What Happened to Waterbeds?

Whatever happened to the waterbed?

In a recent article in the New York Times about the fact-checking website snopes.com, one of the editors of that site opined that now the election was over they would have less fact-checking to do and have more time to write other articles, such as why waterbeds have declined in popularity.  It turned out not to be the case - fake news and internet rumors continue to flourish.

Since she no longer has time to tackle the subject, I thought I would give it a shot. Not many people today even know what waterbeds are, other than a relic of the 1970's. At one time, the waterbed was a very desirable object, a consumer purchase for many 20- and 30-something baby boomers.

I recall in the era that many friends of mine had them and they were considered an object of desire.  I myself even bought a hybrid waterbed in the early 1980s, one that used water tubes inside a conventional mattress, which eliminated the messy problem of trying to get sheets to fit your waterbed.  It also reduced the tendency to feel like you were sleeping on a plastic baggie full of water.

Toward the end of their reign, waterbed manufacturers came up with hybrid designs which looked and functioned more like regular mattresses.

Waterbeds are a classic example of one of those products that is advertised on the premise that your life will be divided into two portions. First, there is the early dark grey period of your life before you ordered a water bed, when your back hurt and nothing was quite right. You had no friends and your dog was ugly.  Second, there is the dawn of the new age when you own a waterbed and your life is perfect and everything is wonderful and your back feels wonderful and life is great.  If only you had a waterbed!

Of course, none of this is true.  But it was the sales pitch which is made on the television with the latest Ronco chicken broiler or whatever product is deemed to be desirable. Informercial pitch men use this selling scheme, showing those dorky "before" people struggling to cut a tomato with some dumb carbon-steel French knife.  The "after" people are cheerfully cutting through a penny with their ginzu knives - and slicing tomatoes to boot!  In the before picture people are shown as miserable sod whose lives have no meaning or goal.  In the after picture are seen happy sunny smiley faces of people who finally achieved the American dream. If only you had the product, your life would be changed forever.   That is the covert and sometimes overt message of marketing, regardless of the product.

Waterbeds, of course have a potent additional selling point - probably the best selling point for any product -  namely sex. The implied promise of only the waterbed was that you would have this amazingly wild sex life.  The scuttlebutt that was passed around (and promoted by the industry) was that having sex on a waterbed was so much more fantastically great than on a conventional bed, or even the floor.  Merely owning a waterbed would make you a paramour or a Don Juan.

Of course, this wasn't the case. When you bought a waterbed, you are just a schmuck with a waterbed, and likely with a string of payments to pay for said waterbed.  In other words it was just another product for you to buy to take a bite out of your bank account or rack up more credit card debt.

In every era of our country, there is always been a "must have" product that everybody seems to want to have. Only a decade or two later, the vaunted "must have" product seems to be obsolete, antiquated, or even silly.  In the 1970's, for a young man with a good job and some disposable income, the desirable items to have were a water bed and a killer stereo system, preferably with a turntable, cassette deck, receiver, and huge-ass speakers.

Today, when you look at these products you are curious as to why anyone in their right mind would want to waste such enormous amounts of money on such silly things. For some reason or another, the desire for the big killer sound system disappeared around the 1980s. Perhaps it was the advent of the CD, which made almost any sound system of audiophile-quality, as we no longer had to listen to the scratch, pop, and static of record players, or turntables as we liked to call them.  Or maybe it was the iPod or listening to music on our computers and other digital devices.   Today, it is the phone and bluetooth - and the surround-sound system-in-a-box.

Similarly, the waterbed, once a desirable object of consumer desire, seems almost juvenile or adolescent by the 1980's and 1990's. A waterbed was something you had in your twenties and outgrew when you became a real adult. Of course, we replaced the water bed in our lives with other types of mattresses with sleep adjustments or power inclination features or memory foam devised by NASA.   Mattress companies for some reason, command high prices for sleep sets - all sold on time, of course!

In other words, we still chase after idiotic consumer goods, we just chased after a different set of idiotic consumer goods. Today, it is not the killer sound system with the humongous speakers, but rather the humongous flat screen television with the surround sound stereo.  Same old shit, different day.

Of course, part of the problem of waterbeds was the actual living with a waterbed. Owning a waterbed presented a number of problems for a waterbed owner. To begin with, they were very heavy. Water weighs a little over eight pounds per gallon and when you throw hundreds of gallons of water into your bedroom you may have hundreds if not thousands of pounds of weight to your bedroom floor.

This additional weight could affect the structure of a building if it was not properly constructed to handle such a load. In addition, Waterbeds, being full of water, are always a risk for leaks and flooding. The waterbed "mattress" was nothing more than a plastic bag, which over time would degrade and possibly leak. The waterbed of course had a liner designed to catch such leaks. But if the liner developed a leak as well, then hundreds of gallons of water could pour onto the floor and into the apartment below. For this reason most landlords would not allow water beds in rental properties.

Waterbed also required heaters, which is something that most people don't realize. If you slept on a waterbed without a heater, the water would be at room temperature and you would feel very cold sleeping on it. That's why a water bed usually had a heater in the form of a pad or heating rod to maintain the water temperature at or near body temperature. This made the water bed warm in the winter, but did present an additional expense for the owner.

Waterbeds usually required special sheets as well, as the "mattress" was recessed into a wooden frame or box. Thus, owning a water bed was additional bit of a hassle when it came to fitting it with sheets and blankets.

And speaking of the frame, most waterbed frames were pretty ugly. Being designed in the 1970's, they were subject to the design excesses of the age. Glitz and glamour were the norm, as well as wood-tone design themes usually achieved with the aid of a router or other woodworking tools. Other bed frames played to the aura of sexuality by providing mirrored surfaces (preferably on the ceiling!) or champagne holders and the like. While such styling might work well for a twenty-something during the Disco era of the 1970's, by the 1980's and 1990's they became something of an embarrassment to their owners.

Usually by this time, they had started to wear out as well and thus many owners started to abandon their water beds. Their landlords didn't like them, they will viewed as ugly, they look immature and juvenile, and they were difficult to deal with.  Throw in "wearing out" or "leak" and there was little reason to keep one.

Just getting in and out of a waterbed can be difficult.

And one other thing, they were uncomfortable as hell. Despite the claims of the industry, water beds were not significantly better for your health, for your back, or for your sleep patterns. While many people profess to love waterbeds and claim they gave them the best night's sleep, others found them difficult to lay in.

While they were supposed to be good for your back, some folks found otherwise.

Sleeping in a water bed took some getting used to, and many people never got used to it or found it relaxing or comfortable.  Worse yet, the purported advantages for sexual relations failed to materialize for many people.  In fact many people found it difficult if not impossible to have sex on an undulating water platform.  Once you start rocking, the water would slosh back and forth, causing a standing wave in the bed that could eventually toss you out.   The industry tried to fix this problem with internal baffles or the water tubes (like the one I had above) but the sloshing effect was still there.

Most of my friends got rid of their water beds by the mid-1980's or the 1990's at the latest. Some tried to sell them in the local PennySaver, others really took them out to the dumpster and threw them in. Since the frame came apart for easy moving, it wasn't difficult to dispose of a used waterbed.  I believe mine ended up in a dumpster in a similar fashion.

The story of waterbeds, though, is instructive, as indeed it is the story of consumerism. As I noted earlier, the huge sound system was a "must have" item for people in the 1970's.  In the nineteen-sixties, it was a giant console color TV and maybe a Hi-Fi set.  In the 1950's it was the black and white television, and in the 1940's, perhaps the console radio.

While some of these may have been desirable consumer goods at the time, and may have provided hours of entertainment, the reality is many of them did not even last the decade before they were obsolete. This is instructive before you go out and buy any consumer goods. Think about how long you actually will have the item in question before it turns into an obsolete brick that is no longer usable.

In more recent times we have some similar "must have" items that have come and gone in our lives. In the 1980's having a personal computer what seemed to be a big deal. And by the 1990's most people were on their second and third machine. About this time the laptop computer became popular both as a useful business tool and status symbol.

Today, we talk about a post-PC era, in which people are migrating toward smartphones and pad devices in place of the traditional desktop PC or even laptop computer. More and more people are turning off their traditional computers and finding themselves using them less and less. And of course more and more of them are making their way to dumpsters across America. What was once a highly desirable consumer good is now a worthless piece of junk.

And it goes without saying that today's smartphones and pad devices and other electronic toys will be let go in the same way.  Today's "must have" smartphone is tomorrow's obsolete model - perhaps on a consumer cycle even shorter than in the past.

The point is - and I did have one - is that it is possible to spend an awful lot of money trying to keep up with these "must have" consumer purchases.  Back in the 1970's you could spend an awful lot of money at the waterbed store - and the salesman would helpfully offer to help you finance it over time so long as you had a pay stub.

But the reality is, you could have just skipped the entire process, save yourself a lot of money, and not missed out on the magic of owning a waterbed. You could just skip right to that "toss it in the dumpster" stage and bypass a lot of grief and hassle. Of course this means you wouldn't have had the bragging rights of owning a waterbed in the 1970's - a dubious distinction at best.

Will waterbeds ever make a comeback? I doubt it, only because people seem to want to move on to the next greatest and latest thing. No doubt, someone will come up with some new type of mattress or sleep device, and it will be talked about in the news and advertised heavily. And no doubt your friends and neighbors will tell you that you "have to have one" as it is that is his given them the "best night sleep" they've ever had.

And no doubt, within a decade it too, will be in the dumpster and people have moved on to something else.

That's pretty much the story of waterbeds.

Cheap Durable Furniture

You can find durable inexpensive and attractive furniture, sometimes in a dumpster!

In a recent article in Market Watch I was interviewed about IKEA furniture.  As I noted in my posting on the subject, I thought IKEA furniture was not a good bargain, as while it is cheap and looks good, it doesn't last very long - maybe 5-10 years at most, if even that.   As a result, you end up buying other furniture anyway, so why bother?

Good furniture should last a lifetime, if not longer.  And it should be strong enough to jack up a car on it - that's my test for quality furniture!

Well, I thought I should show some examples of my furniture "finds".   Yes, some of my dumpster furniture is no longer with us as I sold it at garage sales.   That's pretty sweet - getting something for free, using it for a decade, and then selling it for pure profit.   Let me know when you can do that with any piece of IKEA!

The chair above was one of a set of four, found in a dumpster here on the island.  It is a chinese modern chair with a reed bottom.  It was being tossed away and Mark asked the person tossing it, "got any more like it?" which yielded its three brothers.   They had a lame black vinyl cushion over the reed, which when removed revealed a nice SOLID comfortable chair that blends well with our Arts & Crafts motif.  Can't beat the price, either!

Here's a recent acquisition - a set of three tables bought at a garage sale for $5.   They were also selling golf carts for $299.  The tables were sturdy and made of solid wood (likely pine) but had been "gnawed on" by the owner's dog, so that each corner had a chew pattern on it.   What to do with such a set of tables?

 Tables, three for $5.

Well, Mark got out the electric drill and a sanding disc, plus an old bucket of stain.   He rounded off the corners to give it a primitive/colonial look and then stained it.  Voila!   We thought about using a router to make a nice edge, but this was easier and frankly, worked better than the router.   If you have a router, though, you could have radiused the corners and gone fancy with it.  It all depends on your skill levels and what tools you have - or can borrow.  Give it two coats of Johnson's paste wax, and you've got a nice set of nesting end tables - for nearly free.  And if you didn't know they had been chewed by a dog, you might think they were "antique-y" looking.

This next piece we actually paid $300 for in an antique shop.   The owner of the shop flew over to Europe and filled up containers with "old" furniture (this piece is Dutch, from the 1930's) and had it shipped back.  Hardly an antique, it was however made of quarter-sawn tiger oak - solid stuff.  We removed a filigree from the top which was a little too dressy, and it has that "Craftsman" revival look  (or Mission style) - at a fraction of the cost (a real period piece would run into the thousands!).

 Mission style at IKEA prices.  Bonus: It won't tip over!

The top was sagging though, and about to split.  What to do?  While visiting a local stone shop, we mentioned this, and the owner cut and polished a nice piece of granite for $60.  Small pieces of granite (too small to be used as counter-tops) are considered "scrap" and this was found money for him.  I painted the hardware (which was plated - and the plating coming off) with a "hand hammered" paint and then re-installed.  The result?  A nice sideboard that makes a great serving station as well as storage for china.

But what to do with that bent oak top?   A trip to the lumber yard and we have two pieces of oak 1x2 to screw into the bottom to flatten it out.  Carefully screwing it in, it doesn't crack.  We cut it to length, and borrowing a router, routed the sides to match the front and rear.   It makes a great top for....

A nightstand made from an abandoned trunk and a discarded oak top.

... an antique trunk we found in the trash room at Hunting Towers Apartments nearly 30 years ago!  Not only does this make a good nightstand, the trunk also holds all of our Christmas ornaments.  Total cost:  $0.

 I'll take solid furniture over pretty any day.

This old school chair (part of a set of six) is solid oak, from a local "junk shop, $200 the set.  Along with an old church pew ($150 plus cushion from churchpewcushions.com) and an antique oak table hand-me-down, we have solid seating for 12.

Lineberry carts are fun and practical.

This next piece is fun.  Lineberry carts were used in the mills and factories on the East Coast from the 1800's until the 1980's.   For all I know, some are still being used today.   They are indestructible, with sold cast-iron wheels - they weigh a ton (well, a quarter-ton, anyway).  This is a real cart, by the way - they are so popular as coffee tables that the Chinese are now making fake knock-offs that are not nearly as sturdy, or as interesting.

We saw this one, with a rustic cherry top at an antique mart in Atlanta on the last day.  $300 and it was ours.  It took three people to lift it into the truck.  Fortunately, it is on wheels.   It has that post-industrial chic along with that woodsy Mission look.   It will outlast me - at a price that is pretty modest.

This dining room set was had used For $200.

Used furniture is a good bargain.  If you can find a piece "as new" it can be had for less than half the price.  This dining room set was bought from a friend and now graces our rear screen porch.   Dining outdoors is a lot of fun - sans mosquitoes.  Regular coats of Johnson's paste wax (top and bottom) keep it from disintegrating in the humidity.

This is just a sample of some of the "finds" we've had over the last few years.   The point is, while it is fun to get "everything all at once" and spend thousands of dollars at IKEA buying molded particle board, it is not much more expensive - if in fact, not cheaper - to buy solid quality furniture that will far outlast IKEA or other particle-board furniture manufacturers.   And it will be far more fun and interesting furniture as well!

Particle board is NOT furniture!

Is Private Equity Evil?

Is private equity evil?

The New York Times has been running a series of articles decrying the excesses of private equity and arguing that somehow private equity is inherently evil and a detriment to our society.  While it may be true that some private equity firms may have engaged in nefarious dealings, that is not what the New York Times is talking about.  According to the New York Times, merely making money using private equity is evil in and of itself.

What is private equity, anyway?   In order to understand the issue, you need to understand what the terms mean.  Public equity you are probably more familiar with, is this represents the publicly traded companies on the New York Stock Exchange the NASDAQ and so forth. People get together and buy stock and form a company which raises capital to build factories or make other investments which hopefully generate a return on the capital.

 

Well, that was the theory anyway.  In this modern "dot com" world, people offer stock not to raise capital to build a company, but to create a vehicle to allow them to cash out of their formerly privately held companies.  And just as some private-equity firms have done nefarious things, many publicly held companies have been guilty of equally bad, if not more horrific things in the past. Dumping toxic gas in rural India and killing thousands, for example as Union Carbide did back in the 1980s.  Public equity is no less culpable than private equity, which is one reason this series of articles in the New York Times is just ridiculous rabble-rousing nonsense.

Private equity, as the name implies, is money that is held and invested by private individuals and not through publicly traded stock. This could comprise family-owned companies like the Chamberlain garage door company or the the S.C. Johnson Company, or private equity firms which accept investments from individuals and then manages those investments.  Private equity even includes local mom-and-pop owned stores and the like.  As you can see, there's nothing inherently evil in private equity.

Private equity has many advantages over public equity in terms of how they can invest and manage their investments.  Publicly traded companies have to publish their balance sheets every year (or even quarterly) and thus make available to the public everything they do. This makes it harder to make strategic investments as everyone is aware of what you are attempting to invest in or do.

The biggest problem with public equity is the obsession with stock price.  As I've noted time and again in this blog, small investors are obsessed with stock price and rarely give a thought to price to earnings ratio or dividend payments.  All of the financial channels and financial pages obsess about stock price above anything else, as if it was the only form of return from an investment.

High level managers of many publicly traded companies are paid in terms of stock options. Thus, for example if you are the President of a company and given an option to buy the company stock for $10 a share, it is in your best interest to drive the stock price up as far as possible. If you can drive the stock price up to $20 a share, you can literally double your money overnight by exercising your option.

The problem with this model, is that it encourages managers to look at short-term gains and not long-term goals. When you incentivize managers to pump up the stock price, they will do exactly that, even if it means in the long-term the company may suffer. Stock price is not the only indicia of a company's success, and if you incentivize people to maximize stock price, it can produce skewed results.

Thus, public equity in many ways can be worse than private equity, not only in terms of bad things that publicly traded companies do, but how the finances of publicly traded companies can be manipulated.  Many small investors have lost their shirt buying stocks in publicly traded companies only to find out that the stock price has been a manipulated through some sort of scheme. Remember that Enron was a publicly traded company.  Still sure private equity is inherently evil?

Private equity firms have some advantages in the marketplace in that they can look at long-term gains and profits, versus short-term stock price spikes. Since they don't have to answer to shareholders or disclose their finances to the public, they can operate with more freedom. They can also choose to take larger risks, which can result in far greater rewards.  Private equity firms are often the only investor is willing to touch very risky and toxic assets.

The New York Times uses several examples of how private Equity firms have invested in various industries, and decries these as somehow being inherently evil merely because the people involved made an astonishing amount of money in a short period of time.  However in most cases, publicly traded companies or government agencies would not have touched these investments with a ten-foot pole, as they were too risky and too toxic.

The Hostess company, manufacturer of Twinkies was one of their early examples.  As you now well know, the Hostess company went bankrupt, actually twice, in the last few years. The structure of the Hostess company was very similar to other large corporations I worked for in the past, such as General Motors or United Technologies. General Motors used a "vertical integration" system to manufacture every part of the automobile other than the tires and the gasoline in the fuel tank.

This vertical integration model takes advantage of economies of scale, which made a big difference back in the 1930s and 1940s.  Being able to beat their competitors in the market meant that they had to keep their costs as low as possible.  However, by the 1960s, this model started to fall apart.

Again, it is tempting to say this was a union problem - and the unions were certainly were a big part of the problem - but it was also a management and shareholder problem.  As I have noted before in this blog, when a large company moves to town, everybody sees what kind of taste they can get from the enterprise. The unions want higher wages and especially union dues from their members. Management wants big salaries and to hang on until they can retire with their cushy pensions. The shareholders want huge dividends and big increases in share prices. The state, county, and local governments all want a taste of those tax dollars.  No one, it seems, really wants the enterprise to succeed in the long-run.

Everybody looks out for their own self-interest, this is human nature.  As a result, the 1960's and 1970's many corporations felt embattled. Local factories were being taxed to death while workers went on strike for even more wages.  Management basically gave up and gave themselves a bonus and settled the strike and pushing off the day of reckoning by offering huge retirement benefits which were never properly funded.  This is public equity at work.

Hostess suffered from a number of such problems. They had a large number of factories in many States making everything from Wonder Bread to Twinkies. They also own their own fleet of trucks and hired their own union drivers who worked exclusively for Hostess delivering the baked goods.  At their height they had over 18,000 employees nationwide.

While that model might have worked well in the 1950's or even the 1960's when the trucking industry was regulated, today if you are running a bakery you don't also want to be running a trucking company.  It is far more efficient and easier to farm out the trucking part of the business to a company which specializes in transport.

Hostess went bankrupt a few years back, and an initial attempt was made to reorganize the company. However union members were not willing to go along with cutting benefits and the new management didn't have the courage to close down factories (again raising the ire of the unions). So Hostess ended up in bankruptcy again

At this point, who would take over such a nightmare?  Public equity companies would not dare take such a risk buying a company with such a poor track record and such entrenched difficulties. The government couldn't - or shouldn't - take over a company like this, as the government is least prepared to operate such an enterprise profitably.  (Although I'm sure the folks at the New York Times think that would be the best solution for everything).

Enter private equity. They purchased some of the assets of the company in bankruptcy but not all of them. They bought the factories which looked like they could be made profitable, as well as the intellectual property -  the trademarks (brand names).

As a new company, they started out without the debt of the old company or the overhead of a large number of obsolete factories.  They also declined to get involved in the trucking business, instead relying on other companies to deliver their goods to grocery stores and Walmart and the like. This cut the number of employees from 18000 to less than 1800.

But even then, they were still troubles. A plant in Illinois could not be made to operate efficiently and had to be closed and demolished. This was of course, upsetting to the employees involved, as they hoped that the resurgent hostess company would revive their small town. However, investors are not in the business of social engineering, but in building and operating profitable enterprises.  Unprofitable factories cannot be run forever based on goodwill and social engineering.   It's been tried - in England, in the Soviet Union, in Cuba.  It doesn't work.

Now, when I said that the new Hostess would shed of all of its previous debts in bankruptcy, this also included pension obligations to the many laid-off and retired employees. This is where things get sticky. The New York Times posits that it is unfair that these workers, many who spent their lifetime working for Hostess, should lose part of their pensions. (at least a portion is guaranteed by the Pension Benefit Guaranty Corporation) while private Equity managers take-home pay checks in the hundreds of millions of dollars.

And if you looked at the pre-bankruptcy hostess and the post-bankruptcy hostess as being the same company, then perhaps this argument makes sense.  However, the new Hostess company is a privately held company which comprises purchased assets bought in bankruptcy.  This is not some new-fangled financial strategy or legal paradigm, it is time-honored bankruptcy law.  When you buy your neighbor's tractor at his farm bankruptcy auction, you don't assume the debts of his bankrupt farm.  That's how bankruptcy works.

Indeed, we could not expect the private equity investors to voluntarily assume the pension liability of the company, any more than we would expect a publicly held company to assume this liability voluntarily.  For a publicly held company, Not only would it be bad business, it would be it would result in a shareholder derivative suit for malfeasance.

But private equity companies merely bought assets in bankruptcy.  They were not the ones to underfund the pension plan for decades in a row. They were not the ones who went on strike for higher wages and expanded pension benefits while at the same time failing to ensure these pension benefits were properly funded. There are a  number of bad actors in this scenario, and private equity is the least culpable of them all.

Think of it this way. You buy a car for $20,000 and it turns out to be a lemon. You go to sell the car and all you can get for it is $10,000 which is a good bargain to the person buying it from you. Naturally, you are upset that you have lost half your money, which is a bad thing. But it is it the fault of the person buying the car from you that you lost this money? Are they morally obligated to pay you $20,000 for your car?  Believe it not, some folks actually think so!

And let me give you two real-world examples to illustrate this analogy.   When I was in college, I was looking for a "parts car" to get parts to repair my pizza delivery car which I had wrecked (not while delivering pizzas, fortunately).   I found one in the "Pennysaver" (the Craigslist of the day, in paper format) for $100.   I went to look at it.  It had been hit in the back and the rear fender was pushed into the rear tire, which was shredded.   I gave the guy $100 and he signed over the title.

"Are you gonna get a tow truck to haul it away?" he asked.  "No, " I replied, "I'll just drive it home."   "But it ain't driveable!" he exclaimed.  He then watched in wonderment when I pried open the trunk, took out the bumper jack (remember those?) and stuck it in the wheel well and started jacking until the wheel well started to spread apart, freeing the shredded tire.   I put the spare tire on (back in the days of full-sized spares!) and then started it up.   "Runs fine," I said.

"Sheeet!" he moaned, "If I'da known you coulda done that, I wouldna sold it!"   And I just replied, "Well, I'll sell it back to you for $200 if you want it - for my labor and expertise and all."  He was not happy.   I drove the car for a couple of months and then took it apart to repair the remains of my other car, building a welded-together frankencar.

The point is, I saw opportunity where other people saw disaster.   He thought the car was "totaled" and could only be moved with a tow truck.  I saw a car that could be made to run with little effort and had some residual parts value.   Not only did I use the parts (doors, etc) to rebuild my old car, I sold over $150 in parts off the car, which offset my purchase price.

Now multiply this times a million or a billion and you have private equity.

Or take one of my foreclosure purchases.   We bought a duplex that the previous owner walked away from.   He had mortgaged it for $140,000 to pay for remodeling, and then realized, when the market tanked, that he owed more money on the house than it was worth.   At the same time, he came into an inheritance of another house (his Father's) so he made the strategic (in his mind) decision to walk away from the mortgage on the duplex and move into his Father's house.

He saw no value in this duplex, which he thought would never be worth what he had invested in it.  I bought it for $95,000, completed the renovation he had started, and rented it out at a modest profit.   A decade later, we sold it for nearly $300,000.  Does this make me "evil" for seeing value where others saw only unrecoverable losses?   Do I owe the guy who lost the house part of the profits from selling it?   Bear in mind that when I bought it, I though that maybe a decade later I might make enough money to buy a car - the market going berserk never entered my mind.   I used private capital (much of it borrowed) to invest in an undervalued asset and turned it around.

And if this is evil because it is private equity, is public equity just as evil?   Bear in mind that Warren Buffet uses public equity in the form of his Berkshire Hathaway Corporation (of which I am a Class-B shareholder) to buy undervalued companies and then turn them around.  Is he "evil" for seeing value where others see only losses?   For seeing profit where others only fear?

In a way it's the same kind of deal with Hostess and "private equity" - a term which in and of itself sounds scary, particularly the way the New York Times uses it. Private equity purchased some of the assets of Hostess bankruptcy. The people who lost these assets, the shareholders the bondholders, and the pensioners, got a raw deal. But you can't expect the purchaser of the assets in bankruptcy to pay more than market value for them or indeed assume liabilities they are not liable for, merely to make things "fair".

Unfortunately, this Hostess situation illustrates the problem with the defined-benefit pensions, and how defined-benefit pensions are bankrupting corporations across America as well as local and State governments. So long as a company is growing in market size and number of employees, a defined benefit pension scheme might work - much as a Ponzi scheme continues to work so long as people continue to invest in it.

The problem we had at General Motors - and with  most American companies - is that we were losing market share and moreover as our plants became more automated, required fewer and fewer employees. Promises made back in the 1960s to employees for pensions were not fully funded and when these employees retired in the 1980s and 1990s and onward, there wasn't enough money to pay them. Compounding this was the increased life expectancy of these retirees as well as the increased medical costs.

The beef the New York Times has with the entire situation is that these investors who bought the wreckage of the company in bankruptcy made millions while the pensioners lost tens of thousands each and the employees were out of a job.   This would indeed be an outrage if there was some causal connection between the profits of private equity and the pain of the employees.

And in some instances, there is.   Bain Capital - Mitt Romney's firm - used to buy companies that were not in bankruptcy and then spin off divisions loaded up with the company's debt, including pension debt.   These companies were designed to fail and take out the pensioners.  They would then repackage the remainder and sell the company on the open market - as public equity - and walk away with huge profits.   It is one thing to buy a company's assets in bankruptcy, when you are not obligated to take on the company's debt obligations, it is another to buy a company and walk away from debt intentionally.  But again, this is not a crime limited to private equity - publicly traded stock companies do the same sort of thing, and if you don't believe me, watch what happens to Sears in the coming months - and what has been going on over the last few years.

The flip side of the coin is what would have happened if private equity had not bought Hostess?  Well, if there were no buyers for the assets of the company, then everything would be liquidated.  The "intellectual property" (brand names) would be sold off to a competitor, and the factories sold as mere real estate.   Everyone would have lost their jobs and the pensioners would be in the same situation as before - perhaps worse, as the amount realized in bankruptcy would be far less.

And that is the problem with the New York Times article.   They decry "taking a profit" in private equity as somehow inherently evil or wrong, merely because on the flip side of the bankruptcy, other people are losing money.   But what is the alternative?   Regulating how much profit someone can make?   Passing a law that says that people who used to own something should profit when you fix it up and improve it?  That is not a workable solution.

In another part of the series, the New York Times decries private equity for buying up those crappy mortgages that went bust in 2008.   In case you forgot (like most of America at this point) back in the 2000's under the Bush administration, lending practices were loosened to the point that anyone could get a mortgage on anything, paying ridiculous prices for houses on weird loans that made payments "optional" - but reset over time to onerous.

While banks are to blame for offering these screwy loans (and deserve to lose money as a result), it was the home buyers who signed the loan documents - no one put a gun to their heads.   The loans went bust, of course, and even today many people are upside-down on these loans and facing  foreclosure almost a decade later.   I hope our Canadian friends are watching this.   This is not unusual, either.  I was buying foreclosures in 1998 - a full decade after the meltdown of 1989 which of course, never happened as we all know, right?

The New York Times makes it sound awful that the people who bought these loans actually want them paid back and for some weird reason, just don't "forgive" billions of dollars of mortgage debt.   They are actually foreclosing on people who haven't paid their mortgages and that is just so outrageous it should be stopped!

This is the same old tired argument made by the Left over the last decade - that mortgage debt should be forgiven and houses handed out for free to certain people because, well, because it would be fair, right?   But fair to who?  What about the people who made their mortgage payments or bought houses they could actually afford?   What about people who decided to rent instead of buying?   It is fair that we give away free houses to people who make the most irrational and irresponsible financial decisions and then punish those who are fiscally responsible by using their tax dollars to give away free houses to others?

Another supposed outrage which parallels the mortgage crises is how private equity firms are buying up public utilities such as water works and sewage treatment plants.   Again, these firms didn't put a gun to the head of local municipalities and force them to sign over ownership rights.  Rather, these municipalities recognized that they had mismanaged their public utilities for decades and could no longer operate them.  Piping repairs were deferred or ignored in favor of paying public (union) employees more and more - as well as promising hefty pensions.   Taxpayers "revolted" rather than pay more taxes or higher water bills.  Eventually the piper had to be paid and the New York Times wants to make it out like private equity is somehow to blame for a New Jersey town neglecting its water pipes.

But the ultimate irony that the series in the New York Times fails to realize is that private equity firms rarely keep assets for the long haul.  Like an antique dealer, they buy a "diamond in the rough" at a junk shop, polish it up and wax it, and the put it on display in their antique shop, doubling or tripling their money.   Private equity firms usually try to "spin off" their acquisitions as Initial Public Offerings (IPOs) in new stock companies - public equity.   And again, no one is putting a gun to anyone's head and forcing them to buy the stock, which may or may not be a good deal.

It is not clear from the New York Times series where they are going with this.   Are they saying that private equity should be outlawed?  (good luck with that!)  Or merely heavily regulated (if so, how?). Or are they just trying to fan the flames of discontent to the drumbeat of "income inequality"?   I think the latter.   We are told that it is bad that some people have more money that us, simply because it is bad.   Never mind that the poorest person in the USA lives like a king compared to world income standards - we should judge our self-worth and the "fairness" of our economic system by comparing the wealthiest to the poorest.

But what does it mean to have all this mega-wealth anyway?   And that is the topic of my next posting.

Landlord Insurance?

Several advertisers on this site offer "Landlord Insurance" - is this a good deal?  Probably not.

In reviewing the ads on Google AdSense, I noticed more than one for "Landlord Insurance" which intrigued me.  Being a landlord is a risk-taking venture, and in any risk-taking venture, someone will no doubt offer to insure your risk to provide "peace of mind."  But like extended warranties, whenever someone tries to sell you "peace of mind" you should keep one hand on your wallet.

As a landlord, of course, you have to have insurance.  Usually a commercial homeowner's policy that covers a rented property against fire and other damage is required by your bank - and is a good idea even if you don't have a mortgage.  Liability insurance is also needed - and an umbrella liability policy should also cover excess liability if someone slips and falls on your sidewalk.   Be sure to tell your agent the property is rented out and make sure both policies cover rental properties.   Otherwise, claims may not be paid.

But what these ads on my blog are selling is something slightly different.   Some are offering, in addition to property coverage and liability, "Landlord" protection against eviction, vacancy, and loss of use.   This kind of landlord insurance, in my mind, is as pointless as an extended warranty and about as worthless.  As I noted in my extended warranty posting, as both an Automotive Engineer and a Lawyer, when it comes to repairing my car, I'd rather play auto mechanic than lawyer.   The former gets the car fixed, the latter results only in aggravation.

An extended warranty is a contract - a huge contract in fine print with a lot of exceptions which cut only in favor of the warranty company.  So if you go this route, you spend your hours going through pages of documents and arguing with people on the phone about who pays for repairs. Your car sits disassembled in a shop somewhere while you get "pre-approval" for repairs or have it towed to a shop of their choosing.

Or the company has gone bankrupt (and they do regularly) and you've wasted thousands of dollars on a useless warranty.

If you are so damn scared of owning a car, maybe you should be taking the bus, or buying a less expensive car you can afford to walk away from.

In landlording, the same is true. It is a risk-taking venture, like buying stocks.  Would you buy insurance on your stock investments?  Maybe someone offers such a thing - but I doubt it.  And if the stock market crashed, I doubt it would pay off. You can ameliorate risk in stock market investing my spreading your investments among a number of stocks, bonds, and whatnot - diversifying your portfolio.

In the landlord business, you do have control over a lot of the aspects of your investment, which an ameliorate risk as well.  You can do background checks on your tenants.  You can invest only in better neighborhoods.  You can charge reasonable rents to prevent turnover and vacancy.   You can do some repairs yourself to save money.   You do have a lot of control over the process.

Even then there is risk.  Tenants can stop paying rent and you then have to evict.  If this happens, evict promptly and quickly and move on.  Don't drag out the process by delaying by even a day - or listening to long-winded sob stories from wily tenants.

Would landlord insurance help?  Maybe.  But it seems to me that bleeding to death slowly by paying insurance premiums is just as bad as having the occasional vacancy or even eviction. And if your finances are spread so thin that you can't deal with vacancy or even eviction, maybe you shouldn't be investing in Real Estate.

One reason I shied away from buying more investment real estate is that I realized that if the shit hit the fan and all my tenants stopped paying rent, I could still afford to "carry" the overhead costs of the properties.   If I doubled my portfolio, this would not be true, and I could end up in a bad place in a real hurry.

This is not to say you should not insure the property - your bank will require that. And a lot of "Landlord Insurance" policies cover what is covered by a basic homeowner's policy.  By the way, if you are renting out a property, make sure your homeowner's policy covers rental use - some do not and cover only owner-occupied dwellings.   A commercial policy may be necessary.

And it goes without saying, that an umbrella liability policy that covers you and your rental properties is a good idea in case someone falls through the front porch or whatever.  Again, make sure the policy covers your rental properties as well as your own home and cars.  Usually they ask this on the application form.  And no, lying on the application is not a good idea, but a way that allows the insurance company to legitimately deny your claim.

But some optional coverage (which was apparently advertised on my blog) may include loss of use, loss of rental income, and some even cover the cost of evicting tenants, etc.   I am not sure this is such a swell deal, as the premiums would be correspondingly higher, and insuring something that is at least partially in control of the insured seems kind of weird to me.

It is like these car - and especially boat - policies that offer to pay the retail price of a new car or boat if you wreck or sink your existing car or boat.  It is a 100% incentive to set fire to your car or sink your boat, if they promise to give you a brand-new one, without even a deductible.  Such policies can't be cheap, as they are certain fraud-bait.

There are two kinds of people in the world, I think.   The first kind looks at insurance policies like a Chinese menu - figuring out what claims they would like to file.   These are the kinds of people who get low-deductible policies and file claims often.  The complain if the claim service isn't fast or efficient.   They don't understand why anyone would want a lower-cost policy or high deductible.  To them, insurance is all about what you get paid, not what you pay.

The second group, which includes me, views insurance as a necessary evil in a world where there is risk.   But it is an evil to be minimized as much as policy.   We would like to pay as little for insurance as possible, as we don't plan on filing claims, if at all possible.   And we are not interested in coverage for trivial things like broken windows, which we can repair ourselves.  We are just interested mostly in catastrophic coverage for when the shit really hits the fan.  And we want the lowest possible price and could care less how fast or efficient the claims service is.

Sadly, it seems the first kind of people dominate the world - they want something-for-nothing and want to "make money" on their insurance policy, which is very hard to do.   These sort of folks drive up insurance costs for the rest of us, and they are one reason Obamacare is so damn expensive.

In the long run, though, the first types never win.   Sure, they will regale you about how they got free carpeting in their house when the washing machine overflowed.   But like gamblers who like to tout their "wins" but forget about their losses, the first types will never talk about the high premiums they paid for decades.   And the analogy is apt, as insurance is indeed a legalized form of gambling - albeit a necessary one.

I think I'll take a pass on "Landlord Insurance" for the time being.   Property and liability coverage really is all that I need.

Have Yourself a Scary Little Christmas....

Christmas can be a time of happy memories or terrible nightmares.

Most folks enjoy the holiday season.  Some even throw themselves into it, making hot cocoa for the carolers, waiting in line on Black Friday to get a tickle-me-inappropriately-Elmo.   They blow thousands at Michael's buying decorations and crafts and bake cookies for the company Christmas party.  For them, Christmas is a time of happy memories and family gathered 'round the Christmas tree.

And indeed, one reason we have holidays around the winter solstice is that it is just so damn depressing this time of year - with the sun hardly showing its face and weather cold and damp (but not snowing enough to ski).   So we have parties this time of year just to keep our sanity.  And for most folks, this is "The Most Wonderful Time of the Year"(tm).

For others, less so.  If your parents died in a plane crash on Christmas eve, you might find the Holiday less cheery but instead of reminder of loss and terror.   Mark's Mother died right before Christmas - right in the house, in front of him and his Dad, who were helpless in a blizzard to do anything.  She had a congenital heart defect.  Pretty horrific and sad Christmas - burying your Mom.

Still for others, it can be a reminder of the ghosts of Christmas Past, which can be pretty haunting.   For me, it was my psychotic mother and watching her brain melt down, over time, as I was trapped in the house with her.  My Dad would be away with his mistress, my brother with college, my elder siblings off with their own lives.

In addition to being insane and an alcoholic, she also felt that Christmas was a test of her worth as a Mother and a Housewife.   Everything had to be done, and done perfectly.  Presents were to be bought, the tree to be decorated, lights to be strung, and the usual nonsense.   However, instead of the joyous family get-togethers of previous years, by the late 1970's, I often found myself alone in decorating the tree with a psychopath.

Why she felt Christmas had to be "perfect" and moreover her responsibility is beyond me.  But it sort of ruined Christmas for me - forever.   Don't get me wrong, I am not a Scrooge or anything, but to me the best Christmas gift of all is not having to deal with Christmas.   As soon as someone says, "You HAVE TO..." send Christmas cards, or gifts, or hang holly or throw a party, or whatever, it becomes too much.    Christmas should be a joyous time of the year, not a set of obligations and onerous tasks which need to be completed perfectly or you are somehow less of a human being.

Old Martha Stewart bought into this nonsense - and scarred a generation of housewives as a result.  She would go on her show and make a Christmas Ornament that took 40 hours of painstaking hand-work to make.   And they she would show us her 40-foot tree with 328 of these ornaments on it.   Like this was something we could all do, much less strive to do.  Perfection is the enemy of the adequate.

To me, the ultimate luxury - the greatest Christmas gift of all - is to simply not have to deal with Christmas.   This is not to say we don't decorate or bake cookies or whatever.   But we do a lot less at home than we used to.  Mark finds his Christmas outlet in the annual Christmas sale at the Arts Association, which provides him with enough Christmas trees to decorate and holly to hang to last him a whole year.   And then there are the parties to put on - two of them - which of course is a lot of work.

In a way, that is a good way to deal with the whole Christmas thing.  Rather than spend time decorating your own home or holding a party there, do some volunteer work and bake cookies for the homeless vets or something.   You get to do all that Christmas stuff, but you don't have to do all of it.

Now of course, some folks are Christmas-Crazy and just love the whole concept of the season - the decorations, the shopping, the caroling, the cooking, and whatnot.   Knock yourself out!  Just bear in mind that the rest of us are not like you and often for good reasons.  Don't diss others for not being Christmas freaks.    It is like sports fans.  I am happy for you that you decorated your basement in your team's colors and painted your car to match.   But don't call me a weirdo for not following suit.

After nearly four decades, the PTSD of the family Christmas is starting to fade away.   I realized I can't let my childhood dictate the rest of my life.   But on the other hand, I realize that I am 57 years old and there won't be a shiny new trike or a Lionel train set under the tree this year.   In fact, at this age, buying "presents" is sort of foolish - we need more "stuff" like we need a hole in our heads.   Christmas is for the kiddies - the sense of wonderment and whatnot.   And let them have it!

But for God's sake, don't scar your kids for life trying to make "The Perfect Christmas" - please!