You are now basically an opioid addict trying to suppress the chronic pain that is racking your body.

What threshold of pain theory illustrates, however, is that eventually something has to give.  People's threshold of pain eventually breaks and product and service providers no longer can get away with offering crappy service, as competitors will step in and offer better service for  a lower price. Low-resolution videos are no longer acceptable, not when high resolution is available from other sources. And eventually the angry mob overthrows the dictator, if the dictator cannot feed the angry mob.

On a personal level, eventually if you acquire more and more debt to have things today that you'll pay for tomorrow, something will break.  And it could be precipitated by the loss of a job or another economic setback, or a setback in the overall economy.   But when it does break, it breaks all at once and very suddenly - or at least appears to be very sudden, even though the warning signs were there many years ago.  You can build up your threshold of financial pain and endure it for quite a while, but a better approach, I think, is to keep your threshold of pain low, and avoid the resultant trap.

Jump out of the pot right away, before the water even gets warm!

Sunday, May 27, 2018

Return To McDonald's

Even the "bargains" at McDonald's are no bargains.

I recently had a chance to visit McDonald's twice. This is very unusual for us as we usually don't visit fast food restaurants and try to limit the amount of times we eat out.

However, Mark and I both had dental appointments early in the morning about a week apart. Mark doesn't like to eat breakfast before he goes to the dentist for various reasons including the fact that he tends to gag and doesn't want to barf all over the dentist. Those are probably good reasons.

But by the time he's done with his dental cleaning, he's very hungry having not had breakfast and we looked about for a place to eat something. There is a place across the street called Grandy's which is a southern institution. If you like plates of food piled high with sausage and biscuit gravy and home fries this is the place for you. Unfortunately it's far too much food for us at this point in our lives.

Since we were on our way to pick up the camper from the storage lot, we decided to stop at the drive-through at McDonald's and get an Egg McMuffin. Once you get in the Drive-Thru, you feel kind of rushed as you cannot view the menu board until you're right at the ordering station. At that point people are requesting your order through the speaker and you are in panic mode is there is a line of cars behind you. And this,of course, is by design.

We ordered two egg McMuffin meals with hash browns and coffee and the total came to a staggering $11.38. That's nearly 12 bucks for breakfast. In case you were late for school that's an awful lot of money. The funny thing is we went to the Wholesale Club the next week and picked up two cartons of 18 eggs each for under $4. That's about $0.10 an egg.

I did the analysis on this before so I won't repeat it here. But needless to say, you could prepare an equivalent meal they serve at McDonald's for $6,  for around a buck.

The next week it was my turn to go to the dentist and I went by myself. Afterwards I thought I'd try McDonald's again, and this time see if I could find a better value. I dismissed the drive-in window. The drive-in window I think this designed to steer you toward higher-priced meals which are prominently displayed on the menu.  The less expensive items don't appear on the menu board at all, or if they do are hard to find.

I went inside, as I had to use the bathroom anyway. There was a line of people at the cash register, but four brand new kiosks were not being used. I found this interesting that people felt they got better service at the cash register than they did at the kiosks. But the cash register is also a trap. People stand in line staring into space and then when they get to head of the line, the cashier asksso them what they want, and they stare at the menu board and go "Ahhhhhhhhhh.. I'll have aaaaaa.....".

Again, the menu board is designed to promote high-priced meal options and specialty sandwiches. The lower-cost options are either not shown on the board or are very hard to find.

Since there was no one at the kiosk, I felt like I could take my time and explore the various menu layers. And it was an interesting experience. The cheapest items are hidden behind layers of menus. I managed to locate the sausage egg burrito which was a dollar, and ordered that, along with a cup of coffee for a $1.29.  $2.29 is a lot less than the $6 that I spent the week before.

But I noticed another menu page showing specials, that showed two egg sandwiches for $4 whereas the regular price was $3 each.   When you order at the drive-thru or the cash register, they don't necessarily ring up the lowest price or offer you the special deal.

Moreover even the kiosk tended to promote expensive specialty sandwiches and oversized meals. The big promotion there was a triple Quarter Pounder sandwich which was advertised with a television video showing hamburger patties flipping in the air. It was far too many calories for me anyway, and the cost was several dollars.

I noticed on the kiosk, hiding down in the corner, the McChicken sandwiches are still only a dollar - probably a much better value and better for you in terms of calorie count.

This is not to say that you should eat at McDonalds. The problem with these fast food restaurants is that people tend to use them as kitchens. It was interesting visiting the place at 10 in the morning after my dental appointment as most of the people there were getting "McCafe" drinks which were little more than ice cream and whipped cream flavored with coffee.

And judging by the uniforms the customers were wearing for local retail businesses, it doesn't seem like they really could afford to spend 15 minutes waiting for these coffee drinks and several dollars of their hard-earned  pay. If you think about it, making minimum wage, after taxes, you're probably taking home a few dollars an hour at best. To spend an hour's worth of labor for a coffee drink seems kind of obscene.

When I was a kid growing up the working class carried lunch pails to work. A Dad often had a large Stanley Thermos filled with coffee which lasted him throughout the day. Mother would make sandwiches and maybe a small snack which he would carry in his lunch bucket. Not only did this save a lot of money, it saved a lot of time.

But we are wealthier country today - and a lazier one as well. A lot of people claim they don't know how to cook simple food items. Or they say it's too much of a hassle or it takes too long or costs too much.

This morning, I got up and put the tea kettle on. Before the water could boil I managed to fry two eggs, two vegetarian sausage patties, melt some cheese and put it all in a flax seed roll up with some spinach and onion and hot sauce. This literally took minutes to prepare and cost probably a dollar or two at most.

In the time it took to boil water I was able to make breakfast. And yet I know people here on our Island who will drive 10 to 15 miles to have breakfast served to them at a restaurant. It really makes no sense whatsoever.

And I suppose I could have merely driven home and made breakfast for myself - and in retrospect it probably would have been a better choice. Because even ordering the most cheapest thing on the menu was still no real bargain.

And it is no accident that McDonald's sets up their menus and their menu ordering system so you feel pressured to pick something quickly - and thus eschew the lesser cost options in favor of the more expensive and attractive upscale meals and sandwiches. And an army of marketers and psychologists set up this system designed to ensnare you and take your money. And you and I are pretty powerless against the sort of coercion.

And that's the real lesson I learned at McDonald's that day.

Wednesday, May 23, 2018

When Did Working For The Government Beat the Private Sector?

Decades ago, working for the government was seen as a lesser endeavor.  You didn't get paid much, but on the other hand, you didn't work too hard and couldn't get fired very easily.   Today, many government workers effectively make far more than people in the private sector.

A reader writes, sending me this link to an article that argues that doctors make less money than teachers.  It is a compelling argument in this day of "underpaid teachers" who are illegally going on strike to make more money.   They argue they are underpaid, because they "only" make $40,000 a year in places like Arkansas.   This is not far off the median income in the US of $50,000 per household, and if both husband and wife work at similar jobs, they are well above the level of middle class - particularly in rural States where the cost of living is low.

It is odd, but when I was a kid, teachers were indeed underpaid.   That was 50 years ago.  Today, even in the worst States, they make close to the median income in America.  In the best States, nearly double that.  You can make over a hundred grand teaching third graders in New York State - provided you get lots of useless Master's degrees over the summer and accumulate seniority. 

Then there are benefits - health insurance, a cushy retirement, and of course, summers and holidays off.  When you retire, you get 3/4 of that for the rest of your life - living large in places like, well, where I live.  Except that while I scrimp and save and try to make my savings last the rest of my life, my retired teacher friends buy new cars every three years - taking out loans, of course!

Today, the public sector is better than the private!

Now consider a doctor or lawyer - a self-employed individual in many cases, having to pay for their own benefits, fund their own retirement, and taxed at a much higher rate - to the point they are really not doing better than many teachers or other public "servants".   Sure, you make a big "salary" but then again, you pay an 18% self-employment tax on top of the highest rates of income taxes.   And that doesn't address the years you spent learning the trade and the tens (if not hundreds) of thousands of dollars you spent getting your degree.

Sure, a few doctors and lawyers make millions, with specialty practices and celebrity clients.   But the vast bulk actually have to work like dogs - as my previous doctor did (before the stress killed her).   Being a small businessperson in addition to your job is a lot of stress - which is one reason why I decided not to do it anymore.

And then there is the risk. As a doctor or lawyer, you can be sued out of existence. As a teacher (or fireman, or police officer), you can only be fired - and keep your benefits.

Like the guy in Florida who refused to go into the school building and confront the school shooter. He retired and has $100,000 a year in pension.

What the fuck happened?  When did being a government employee become the best option, rather than the last resort?

Well, to be sure, there has been pressure on wages and salaries across the board.   You can't get too many cushy jobs in the private sector anymore, as there is competition from overseas, and even competition from your fellow Americans, particularly those just graduating, willing to work cheap to pay off student loans.

Then there is the cost of education - skyrocketing.     I left the Patent Office and got my law degree, so I could make more money.   A lot of young people ask me how to get into the Patent business, or whether they should leave the USPTO and become lawyers.   I advise them to think hard about this, as a job with the Patent Office can be a guarantee of income for life, whereas working for a law firm is maybe a 5-10 year commitment (on their part) before they throw you out.  And the odds are, they will throw you out.  Many are hired, few make partner.

Today, rather than going to law school and becoming a lawyer, I would have stayed at the Patent Office - I'd have eight weeks of vacation and be ready to retire!   You read that right - eight weeks of paid vacation, by the time you have 20 years in (and by now, I'd have 32!).

Now, some on the Left argue that we shouldn't be "attacking" teachers and other public servants, but instead all fighting for a "fair wage" whatever that means.   But the problem with public sector employees, is that they have been using blackmail to get pay raises as of late.   Today, so many parents use school as a daycare center, so they get upset when school is closed - they have to scramble to make alternative arrangements.   And no one wants to see the "Blue Flu" or a Fireman's walkout, if you are being mugged or your house is on fire.

And in many cases, such as the ill-fated Bell, California (no relation) the lick-spittle union lackeys stuffed the city council with their own goons, and then all voted themselves a huge pay raise, bankrupting the town.   And that case is not an isolated incident, particularly in California.

The sad thing is, to me, is that these government employees aren't saving a nickel of it.  Like lottery winners, they go out and buy big houses, fancy cars, and go into debt - and then argue that they are "living paycheck to paycheck" and need a raise.   But a funny thing - my teachers back in 1968 were actually underpaid, but they managed to make ends meet.   For many salary slaves, money works like Boyle's law - spending increases to accommodate more income.

The teacher's unions have been using a different tactic as of late - instead of arguing they need a pay raise (which they are actually arguing for) they claim they want new taxes enacted to give more money to the schools, which makes them look more altruistic.   But of course, if you give money to a "school" the building really can't spend it, it ends up in the hands of teachers, in the form of salaries.

They also argue that they are due a raise because they haven't had one in a long time, and are making less money, effectively, today, than in the past.   But since inflation has been at record low levels (ask any Senior about their Social Security Cost-of-living adjustments over the last ten years!) there hasn't been a need for a pay raise.  And if you were overpaid to begin with, well, maybe it is time to adjust salaries downward a bit.

The real cost of these pay raises is already being felt in the Northeast, where having a five-figure property tax bill is the new norm.  I ran into a couple who have a house in New York, and their tax bill is over $20,000 per year.   This would drain my finances down to nothing in short order.   So they are forced to sell a house they bought in 1970 and paid for over the years and hoped to retire in, but now can no longer afford, even with no mortgage.

What is odd to me, is that many of these latest teacher strikes are occurring in rural "Red" States, where you'd think the legislature would take a firmer line.  But they have all folded, like cheap umbrellas, one after the other, as angry constituents call them and want their free daycare back.

As a result, the legislatures have had to pass tax increases.   And this surely will affect the economy and fuel inflation, which is already on the rise.   And teachers will no doubt strike next year or in the next State, as they see other teachers wring concessions from cowardly lawmakers.   And since each raise will be wiped out by inflation, strikes will continue.  Welcome to France.

The sad thing is, to me, is that our current economy rewards people who avoid risk, but who can get an "in" with a cushy job.   It is like factory workers in the 1960's and 1970's - if you got into a union plant, you made a ton of money and had the good life.  If not, well, screw you.  And whether you got in or not depended less on your skills, and more on your connections - as well as your willingness to swear loyalty to the mafia bosses who ran the unions.

Risk-takers, such as businesspeople, are less and less rewarded.   Or more precisely, small businesspeople take huge risks and at most, earn meager rewards - on par with a government employee.  The people at the very top take little risk and reap huge rewards - often guaranteed, or by risking other people's money - usually yours and mine.

Tuesday, May 22, 2018

Critical Mass - Why Facebook Succeeded and Google Plus Failed

Once you have a critical mass of users, many other things follow.

I was on Google Plus the other day, just out of curiosity as to what it was.   If you use a Google (or what they call "Alphabet" - something else that never took off) product, you are automatically assigned a Google Plus account, whether you like it or not.   This, of course, pissed a lot of people off by itself.   But you'd think that Google being the biggest thing on the Internet, they would have billions of Google Plus users, and would decimate Facebook in a matter of months.

Think again, of course.

The problem with social networking, is that in order for a site to work, you need a critical mass of people on the site.   If only a tiny minority of folks are on the site, then no one else will want to join it - not if there is an alternative that already has achieved critical mass.  Thus, Facebook could be a lot crummier than Google Plus and it really doesn't matter - they have the critical mass, and unless a mass-defection takes place (very unlikely, as recent events illustrate), Google Plus doesn't stand a chance.

Yet Facebook took off where MySpace failed.  Why?  Well, simply put, Facebook got its foot in the door early enough before MySpace achieved critical mass.  MySpace was an interesting site, but they went commercial too quickly, and then kept changing the format of the site too early on, to the point where people didn't feel they had a commitment to the site.  It wasn't essential to daily living as some people perceive Facebook to be.  People were already leaving MySpace in droves (I got bored with it pretty fast) and Facebook was in the Right Place at the Right Time to take on these users, as well as a far greater number who were just discovering what "social networking" was all about.

Critical mass is the theory behind most of these silicon valley startups.  The idea is, you can hemorrhage cash for months or years, but in the interim, you are building up a loyal following and becoming a de facto go-to place on the Internet.   Pretty soon, you are an institution, like Google, and you can do whatever the hell you want to do, and likely not piss off too many people.  Oh, the early days of the Internet!   Remember when Google's slogan was "Don't be evil?"   Ha-ha, that didn't last too long!

Back then, Google was the scrappy start-up, and Microsoft, who made operating systems, was the big, bad, 600-lb gorilla in the marketplace - the IBM of the 1990's - the company we all loved to hate - the "evil" that Google was against.  Today?   Well, Windows is still around, but smart phones and tablets are the thing, not PCs, and Microsoft flubbed music players, smart phones, and, well, just about everything that wasn't Windows.

But Microsoft got to be where it is because of critical mass.  Once the IBM-PC became a de facto industry standard for personal computers - wiping a motley collection of wanna-be PCs off the map - even the Apple II - Microsoft found itself with a virtual monopoly on operating systems, and then started printing money.  The trick then, of course was to stay in that position of monopoly power, which is why they spent the time and money developing Windows copying windows from Xerox PARC.

But Microsoft missed the Internet.  Concentrating on operating systems, they didn't pay attention to what became the next big thing, and in fact, what most computing devices are used for today - accessing the Internet.   Late in the game, they got into Internet Explorer, and made it part and parcel of Windows, virtually wiping out Netscape Navigator.  But most folks today use Chrome or Firefox, in spite of IE.   Microsoft is into the cloud, of course - renting you software over the Internet these days, instead of letting you buy it once and use it (that would be no fun, right?).

But the world moved on, and social networking and other Internet-related activities are now the next big thing - and Microsoft really doesn't have much room for rapid growth at this point.

Apple - after losing the PC wars, firing Steve Jobs, and nearly going bust, is now the media's darling. And the critical mass thing they have, for the time being, is the iPhone and iPad.  The problem for Apple though, is that there is no "Moat" around their products.  The iPhone has a large market share in the USA, but worldwide, is a minority player.  And quite frankly, the competition is so much cheaper and easier to use, it is hard to see how they can build a "moat" or maintain it for very long.

Oh, sure, if you buy into Apple, they try to rope you into their "ecosystem" - getting you to buy an iPad to go with your iPhone, and an Applewatch, an iMac, or maybe an AppleTV.   The problem for Apple is, their products bundle hardware with software, and when you buy an Apple product, the price is easily double - sometimes as much as ten times - as much as the competing brands.   And as Facebook has illustrated, the real money isn't in selling hardware or even software, but in online services.   And maybe that is where Apple will build its next moat - in Applepay or other services they can sell online.

The problem with critical mass is that many of these silicon valley companies never achieve it, and some never will, as low-cost competition will always be around.   The related problem is that some companies never achieve it before they run out of capital to squander.   Elon Musk could end up the richest guy in the world - or bankrupt - depending on whether he can build and sell enough Model-3 sedans (sedans? how quaint!) before he runs out of capital.  Other companies, like Twitter, have become institutions - but have yet to make money.   Even Facebook faced this problem early on - but seems to have it largely licked.  Of course, Facebook is now facing a whole host of new problems, caused by their whoring of their users to some pretty odious Russian pimps.   Fighting that is going to cost them money.  But of course, despite all the hue and cry from users, Facebook activity has actually risen since the Cambridge Analytica fiasco.
"Hey, we're selling your most personal data to Russian oligarchs and other shady people, who are using it to manipulate you and program your mind!"
"Still have cute cat videos?" 
"Yup." 
"No prob!"
Once you have that  critical mass, you can shit all over your customers.

Up to a point.

I mentioned IBM in the context of the IBM-PC, a product we all thought at the time would allow IBM to "take over the world" for good.  They already had a monopoly in the computer business (you had IBM or some crappy off-brand, period) and many us hobbyist computer geeks in the pre-PC days were concerned that the IBM-PC would result in the personal computer turning corporate.  It did, of course, but the corporation was Microsoft, not IBM.   Who saw that coming?  Even Bill Gates was taken by surprise.

So these "moats" can be drained over time - and sometimes in a real hurry.   Other times, it may take decades.   When I went to work for GM, we had a majority share of the US car market.   Today, GM has survived bankruptcy and no longer has the dominant market share it once had - except in China.  How times have changed.   And what changed was an energy crises and the price of gas going through the roof as a result of the Arab Oil Embargo of 1973.

GM thought they could tell us what to buy, but when an alternative came on the scene - funny little Japanese cars that got good gas mileage and actually cost less than US cars - people started to migrate away.  A trickle at first, then a flood.  Today, the Japanese charge more for their vehicles than US makers, in most cases, because they are viewed as better products.  GM has to sell on price point, in many instances - which is why they (and Ford and Chrysler) are largely abandoning the car market in favor of SUVs and trucks.  People still buy cars, just not "American" cars.  Trucks and SUVs can't be far behind, can they?

But the Japanese are finding themselves outwitted by the Koreans - and the Chinese and Indians next.  Again, it started with a trickle, then a flood.  Who's next?  Maybe GM will someday clean their clock.  But then again, given how history is, once a company loses that critical mass, it is damn hard to get it back.  Apple had critical mass with the Apple II, until the IBM-PC hit the scene.  It took a whole new product line - iPads and iPhones - to get that critical mass back again.

Warren Buffett likes to opine that he invests in companies that have "moats" to prevent competition.  Companies that already have this critical mass - large enough in a given market that no one will bother to start a competing business.  A lot of folks scratched their heads when he bought up small-town newspapers.   But it is a typical Buffett move - buying something that is basically a monopoly at this point.   In every town, all the newspapers (and in days gone by, there were usually several) have gone bankrupt or consolidated.   Syracuse used to have the Herald, the Journal, the Post, and the Standard - among others.   Today it is the Syracuse Herald-Journal/Post-Standard.  And the same is true in other small towns.   And who in their right mind would start a newspaper today? 

So they can keep cranking out crappy, second-rate newspapers, and a lot of people keep buying them.  There still needs to be a "paper of record" where the governments (and individuals) can post legal notices and whatnot.  In fact, our local paper here has little else but.  Legal notices is one of their largest and most profitable advertisers.   Moats!

I am not sure what the point of all of this is, other than to observe that the model of critical mass can work, and it can prop up crappy companies and crappy products for a long, long time.   But eventually, every company that lives behind a moat has its comeuppance.   The railroads were once perceived as invincible, and had a "moat" and critical mass that seemed insurmountable.  But the automobile, and later on, the jetliner, replaced the train as the primary means of mechanized transport in the USA and indeed, the world.  You can only hide behind a moat for so long.

And the reason for this is, I think, that people hate monopolies and will flock to the next big thing, as soon as it looks viable and has a critical mass of its own.   I noted before that people who pine for the days of trolleys are nostalgic idiots.   No one liked the monopoly of the trolley when it was around.  People couldn't wait to get their own cars.   GM and Firestone didn't "destroy" the LA trolley system to sell more cars and buses - they bought it for a song because people were already migrating away from trolleys, and buses were far less costly to operate, as they required no tracks.

Similarly, people hate their cable companies - they are one of the most reviled institutions on the planet.   Folks are "cord-cutting" and moving on to new technologies such as streaming not just as some sort of fad, but because they are running away from a monopoly that has become too complacent and too willing to sell a substandard product (moronic television shows loaded with almost 50% commercials).  And sadly for the cable people, there already is a critical mass in the streaming business. The best they can hope for is to sell people internet services over their antiquated coaxial lines.

Yes, this trend took decades to occur - and cable is by no means "dead" yet by any measure.  But the writing is on the wall.  Once you've gone to a streaming model and picked the programs you want to watch when you want to watch, with either few commercials or commercial-free, you aren't about to go back to watching what is on when they say it is on, interrupted by five minutes of commercials for every five minutes of programming.  It is, in fact, painful to watch, once you've been off the leash.

It would be akin to trying to be content with a slow-moving trolley, making stops along the way, when you've tasted the freedom of zooming by in your automobile, going where you want, when you want, a lot faster than a trolley.  You aren't about to go back.

And who knows?  Maybe these self-driving cars will be the next thing beyond that.   Once you've stopped owning a car and instead hail one on your phone, maybe the idea of everyone owning a car will be obsolete.   And maybe this is already happening in some places, with services like Uber and Lyft - both of which have critical mass, but are not making money - yet.   Many folks in larger cities are giving up cars entirely and reporting that the freedom of not owning a car is liberating.   For the annual cost of owning a car - even a "paid-for" car - you can hail a lot of Uber rides.

But critical mass has other applications - even for small businesses.   On our little island, vistorship was down - way down - about ten years ago.  As a result, none of the hotels or restaurants were making money.  Many would shut down, halfway through the dinner hour, as there were no customers whatsoever.   If you are going to serve things like raw oysters, you'd better be prepared to throw away a lot of oysters, or have a  critical mass of people to support such a restaurant.   Today, with new hotels and new homes being built - and vistorship up - we can support more restaurants, although it is still a challenge to get help (again, a critical mass of employable and skilled people need to be present!).   But we are far better off than before - despite what the naysayers always say.

So, if you decide to open a business, ask yourself whether you have this critical mass of customers and employees, in order to make it work.  Without either, you'll go broke.  It is like the sad little shops that open up in Lansing, New York, trying to sell coffee or Nascar collectibles, or ice cream - without doing research first to see whether there is a clientele for these things.  You can't just open up a cents shop and hope people come.   It is a sure way to go broke.

Sunday, May 20, 2018

Are All Psychiatrists Crazy?

Psychiatry was quite a fad back in the 1960's - even middle-class people went to a "shrink" or an "analyst" to discuss their angst.   Today, it it less popular among the bulk of Americans, only because insurance no longer covers this expensive treatment.   But are psychiatrists themselves a little crazy?  I think you have to be a little nuts to become one, quite frankly - and many have admitted as much to me!

Back when I was a kid in the 1960's and 1970's, going to a psychiatrist was a common thing among the middle-class.  It was, in fact, sort of a perverse status symbol, that you had some sort of angst about the modern world, and could afford to spend an hour every week talking to someone about your deepest feelings.   Psychiatrist jokes were common with comedians.  Being "analyzed" was featured in movies, such as Annie Hall.  Bob Newhart did a show where he played a psychiatrist - and not for insane people, but rather for common folks with quirky complexes or anxieties. Charles Shultz featured Lucy as a 5-cent psychiatrist, as shown above.  It was a thing back then.

Of course, back then, the psychiatrists, like the "pain doctors" of today, were also your drug dealers.  Feeling a little stressed?  Go do the nice doc, and he'll write you a script for some Quaaludes.   It was a booming business, and so long as the insurance company paid (as they do today with Oxycontin and "sports medicine" clinics), the party kept going on.   But eventually, Quaaludes were outlawed, and after some prominent overdoses involving other depressants, the whole idea of "better living through chemistry" started to fade from the scene.  The coupe-de-grace was when companies cut benefits, such as mental health counseling, from their insurance plans.

But hey, by then, it was the late 1970's - the "me" decade.  Downers were out, cocaine, was in.   Snort a line and you're king of the world!  No time for angst and doubt now - in fact, going to a "shrink" was no longer seen as a status symbol, but a mark of weakness.   Psychiatrists had their hands full with really mentally ill people by that point, anyway - many victims of the "free love" and drug era of the previous decade.

Along the path of life, I've met many of psychiatrist and psychologist, and quite frankly, I always thought they were the blind-leading-the-blind.   Their personal lives were often train wrecks, yet they were dispensing advice to other people.   What's more, they often were a little crazy themselves, and more than one admitted to me that they got into the field to better understand their own problems.

My first exposure to a "shrink" was my Mother's psychiatrist, who also "treated" my brother, which arguably is a conflict.  He sedated Mother with Librium, which didn't seem to help with her underlying problems - alcoholism and an inability to come to grips with her sexuality.  In fact, I doubt my mother ever mentioned the latter to her doctor (out of some sort of stupid, outdated concept of shame) or admitted to the former.   If you lie to your psychiatrist, you aren't going to get better.  Yet most of the patients I've known have told me things that their doctor should know about - but they feel too embarrassed to admit them.  How can a shrink do you any good if he has an inaccurate picture of you?

The problem with Mom's doctor went beyond that.  I ended up dating his daughter, and she was a nice girl, but decidedly mentally ill.   Their house was a crazy house.  I don't know how to explain it - I don't believe in auras or that nonsense.  But at least three four times in my life, I have been in houses where you can tell crazy is going on.  They are deafeningly quiet.   The first was my brother's girlfriend's house.  Her mother was sedated beyond all belief - sort of like Mary Hartman.  Her brother was also crazy - institutionalized, actually - again having more to do with his family not accepting his sexuality than anything else.

The house was deathly quiet.  Even when the television was blaring, it was deathly quiet.  I don't know how to describe it, but it was like the soul was sucked out of the place.  Later on in life, I would meet a very nice young man whose Mother committed suicide.  He and his Dad lived alone together, in the same house his Mother died in.  That house was very quiet as well.  And I just thought of it, my friend whose brother committed suicide also lived in one of these "quiet" houses as well.  Maybe it is a matter of my perception.  Maybe there is something to this aura nonsense.  Probably the former.

Anyway, my girlfriend's house - which was also my Mother's and brother's psychiatrist's house, also had that deathly quiet aura about it.  One day we were there, in her room, and we started talking about horses, for some reason.  "We have a horse!" she said.   This was odd to me, as I had been in their barn and never saw any horse.  She took me outside to a shed, and opened up the door, which appeared to be stuck.  Inside the darkened shed (with no open windows) was a sad-looking old mare, standing in its own filth.   I was appalled.  Apparently, they had bought the horse ages ago, lost interest in it, and basically fed it once in a while and very rarely, cleaned out its shed.

Welcome to crazytown.  Population, one family.

I kind of became skeptical of psychiatrists at that point.  How could this guy help my Mother and brother, when his own household was so messed up?

I met a few more head shrinkers in my life.  One was the head of the psychology department at a school I used to go to.  He was a very nice guy, but wanted me to come back to his office with him, after hours, so he could "hypnotize" me.  He put his hand on my inner thigh, and I figured out quickly what he really wanted.   And he was married, too.  Another psychologist I met in academia finally came out of the closet at age 45.  He liked to hang out with the pretty boys, so I was safe around him.  But it amazed me that someone who is supposed to be giving advice to people, particularly young people, couldn't figure out his own life very well.   He admitted to me that one reason he got into the field was to deal with his own issues about sexuality.

And these were not bad guys - I liked them both in spite of their faults (and hoped they did vice-versa).  But the point is, where they in any position to be doling out wisdom of the mind to other before getting their own house in order?

But of course, he got his PhD in an era where homosexuality was considered a mental illness.   So maybe he was a victim of the era.   But I didn't really feel he had his shit together - any more than any other person does.   And that is why I am not a fan of gurus, religious leaders, and whatnot.  The idea that some of us, having lived about the same short time-span on this planet, and having about the same life experiences, have some special insight into life that others of us don't have, seems kind of ridiculous.  I mean, you go to shrink school or priest school, and they teach you in a few years, all the secrets of life that the rest of us don't know?   I highly doubt that could happen.

As I noted before, I doubt the human brain can accurately map out the human brain.  It just seems to be patently obvious - you cannot put more information into a vessel than it can hold, and us trying to understand how our brains work is like a toaster telling you how it works.   It is a noble effort, to be sure, but it seems like a divide-by-zero error to me.  If we truly understood how our brains worked, down to the most minute detail, we would become Gods.   And that ain't about to happen.

But on the other hand, perhaps if we knew the basic structure of the brain and how it works and malfunctions, it might be illuminating.   One of the most insightful books I ever read, was not about psychiatry or the human mind, but was a Defense Advance Research Projects Agency (DARPA) concerning neural networks.  Reading about how neural networks - which are based on the design of the human brain - work and malfunction was illuminating.   Trying to train a Maverick Missile to identify Soviet tanks by optical recognition was almost comical.   What was intended was for the network to "learn" what a Soviet tank looked like, as opposed to a NATO tank.   What the system actually learned was to identify the difference between spy photos (grainy, out of focus, and dark)  of Soviet tanks and "beauty shots" from tank manufacturers (bright, focused, and clear) of NATO tanks.  What the system actually learned was to aim at dark and obscured objects.

Sort of reminds you of how teenagers learn.  You try to teach them one thing, but they are learning something else entirely - often the opposite of what you intended!

But I digress.

My next experience with the head shrinkers was a little scary.  I was dating a young man who had anxiety problems - again related to sexuality.   He was mocked and bullied in high school, and instead of graduating and putting it as far behind him as possible, he had an episode and ended up in a hospital.  This resulted in him staying in high school until he was 20.   The problem was "high school" and the cure was "more high school."   It was like torture.

So they medicated him and got him hooked on the psychiatry gag, such that he adopted mental illness as a hobby.   As I noted before, one problem with mentally ill people is that they are selfish they are introspective and think the world revolves around them.  The "cure" for this is to spend hours each week talking about themselves with a doctor, which makes them feel even more important and their trivial problems even larger than they are.  The cure is to throw gasoline on the fire.   Oh, and by the way,  no one has ever been cured by psychiatrists or psychologists.

What scared me about his doctor was that he asked to see me (and charged me for the visit as well!) and during our "session" he told me a lot of confidential patient information about my friend. Not only was it a conflict for him to see me at all, but to tell me doctor-patient confidential information was beyond unprofessional!

We ended up seeing a counselor at school, and his advice to me was "run away as fast as you can!" which turned out to be good advice.   It is difficult, if not impossible, to form a healthy relationship with a crazy person.  It is hard enough to do it with someone who is "normal" (whatever that is).    As I noted above, even "professionals" in this field have a batting average of .000 in terms of effecting a cure.   What are the odds you'll be able to work things out with someone who is off-kilter?

This is not to say that we don't have empathy for folks who are crazy.  The problem is, as I noted before, they are often selfish and look at the world through a crazy prism, where the world is a merry-go-round, and they are in the center.   And the rest of us are just wallpaper.   So when you shoot up a school, well, those aren't real people you're killing, right?  It is just another first-person-shooter video game, and you've got the high score!

And that brings us to the present.   While having an "analyst" was all in vogue in 1968 in the Mad Men era, today the shrinks are busy with more serious problems - young people (and it usually is when this sets in - around 18-22 years old) going crazy and becoming violent.   No longer is the bread-and-butter of the business some bored housewife who is anxious about the "rooskies" dropping "the big one" or the helter-skelter of "modern" living.   No longer is it some young executive who is overly stressed and wants a happy pill.   No, today, it is really crazy people doing very bad things - to themselves or others.   And a lot of the work ends up being forensic.

Are people today crazier than back in 1968?   Perhaps so.   We watch far more television these days, and the Internet - well, you get the idea.   It is possible to be a "little" off and still be functional in society.  But if you spend hours every day on a conspiracy theory site, an ISIS recruiting site, or an alt.right discussion group, you can go from a little off to way off in no time.

And then there is depression.   People watch too much television and get depressed, because their lives are not as fabulous as the people on TeeVee.   They end up watching other people cook, dance, remodel homes, or build trebuchets in their back yard, rather than doing things themselves.  As a result, they develop learned helplessness, a condition that occurs when people start to think nothing they can do can change their world, even a little bit

Of course, the cure for this is simple - no pills, no analysts are needed.   Simply cut the cord on cable, and spend less time on the Internet.  Get off Facebook and Twitter.  Stop watching other people do things and do things yourself.

You will be a lot happier in life and actually get shit done as well as save money.   Instead of watching TeeVee, getting depressed and sending out for pizza (and feeling worthless as a result) you can make your own meals, save money, and put money in the bank (and pay off your debts).   Who knows, maybe you'll be the one on reality TeeVee.   I think so many Americans feel so useless and depressed these days that reality TeeVee is running out of people to feature, as most Americans are couch potatoes whose only shot at fame is to be the victim or witness to some regularly occurring mass-shooting.

Of course, a lot of other things have changed since the 1960's.  We all saw One Flew Over the Cuckoo's Nest and thought that mental institutions were cruel and should be closed.  So we did.  We closed them and opened homeless shelters - medicating millions of people who should have been in a controlled environment.   They get better, stop taking their meds, and then get worse - in a never-ending cycle of misery.  A worse form of torture, I could not imagine.  And yet, we thought mental institutions were cruel.   Go figure!

I am not sure what the point of all of this was.   A reader sent me an article about how guaranteed basic income was a good idea - an article written by a psychiatrist.  And my gut reaction was, other than playing outside of his sandbox, that most psychiatrists and psychologists are looney-tunes.  If you can't spot the obvious flaws in "guaranteed basic income" then you really don't think very hard.

But I guess it illustrates how some folks are willing to believe anything said by anybody who has a set of "credentials" - no matter whether these credentials are relevant to the line of work they are in, or whether, in fact, those credentials really qualify them in their own field of work!  Think about this:  Whenever some "crazy" guy shoots up some place with a gun (like this week, last week, 20 minutes ago, whatever), a number of "expert witnesses" will appear at trial to argue whether the person was sane or not.  If sane, we can put him in the chair and fry him (hooray!).  If not, he ends up like John Hinkley, a quasi-celebrity who is now living at home with his Mother.  How nice for him.

The point is, in this "science of the mind" we have, you can line up and equal number of experts in the field, who will come to opposite conclusions (crazy or sane) in almost every case.  And maybe because I used to be a lawyer, that I am skeptical of "expert witnesses" because in many cases, they say what you pay them to say, and not what is necessarily the truth.   And juries, baffled and confused by a litany of degrees and awards, will buy a credentialist argument, and assume that whatever the credentialed guy says is true.

And before you take me to task on that, let me remind you that Ben Carson is a neurosurgeon.

Would you go to him for advice... on anything?

Saturday, May 19, 2018

Obama care and Delaying Social Security

Taking social security early may mean losing your Obamacare subsidy.

A reader writes that he and his wife are debating whether to take Social Security early or not.  And one thing that is affecting their decision is the Obamacare subsidy.  If they take Social Security early, they may lose all or part of their Obamacare subsidy - meaning they may have to pay tens of thousands of dollars for ObamaCare, each year.

One problem with Social Security is that the age cutoffs are completely detached from that of Medicare.  At the present time, you can collect Social Security early at age 62 or wait until the full retirement age of 66 or 67 depending on the year you were born.  You can even delay it until age 70 and get increased benefits for each year you delay.

Unfortunately, Medicare is locked in at age 65, which used to be the age for "full" Social Security, but now no longer aligns.  Thus, if you take Social Security early, you still have to fund your own health insurance somehow, unless you qualify for Medicaid.  But in order to qualify for Medicaid you have to be living below the poverty line, which collecting Social Security may push you above.

As I noted before, there are many reasons to take Social Security early.  If you work out the numbers as an accountant friend of mine did, if you live to be the average age you'll end up collecting more money if you collect early - in terms of the overall payout from the Social Security Administration. On the other hand if you delay collecting Social Security, your monthly payout will be more, and if you end up living to an old age this might be a more advantageous situation to you.  If only we knew how old we will be when we die we can make a logical choice.  But that's a piece of information most of us don't want to know.

The problem with Obamacare, as I noted before, is that it kicks in once you make a dollar more than the poverty line.   Below that you're forced to go on Medicaid.  But once you make a dollar more than the poverty line, you can get a enormous subsidy and enormous subsidy from the government to pay for Obamacare.   The subsidy starts at about 100%, and then tapers off linearly to about 50%, based on your income level.  At that point suddenly drops off to zero, which for a married couple occurs at about $70,000 income.

When the law was written, no one anticipated the premiums with me so expensive and thought the taper to 50% would be sufficient, even with the sharp cliff at the end.  But since the law was enacted, premiums have skyrocketed.  Ours started at about $12,000 a year, quickly increased to $18,000, and now are running about $24,000 year, which is a staggering sum of money.  Without the government subsidy, we could not afford this kind of insurance.

Initially, my thought was that as soon as I qualified for Social Security I would take it.  But if I did take Social Security early, it would increase my annual income to the point where I might have to give up some or all of my Obamacare subsidy.  It could end up creating a unique situation where it pushes my income over the cutoff level and all the money I collected in Social Security would just be spent entirely on Obamacare premiums.

For our reader, who is a few years older than me, this is a decision that he has to make very shortly. And all I can suggest is to do the math and figure out which scenario ends up working to your advantage.  If delaying Social Security until age 66 (only four short years) means you retain your Obamacare subsidy, then it would make sense to delay collecting Social Security.  On the other hand, there are folks who need the money now, as they have no other means of support and retirement. It's a tough question to answer.

For me, I'm not sure need answer the question right now.  I have a feeling Obamacare will change dramatically in the next five or six years, before I have to make this decision and as a result there's no need for me to decide now.  It might very well turn out that the health insurance landscape is dramatically altered between now and age 62 or 67.

But this convoluted system that we have illustrates the problem with the carrot-and-stick approach to government.  When the government creates incentives by giving away money or creates penalties by increasing taxes for certain situations and scenarios and behaviors, it forces people to do odd things in order to optimize their outcome. And often these odd things are not the optimal situation for the individual or society as a whole, nor are they what the individual or society would like to occur.

Free market fans and libertarians would argue that if we didn't have such carrot-and-stick approaches that people would do what was the best optimal outcome for themselves.  Once these government distortions in the marketplace are removed, a new equilibrium would be achieved.

It's a nice theory and a nice fantasy, but a neglects human nature.  Human nature being what it is, many people would elect to have no health insurance at all and then throw themselves on the mercy of charity when they end up in the hospital with severe illness or injury.  In the classic example, many young people go out buy a new motorcycle instead of using that money to pay for health insurance premiums.  They wreck the motorcycle, end up in the hospital, and now are a liability to the state.

Meanwhile, the responsible citizen who eschews buying a motorcycle or other expensive toy and instead spends his money on health insurance ends up being punished, as a big portion of his health insurance premiums end up paying for the people who are irresponsible.

Unless we're willing to take the libertarian argument to its logical conclusion - and deny medical coverage to people without health insurance or ability to pay, the system simply wouldn't work.  But since we are compassionate society, we can't let people bleed to death at the door to the hospital simply because they don't have an insurance card (or are we doing that already?).

I guess the point is, the theories and incentives or lack thereof on either side of the political spectrum end up having unintended consequences.  And there are no easy answers.

Thursday, May 17, 2018

Investment Advisers

Investment advisers get paid - and the money that pays them comes from you.

In a recent article in MarketWatch, early retiree Chis Mamula recounts the worst investment advice he ever got.  He claims to be retired at age 41, after making an awful lot of money and investing it wisely, but points out that due to excess fees from investment advisers, as well as poor investment choices and tax problems, he could have easily socked away a million dollars more.

Let me just point out here that while I admire Mr. Mamula for retiring at age 41, I think he's one of this new generation of people who claim to be retired, when they really are not.  As long as you're engaged in a money-making venture for profit, you're not really retired.  If a person claims to be "retired" and yet to runs a website or a podcast or whatever (usually hyping early retirement!), particularly one that is monetized, it's not really being retired.  They're just working in a different line of work.

But I digress.

What interesting about the article is at the author came to the same conclusion I did many years ago. Namely that investment advisers can be a double-edged sword.  They can provide you with some good advice, but they also want to be paid for that advice.  Nothing in life is free.  Relying on recommendations from family or friends for an investment adviser is probably short-sighted at best.

Yet when I talk to most people here on retirement island, or my friends down in The Villages, they all say they don't know much about investing, and just hand over all their money to "The Guy" - who invests it for them.  And without exception they all love "The Guy" that they use for their investments, and say he's doing great things for them.  But in many cases they have no idea a load or no-load fund is, or what expense ratios areThey're not really sure how "The Guy" gets paid, as it is not really itemized on financial statements.

And quite frankly, when I started this blog, I had no clue, either.  Today, I have half a clue, which is still a half-clue short of where I need to be.   The 401(k) and IRA have forced us to become investors, and few of us have the skills to do it.   I have stumbled along - like the author of the Marketwatch article, making expensive mistakes along the way.  By the time I am dead, I will have it all figured out - by then it will be too late to use this knowledge.

My first experience with an investment adviser was when I was very young.  I called an investment adviser and ask him how to start an IRA.  He said "get together $5,000 and we can talk."  But of course I didn't have $5,000.  And I realized right there that investment advisers earn commissions on the money that is invested, and therefore they want to see a certain sizable amount of money before they'll even talk to you.

My second experience was with a family recommendation - namely my father.  When my father was forced into early retirement age 55 he dabbled a bit as a financial adviser.  It is a pretty lucrative racket.  You set up a retirement plan for a company and you get commission checks for the rest of your life - as he did.  Not big checks, but checks, nevertheless.   I wanted to invest some money and he set me up with American funds which I didn't realize had huge 5% upfront load -  which he got a taste of.  My own dad basically fucked me on a retirement account!

Of course, all is fair in love and war, and I've certainly had cost him far more to raise me as a child than he managed to scrape from my pitiful IRA account.   So we're more than even, I think.   Although, how much a price do you put on emotional cruelty?   Just kidding!  Parents aren't perfect, to be sure.  Just grow up, move away, and move on with life.   There is a happily ever after, really!

My next experience was with Northwestern Mutual.  My Northwestern agent was very good at selling me policies and investments because he got a commission on each one of these.  He put me into some funds, which I could have sworn he said didn't have loads but later on I found had very high loads and expense ratios. Yes, American Funds, once again. When I stopped buying new products from him,  he stopped returning my calls.  What I wanted was advice, and I never seemed to get that.  In fact that's a common denominator among financial advisers I've talked to - you ask them how much money you need for retirement and they say, "that depends" and then try to sell you another product.

My next experience was with State Farm.  State Farm decided to become a bank and handle people's investments, which is a very lucrative deal.  The local agent and invited me over and I showed her my entire portfolio.  She suggested I cash in everything including my life insurance and hand it over to her for which she would get a 5% commission.  I wasn't ready to hand her a payday of $50,000 just for "the sake of convenience" as she put it, and we walked away.

We had a number of funds with Fidelity, again based on a family recommendation - this time Mark's father.  Mark's dad always put everything in to Fidelity because "The Guy" he went to at Fidelity was so smart and gave him good returns on his investment.  And he did pretty well with Fidelity and we've done pretty well with it as well.  But once our portfolio reached a certain amount, we had phone calls for them asking us to come in and talk with an adviser.  And I'm not sure what the adviser did other than "rebalance" our portfolio.  And it was never clear to me whether he was getting a commission on this or not.

Here's a clue: people don't work for free. Those fancy offices with the glass walls and the marble countertops aren't donated.  A recent article about Fidelity reports that some Fidelity advisers were abusing the reimbursement program for home computers.  They would buy a computer for home office use, and then return the computer to the store and get a refund after submitting the paperwork to Fidelity to be reimbursed for up to $10,000.

That's an awful lot of money - can you guess where it came from?  Yes it was paid for by the customers of Fidelity, indirectly. I'm not taking a particular piss on Fidelity here, all of these brokerage houses are about the same.  They invest your money - billions and billions of dollars - and take a tiny percentage off the top, which is how they earn their living.  How much they take varies depending on the brokerage house involved.  As I noted, the American Funds my dad (and my Northwestern Mutual adviser) put me into, had very high load fees.  Fidelity was somewhere in the middle to low-end, and other companies like Vanguard have very very low fees.

Some places charged me $20 a trade to buy stocks, which dropped to $9.99, then $7.99 and today, free, at least with Merrill Edge.   Free trades makes it possible to create your own "mutual fund" of stocks, with few fees.  Note that if you buy some mutual funds through Merrill, there are some fees involved, if the funds are managed by another company (Fidelity, Vanguard). 

The problem is it took me more than 30 years to learn all of this, and there were a lot of painful lessons involved.  The author of the MarketWatch article says about the same thing.  He was making a lot of money and investing it, but had no clue about what was going on.  He had to educate himself about investments - and realized it really wasn't all that difficult.  In fact, given the seriousness of the subject matter and how vital it is to your basic survival, it is someone ironic that people take such a laissez-faire attitude towards something so important in their lives.

The few people that do try to take control of their finances often do disastrous things.  These are the folks who invest in Bitcoin or gold or whatever get-rich-quick scheme comes down the pike. They are convinced that the people putting their money into mutual funds are a bunch of chumps - and they are going to beat the system by investing in some scam or con, instead.  Usually, they lose their shirts, become bitter, and say it's the government's fault.

There is however, a happy medium.  You can educate yourself about finances and make more rational choices. You can also accept that you're going to make some bad decisions and lose some money - that's the nature of the investment game.  And some of those poor choices are going to be paying too many fees to investment advisers.

What should you look for in an investment adviser?  It's a tough call.  If you have a 401(k) through your company and are invested in one or more of a number of mutual funds they offer, you probably don't need an investment adviser until you approach retirement, or rollover your 401(k) into an IRA.

There are plenty of investment advisers and banks out there who will encourage you to rollover your 401(k) into an IRA.  And I'm not saying it's a bad idea - I've done it every time myself when it left a job.   The idea of leaving my money with people who I used to work for - who may not be happy with me leaving - didn't strike me as a good idea.   These investment advisers want people to roll over the money to their company, so they can take a little taste of it as it passes through their hands.

The thing to do is educate yourself about loads, both front-end and back-end, as well as expense ratios. You can look all this stuff up on the internet as I illustrated before in this blog (often thanks to helpful readers!).  When somebody suggests a fund to invest in, you can research this information online.  It is like buying a car - you'd go online to see what a reasonable price is, before sitting down at the dealer and signing on the dotted line, right?  Same is true for investments.  Do the research, do the math.

Also, ask direct an honest questions of the adviser as to how he's being paid for this. Most will give you elusive answers - I've never gotten a straight answer myself - but if you push the matter they should tell you.  Walk away from someone who's deceptive - even the tiniest bit of deception, as we know, is a telltale of what is to come.

And never, never ever, give a financial adviser or broker trading authority on your account.  If you are investing for the long-term there should be no reason for you to trade funds or stocks more than a few times a year at most.  Anything else is just gambling.  And investment advisers and brokers get paid on how many trades they make and it's been shown in the past that some crooked brokers will trade an account down to zero, collecting fees for each trade.  Some unscrupulous Brokers have ripped off old people off, buying and selling the same stocks multiple times in one day, just to generate trading fees.

And beware of any broker from Madison County, New York - my hometown.

The author of the MarketWatch article doesn't say it exactly how he get ripped off.  He does mention paying excessive fees, which over time can add up to a lot of money.  He also mentions having undesirable tax consequences, which sort of had me puzzled.  I can only guess that perhaps his investment adviser sold some stocks and created huge capital gains problems for him during the year which he did not anticipate.

But overall even though the author is vague as to exactly how he lost money (which would have educated all of us as to how to avoid these pitfalls) he does make a good point.  Going with someone based on family recommendations, or  recommendations from your doctor, is probably a bad idea.  It's a better idea to educate yourself about finances. The more you learn, and the more you know the better off you'll be.

It's like owning a car.  Even if you never turn a wrench on a car, the more you understand how it works, the better off you'll be when you go to see the mechanic.  Because you'll be able to spot when he's bullshiting you and when he's telling you the truth - and be able to tell a good mechanic from a bad one.

As I noted earlier post, there was an article online where a woman gigglingly complained that her car needed "A new evaporative emission canister, whatever that is!" as if being ignorant of this was some sort of badge of honor.  Indeed, many people wear ignorance as a badge of honor, thinking that actually knowing things is somehow plebeian.  I guess this starts in grade school, where you get mocked for raising your hand and having the right answers.  But, actually the opposite is true -ignorant people usually end up poor and worse off than people who bothered to learn things.  And for the life of me, I've never heard of an evaporative emissions canister wearing out on the car so I think she did get ripped off.

It's not like this stuff is hard to learn - we have this thing called the internet.  You can Google things and learn a lot, provided you can filter out the bullshit from the truth.  And of course in the financial field the bullshit will be the get-rich-quick schemes and discussion groups exhorting you invest in Bitcoin or dot-com stocks, or IPOs or gold or whatever shiny things coming down the pike.

But there are a lot of other financial sites and give you a treasure trove of data, although they are not as sexy and stimulating as he get rich-quick-scheme sites. But then again, that's probably life in general - anything that seems like cotton candy fluff is appealing, but it's probably bad for you. Broccoli and the other hand might make you regular but is really less sexy - unless you covered it with cheese.