Wednesday, November 24, 2010

How Closely Should You Follow the Market?


Many folks like to watch the market on a day-to-day basis, encouraged by the moronic reporting on the TeeVee, which touts the ups and downs of the " Dow"  as the pulse of the nation.  You are better off standing back from these fluctuations and thinking long-term.

How closely should you follow the market?  The short answer is, not very.  For most younger people, contributing to their 401(k) or IRA, life is too busy to check their account balances on a day-to-day basis, and since they are investing for the long run, they rarely try to figure out what is going on, other than to read their quarterly or annual Statements.

Yet some folks follow the Dow Jones Industrial Average on a day-to-day basis, as if this somehow made them "more informed" or allowed them to better manage their portfolio.  But doing so is a waste of time - and perhaps a dangerous one.  Trying to time the market or trading based on daily fluctuations is never a good idea - and a good way to churn your account down to nothing in no time.

As I have noted before, so-called "Day Trading" schemes are little more than Casino gambling, and for both forms of gambling, there are idiots out there who will claim you can "make money" this way.  You and I, being rational human beings, scratch our heads and think, "I must be missing something there, how can you make money buying and selling a stock the same day?"

And no, you aren't missing anything.  Compulsive gamblers, of the day-trading variety or the casino variety are total idiots.  Just walk away from people like that, as they are nothing but trouble, and will, like clockwork, eventually hit you up for money after they have gambled all theirs away.

There is money to be made in gambling - if you RUN a Casino, or you SELL a "Day-Trading System".  But otherwise, it is just a game for chumps.

I have checked the balance on my E*Trade Account a few days in a row, now.  What is interesting is that the account balance can vary by several thousand dollars a day, and a stock that is "up" one day can be "down" the next.  Oftentimes, these pricing variations are due to events in the news (North Korea attacking South Korea, for example) or due to quarterly profit reports, a company getting a lucrative contract, or whatever.  Or it could be just that someone decided to sell a lot of shares one day, which depressed prices, or someone else decided to buy, inflating prices.  For small cap companies, this latter effect can be huge, which is why the con-artists out there are always trying to get your to buy penny stocks.

Taking a long view and not micro-managing (or churning) your own investment accounts is a far better approach to investing than checking things on a day-to-day basis.  If you over-manage your investment accounts, there will be a temptation to "do something" to prevent losses, or do something else to obtain gains.

Usually, this means people selling stocks that are taking a nose-dive and then buying stocks they see on the rise.  This is the classic case of Buying High and Selling Low and a sure way to go broke in no time.  As I have noted previously, a lot of very stupid people panicked during the crash of 2008 and sold all their stocks and bought bonds, on the premise that they could not "afford to lose any more!"

But of course, the market recovered within about a year - to its previous levels.  The rest of us who held on to our investments, got most of the losses back.  Those who panicked and sold, locked in their losses and are now only half as wealthy as they once were.  Fear and Greed - what drives the Stock market and what causes the "buy high, sell low" mentality.

When you retire, you have a lot more time on your hands, and the temptation is to start managing your investments more closely.  But again, other than long-term strategies, you should not be thinking of buying and selling individual stocks or funds based on the day-to-day or week-to-week operation of the market.

And yes, I am aware that all the financial shows on TeeVee advise just that - often shouting at you to buy or sell such a stock as if you could create wealth this way.  Usually it doesn't work out, other than for the trading firm, which collects fees on every trade (the house always wins, no?).

A better approach, when you reach retirement, is to think about your long-term goals and security.  By age 65, you should have earned all the money you need to retire.  You should not have to rely on market returns to fund your retirement at that stage in life, although many people do.

The long-term strategy is to take money from risky investments, as you get older, and put them into risk-free ones.  So, for example, when you withdraw money every year from your 401(k) or IRA, as you are required to do, put some of it aside into a government backed security or other instrument where the principle is guaranteed not to decrease in value.

Stock picking, on the other hand, is just legalized gambling.  And while some people claim they make money at it, for the most part, people lose money - often a lot.  Like gamblers, most live in denial, remembering the big wins from their trades, and conveniently forgetting their huge losses.

I have a number of friends who have tried to "play the market" with various schemes, from day trading, to futures investing, to short-selling.  In all cases, they ended up in fairly serious financial trouble down the road, even after some initial successes.  Age 70 is not a fun time to be starting over in life, to be sure.

There Ain't No Such Thing As A Free Lunch.  Yes, there are people who "make it big" in the stock market, and they are basically just lucky - but believe their luck to be some sort of insight into the market.   This is unfortunate, as it leads them to make bad decisions later on.  The fellow who pulls the handle on the million-dollar slot machine doesn't believe he knows anything more about slots than anyone else, but a stock picker will tend to think his rewards are a function of his skill.  (Note:  There are some people who do believe that there is a technique to playing slots, which are just raw probability machines.  We call these people idiots.  They flunked math).

And that is the problem with stock picking.  You make some good choices, and you start to think you are a genius, and that is dangerous thinking.

Back in 2009, I bought Avis stock for 74 cents a share, when the market tanked and rumors abounded that they were teetering on the brink of bankruptcy.  The stock rebounded in six months - by 1600%, netting me over $10,000 for a $750 investment.

Am I a stock genius?  Hardly.  If you bought nearly any stock back in February 2008 (other than GM, Fannie Mae, Bank of America, or Fleetwood Enterprises, all of which I also bought) you would have made money.  Those other stocks I mention, they too, teetered on the verge of bankruptcy.  Some went, others didn't, but they all tanked.   No, I am no "genius" - my "stock pick" of Avis only offset my losses in other other stocks.  Never confuse getting lucky with being brilliant.

A little humble pie is a good diet for any investor - on a regular basis.

One of my best investments, I made by accident.  I was trying to buy stock in the company that makes Morningstar Farms products, which of course, is Kellogg.  Instead, I ended up investing in a company called Morningstar, which ironically, provides investment advice and software for investors.  It has done remarkably well, increasing in value by over 50% (I sold my original investment amount, and kept the rest, a practice I usually do when a stock spikes upward).  Kellogg, in contrast, has gone up only about 2-3% in the same time period.

That's pretty embarrassing to admit, but it illustrates the Monkey-and-a-Dartboard effect of the market.  As reported regularly in the press, randomly picked stocks often end up doing better than market guru's picks, over time.  You are better off just picking stocks at random, than to listen to the shouting guy on TeeVee, although I would not recommend either.

So.. don't obsess about the day-to-day fluctuations in the market.  Diversify your portfolio, put an increasing amount of money into "safe" investments over time, and don't try to time the market on a day-to-day basis.  For the small investor, that's about all you can do.

When Poets were Rock Stars

Sidney Lanier was a famous poet for whom one the largest lakes in the State of Georgia, as well as the largest bridge, are named after.  At one time in this country, poets were treated like rock stars - with autograph seekers, fans, and even groupies.

The culture of celebrity is nothing new in this country, or any other.  Long before we had drug-addicted rock-star celebrities, we had laudanum-addicted poets.  It is hard to believe, today, but in the era before recorded music, poetry was quite popular, and was considered an acceptable pursuit for a man to take on.

Oddly enough, today, in our "liberated" society, the art of poetry has fallen by the wayside, it would seem, and becoming a professional poet is not something one hears of often.  And oddly enough, a man is more likely to be castigated and snickered at for being a "poet" today than back in the 1800's.

Walt Whitman, Longfellow, Emerson, all household names back in the day, but hardly heard of today in most quarters.  And I have read in various publications as to how such poets were besieged at times, with hangers-on, autograph seekers, and fans or one sort of another.

Perhaps the writing of rock lyrics is the new poetry of today.  Or, God Forbid, "rap" rhymes.  If so, what a sad legacy we are leaving behind.

Sidney Lanier is an interesting fellow, famous for his poetry back in the day, and famous for his "Marshes of Glynn" epic, a planned part of a series of poems that he never completed before he died of tuberculosis.  While a Georgia native, much of his life was spent in Baltimore.  Yet he made quite an impression on the people of the State of Georiga.  Both Lake Lanier and the Lanier Bridge are named after him.

It is interesting to me that as late as the 1950's, his reputation was such that both the bridge span and lake would be named after him  (the original lift bridge was built in 1956, and Lake Lanier completed about the same time).  Today, I am not sure a poet would be chosen for the name of either, but rather, we would have the Senator Claghorn Bridge, or Lake Sonny Perdue (our former colorful Governor).

No, this has nothing to do with economics.  Just something I was thinking about.  When poets were rocks stars....


The Marshes of Glynn

    GLOOMS of the live-oaks, beautiful-braided and woven
    With intricate shades of the vines that myriad-cloven
      Clamber the forks of the multiform boughs,--
                            Emerald twilights,--
                            Virginal shy lights,
    Wrought of the leaves to allure to the whisper of vows,
    When lovers pace timidly down through the green colonnades
    Of the dim sweet woods, of the dear dark woods,
      Of the heavenly woods and glades,
    That run to the radiant marginal sand-beach within
            The wide sea-marshes of Glynn;--
    Beautiful glooms, soft dusks in the noon-day fire,--
    Wildwood privacies, closets of lone desire,
    Chamber from chamber parted with wavering arras of leaves,--
    Cells for the passionate pleasure of prayer to the soul that grieves,
    Pure with a sense of the passing of saints through the wood,
    Cool for the dutiful weighing of ill with good;--
    O braided dusks of the oak and woven shades of the vine,
    While the riotous noon-day sun of the June-day long did shine
    Ye held me fast in your heart and I held you fast in mine;
    But now when the noon is no more, and riot is rest,
    And the sun is a-wait at the ponderous gate of the West,
    And the slant yellow beam down the wood-aisle doth seem
    Like a lane into heaven that leads from a dream,--
    Ay, now, when my soul all day hath drunken the soul of the oak,
    And my heart is at ease from men, and the wearisome sound of the stroke
      Of the scythe of time and the trowel of trade is low,
      And belief overmasters doubt, and I know that I know,
      And my spirit is grown to a lordly great compass within,
    That the length and the breadth and the sweep of the marshes of Glynn
    Will work me no fear like the fear they have wrought me of yore
    When length was fatigue, and when breadth was but bitterness sore,
    And when terror and shrinking and dreary unnamable pain
    Drew over me out of the merciless miles of the plain,--
    Oh, now, unafraid, I am fain to face
      The vast sweet visage of space.
    To the edge of the wood I am drawn, I am drawn,
    Where the gray beach glimmering runs, as a belt of the dawn,
      For a mete and a mark
        To the forest-dark:--
                            So:
    Affable live-oak, leaning low,--
    Thus--with your favor--soft, with a reverent hand,
    (Not lightly touching your person, Lord of the land!)
    Bending your beauty aside, with a step I stand
    On the firm-packed sand,
                            Free
    By a world of marsh that borders a world of sea.
      Sinuous southward and sinuous northward the shimmering band
      Of the sand-beach fastens the fringe of the marsh to the folds of the land.
    Inward and outward to northward and southward the beach-lines linger and curl
    As a silver-wrought garment that clings to and follows
        the firm sweet limbs of a girl.
    Vanishing, swerving, evermore curving again into sight,
    Softly the sand-beach wavers away to a dim gray looping of light.
    And what if behind me to westward the wall of the woods stands high?
    The world lies east: how ample, the marsh and the sea and the sky!
    A league and a league of marsh-grass, waist-high, broad in the blade,
    Green, and all of a height, and unflecked with a light or a shade,
    Stretch leisurely off, in a pleasant plain,
    To the terminal blue of the main.
    Oh, what is abroad in the marsh and the terminal sea?
      Somehow my soul seems suddenly free
    From the weighing of fate and the sad discussion of sin,
    By the length and the breadth and the sweep of the marshes of Glynn.
    Ye marshes, how candid and simple and nothing-withholding and free
    Ye publish yourselves to the sky and offer yourselves to the sea!
    Tolerant plains, that suffer the sea and the rains and the sun,
    Ye spread and span like the catholic man who hath mightily won
    God out of knowledge and good out of infinite pain
    And sight out of blindness and purity out of a stain.
    As the marsh-hen secretly builds on the watery sod,
    Behold I will build me a nest on the greatness of God:
    I will fly in the greatness of God as the marsh-hen flies
    In the freedom that fills all the space 'twixt the marsh and the skies:
    By so many roots as the marsh-grass sends in the sod
    I will heartily lay me a-hold on the greatness of God:
    Oh, like to the greatness of God is the greatness within
    The range of the marshes, the liberal marshes of Glynn.
    And the sea lends large, as the marsh: lo, out of his plenty the sea
    Pours fast: full soon the time of the flood-tide must be:
    Look how the grace of the sea doth go
    About and about through the intricate channels that flow
            Here and there,
                            Everywhere,
    Till his waters have flooded the uttermost creeks and the low-lying lanes,
    And the marsh is meshed with a million veins,
    That like as with rosy and silvery essences flow
      In the rose-and-silver evening glow.
                            Farewell, my lord Sun!
    The creeks overflow: a thousand rivulets run
    'Twixt the roots of the sod; the blades of the marsh-grass stir;
    Passeth a hurrying sound of wings that westward whirr;
    Passeth, and all is still; and the currents cease to run;
    And the sea and the marsh are one.
    How still the plains of the waters be!
    The tide is in his ecstasy.
    The tide is at his highest height:
                            And it is night.
    And now from the Vast of the Lord will the waters of sleep
    Roll in on the souls of men,
    But who will reveal to our waking ken
    The forms that swim and the shapes that creep
                            Under the waters of sleep?
    And I would I could know what swimmeth below when the tide comes in
    On the length and the breadth of the marvellous marshes of Glynn.
     
    Sidney Lanier

Tuesday, November 23, 2010

The Myth of the Indispensable Man


No one people or group or profession is unique or indispensable in our society.

In response to my rant about High School (A government-run industry), I received a poorly worded response from a "teacher" to the effect that I should get down on my knees and pray to teachers everywhere, every day, thanking them for giving me the gift of reading and writing.  Nice try, but sorry, no sale.  Go sell crazy somewhere else.

And yet, that is a sentiment that the Teacher's Union likes to promote.  A popular bumper sticker the union hands out says "If you can read this, thank a teacher!"  Of course, that slogan is a two-way street.  If the slogan has any merit, then teachers should be blamed as well, for the increasing illiteracy rate among High School graduates.

But the theory is flawed inherently, as no one group of people is critical to our society, be they teachers, farmers, or truck drivers.  And it is usually loudmouthed idiots who advance such theories - that they are so central and important to what is going on - and that they are under-appreciated as well.  But the theory can easily be proven false, and let me show you why.

Robert Heinlein, in his short story The Roads Must Roll, addressed this issue.  In that novella, Heinlein describes the "road cities" of the future.  Heinlein correctly predicted the social trend, that the adjoining cities, such as New York and Washington, would eventually grow together as one long continuous "road city".  What he got wrong was how it would happen, technically.  He envisioned a rolling road, like a conveyor belt, connecting cities, powered by solar energy.  That didn't quite happen.

The plot of the story centers around the road workers, and in particular, one disgruntled worker who makes the argument that they, the road technicians, are responsible for keeping the roads running, and thus, their job is of primary importance to the economy.  Without them, commerce literally would grind to a halt.  So he stages a road strike, to push for higher wages, greater benefits, and more control.  And again, while Heinlein got the technical details wrong, he accurately predicted the social trend.

The long and short of it is this:  while we all have important jobs to do, not one of us is central or utterly important to the economy.  We all can be replaced or substituted.  There is no indispensable man.

Like teachers, farmers have a similar bumper sticker that reads, "If you ate today, thank a farmer!" and it reflects this flawed "indispensable man" concept.  And some people buy into this, giving farmers an aura of saintliness as they do teachers, thinking that both are working solely for the public good, and not for private profit.

And historically, some economists (prior to Adam Smith) bought into this - thinking that all economies began on the farm, and that all other economic activity was basically parasitic.  But they were wrong of course.

What would we do if there were no farmers to grow our food?  Myself, I would just hire someone else to grow my food.  You see, I don't need to "thank" the farmer, as I already paid him - through the price I pay for food, and the subsidies he receives from my tax dollars.  And I am quite certain he appreciates this "thanks", too.

If one farmer decides he is the engine of the economy - or if a group of them did - and decided to go on strike, Ayn Rand style, it would be a simple matter to replace them all, as there is no great "secret" to modern farming.

And in fact, the farmer does not act alone in growing his crops or raising his livestock, but instead depends upon an intricate network of actors, corporations, and supply chains.  Ask any livestock farmer how long he would stay in business if all the Veterinarians and veterinary medicine suddenly disappeared.  Not long, he would tell you.  So is the Vet now the "indispensable man" in the livestock business?  Hardly.

Today's farmers can farm 1,000 times more acreage than the farmers of 100 years ago, thanks to modern technology.  So is the man who builds tractors on the assembly line the "indispensable man"?  Or is it the Engineer at John Deere who designs them?  What about all the other equipment that a modern farm uses?  Could a farmer do all the work he does without it?  Of course not.  And what about the electricity to run it?  Is the man on the switch at the power plant now the "indispensable man?"

No.  Of course not.

And of course, you cannot farm if you cannot get your products to market.  Transportation is key to modern farming - starting with the canals of the early 1800's, which opened up Western New York as the breadbasket of the East, to the trains of the late 1800's which opened up the whole country to be breadbasket to the world, to the trucks of today, that, as one trucker bumper sticker argues, are indispensable to the movement of any goods anywhere.

Are truck drivers the indispensable man?  Hardly.  Anyone with a high school diploma and only a mild drinking problem can qualify to be one.  And yet, this group, too, likes to posit itself as "indispensable" to our modern economy.

But what about all the chemical technology which we (perhaps unfortunately) rely upon to grow crops?  Monsanto didn't develop its "Roundup Ready" crop strains and herbicides for funsies.  And yet, these crops have increased yields dramatically, making low food prices possible.  And ask the executives at Monsanto if they would have spent all that money if they could not have protected their ideas with Patents - and they would tell you "heck no!"

So maybe I am the indispensable man - after all, without Patent Attorneys, all innovation would grind to a halt, right?  Perhaps not.  But it illustrates how silly this "indispensable man" argument is.  None of us is more important than the other, to the workings of the economy.  Rather, we all work in concert with one another - interacting as it were - to create an overall system.

The fact that some of us make more money than others is a function of supply and demand, as well as other factors (unions, for example) not inherent worth in the economy.  So truck drivers are not paid well, because basically anyone can become one, and the supply is largely endless.  The barriers to entry in that business are low, and supply is high.  Teachers were historically paid low, as the supply was large and the credentials were thinner than required today.  Today, with stronger unions, as well as increased credential requirements, pay has increased dramatically - perhaps more than necessary.  Regardless, the myth of the "underpaid teacher" is a thing of the past.

For example, I live on a retirement island, where the homes average about $500,000 apiece, or more than three times the national average.  Many of the folks I know here are retired teachers, and they live a lifestyle that is clearly upper-middle-class.  They bring in combined pensions over $150,000 a year and "snowbird" between two homes.  You can be an "underpaid teacher" or you can live on a retirement island, but you can't do both.  Pick one.  Their very existence here negates the argument that teachers are underpaid.  It is a comfortable profession, period.

Some teachers, in response to this argument, say "Well, when you start out, you make hardly anything!" which is such a stupid argument that again is calls into question the competency of teachers in general (as does the misspelled flames I receive).  In any profession, a person right out of school makes little or nothing.  I started out in the Patent business making only $22,000 a year as an Examiner.  Yet, after 20 years, an Examiner can make close to (if not over) $100,000 a year, and have excellent retirement benefits, including health care (and some of the best government health insurance around).  Are Examiner's underpaid?  Not really.

But loudmouthed whiners in any profession will argue that they should be making more money, because "the other guy" is making more.  And usually the other guy isn't, but they fail to see that.  And they also fail to see that they are making more than the national average and are quite well off.  To those sorts of people, no amount of pay is enough, so long as someone else is making more.  They are whiners, plain and simple.

And supply and demand affects every profession - and affects prices accordingly.  When I started in this field, I was Patent Attorney No. 34,546 - the 34,546th Patent Attorney to be registered.  Today, they are registering Attorneys with numbers in the 65,000+ range.  There have been more Attorneys registered since I started than had ever been registered, period.  In real terms, this means the supply of Patent Attorneys has more than doubled since I started out.

And guess what that does to prices?  Yea.  They go down.  And no, we don't have a "union" to strike for higher wages.  That sort of lame behavior is for losers - people who can't compete on the merits and need a union nanny to protect them - people who like to buy into the argument that they are the "indispensable man" in our society.

There is nothing magical or saintly about teaching.  It is a job, plain and simple, and you are paid for it.  And we all teach, at one time or another.  I paid my way through school, in part by tutoring Calculus.  In Law School, I tutored Law Masters candidates in Tax Law.  Does this make me Mother Theresa?  Hardly.  Teaching high school only makes you a government employee, with everything that goes along with it.  If you do a good job, great.  But don't expect to be beatified because of your chosen profession.  That sort of nonsense is far past its "sell-by" date.

Not only is it a government job, it is a union job, which is why a lot of qualified people say "no thanks" to teaching.  Frankly, not many people want to put up with not only silly government rules, but silly union rules on top of that.  So people with ambition gravitate toward other fields, it is as simple as that.

And this is one reason the home schooling movement and the charter school movement scare the shit out of the teacher's union.  These are the shops that are turning out Toyotas and BMWs, while the public schools continue to crank out Vegas and say "Whaddya gonna do about it?"  Well, we can buy competing products - and the teachers union wants to shut down the competition completely.

I have a number of friends who home-school their kids, with great success.  It turns out, you don't need to go to teachers college to teach a kid to read.  If you can read this, thank your home-schooler?  Their kids not only are better educated, but less likely to be on drugs or pregnant by the 10th grade, or have emotional problems brought on by the "Lord of the Flies" environment that public schools not only tolerate, but nurture.

As it turns out, learning is something that anyone can do, anywhere.  And in fact, learning is not something that is spewed out by teachers like magic farts, but is instead something the STUDENT has to do on his own.  Education starts with the student, and no matter how much money you throw at teachers, schools, and facilities, if a student doesn't have the urge to learn, it will do no good.  Conversely, the worst schools in the world cannot hold back the student with a burning desire to learn.

As I noted in my Law School posting, not only is it possible to ace your law school exams after skipping every single class in the semester, it is easier to do so.  Most of us are autodidacts, and we learn on our own.  A good teacher can point you in the right direction, and add to this learning process - but they are not the learning process itself.  The teacher's union, on the other hand, wants to get people to think otherwise - that all learning comes from teachers, preferably unionized teachers.  And it is a powerful, well-funded union than can turn elections.

One of my Math teachers illustrated this point neatly during my Sophomore year in high school.  I had been skipping class regularly, when she announced a test coming up.  I asked her for more time to study for the test, and she said "No, you'll have to learn the material on your own."  So I sat down, read the text book, and aced the test.  Attending her classes was not essential to learning the material, it turns out.

However, she was instrumental in teaching me that lesson, as well as challenging me to prove her wrong.  She was a good teacher.  But not indispensable.

That example illustrates how much time is wasted in High School, by the way.  The material could be swallowed up in two years, tops, but it is stretched out as an extended baby-sitting system, in a society that has extended childhood well into the 20's and 30's.

The best teachers are great.  But if they have the worst students, there is little they can do to force them to learn - if they are predisposed not to.  This is one reason inner-city schools fail consistently.  Not that they have poor facilities or "bad teachers" but that the students - many of them, have no desire to learn.

I am not anti-teacher, just anti-mediocrity, and our government-run school system is not a model of excellence.  And I am also anti-bullshit, so I don't buy sloganeering and bumper-sticker mentalities put forth by special interest groups.  And no, I don't "owe" my education or skills to teachers, I owe that to more my own innate abilities and efforts and desires to learn.

No one is indispensable in this economy, and no one person or group can lay claim to the mantle of indispensability.  Ayn Rand tried, in her Atlas Shrugged, to argue that the movers and shakers of industry, such as her Henry Reardon, were "indispensable people" to the economy.  But her argument was just as flawed as the Road Engineer's argument in Heinlein's The Roads Must Roll.  Fire a capitalist, and some other person will take their place - perhaps not as well, but well enough.

Even people with special skills are not "indispensable" in our economy.  A rock star, a sports star, or even a brain surgeon are not irreplaceable.  When the Grateful Dead stopped touring, the world did not grind to a halt.  The Deadheads found other things to do, and I am sure more than one took the opportunity to wonder what the heck they did with the previous decades of their life.

You might argue that a skilled surgeon is "indispensable" and they certainly are in demand if you are sick.  But we all die anyway - all modern medicine does is prolong our lives a certain amount and keep us in better comfort.  It hardly provides immortality or insures survival of the species.  Doctors are often beatified - or used to be, until we started beating them up.  Nurses are still singled out as "angels of mercy" but again, it is a job - an important one - but one that is not any more indispensable to our society than any other.

On a personal level, if someone seems "indispensable" in your business life, it probably is a good idea to fire them.  Many toadying people try to insinuate themselves into organizations, making themselves "indispensable" to the boss by being the only one to know the combination to the safe, or how the boss likes his coffee in the morning.  Rarely are these folks really indispensable to the organization, but rather they made it a point to accumulate and hoard information.  Usually, they are the ones to crow their indispensability, too.  You are better off firing such people and taking the economic hit it takes to reorganize without these folks than to continue relying upon them, even if it means drilling out the lock to the safe.  And chances are, once you fire the "indispensable" employee, you find out they were not so indispensable after all.

Of course, there are companies that appear to rely upon one tech guru or person to keep everything together.  And I have seen firsthand how such a company can fall apart when the guy who runs everything ends up dying or being incapacitated.  The world doesn't end, of course, just one company goes belly-up, only to be swallowed up by its competitors.  But it illustrates how relying on one guy can be dangerous to your business.

And of course, it goes without saying that you should NEVER view yourself as the indispensable person, ever.  I knew someone who tried that, quitting his job in a fit of pique, convinced that the company would call him back, begging him to return, as they "could not get along without him".  But days passed, then weeks and months, and they never called.  Even if he was "indispensable" it was better for them in the long run to learn how to live without him and move on.  Being blackmailed is never nice, and paying ransom is often the worst way to go.  So he never worked again, and foolishly, he had quit a mere months before his pension was vested.  Moral:  No one is indispensable.

Now, a note to the teachers out there who want to flame me:  First, READ the entire post before going off with your flames.  It is embarrassing to me when a teacher, of all people, can't read and understand the point of an essay.  Second, do a spell check, for chrissake, as that is doubly embarrassing and undercuts your arguments.

But the point is, none of us are indispensable to our society, and no one job is some sort of religious calling (even religious callings) but are in fact, jobs that we get paid for.  The mythology of one group of people being more indispensable than another is just stupid, period.  And it is shameful when people who are supposed to be smart - teachers, for example - buy into such thinking.

Monday, November 22, 2010

The Coming Retirement Debacle


What will happen when nearly half the country retires?  Chaos, is what will happen.

As I have noted before in this blog, the entire concept of "retirement" is a relatively new invention of only the last 50 years or so.  When Social Security was established during the Great Depression, not many people were expected to live to collect benefits at age 65.  As one commentator put it, Social Security was there for you, should you make a mistake and live too long, sheerly by accident..

But after WWII something happened.  The concept of "retirement" was established, as an extension of life - 10-20 years or more, living in relative luxury, apart from your family.  Prior to that time, when you got old, you might move in with your kids (or hand them down the family farm) and have them take care of you in your declining years, while you tried to help them with raising a family and keeping a house or running a business.  The nuclear family might have a grandparent hanging around, at least for a time.

But things changed dramatically.  Retirement communities, virtually unheard of, a decade earlier, sprang up and grew exponentially.  Today, we have entire retirement cities throughout the sunbelt, and a luxurious retirement is the dream of everyone and many consider it a God-given right.

Between pension plans and Social Security, a person can live comfortably into their later years, in a luxurious home, with new cars every few years, and live a life of leisure.  It is a great deal, for those lucky enough to have gotten into it.  It may not be a phenomenon that goes on forever.

Is this concept due for a radical overhaul?  Can it be sustained?  As I noted in other blog entries, demographics drive much of our economy, and demographics are often ignored by modern economists.  And our generation - the "baby boomers" born between 1945 and 1960 form a huge demographic group.

When we were born, hospitals sprang up and suburbia was built.  Freeways were made so our parents could commute to work in the new suburbs.  And when we were old enough to go to school, an orgy of school building took place.  Much of the school building stock in this country still dates from that time period.   And as we went to college, colleges expanded, and "youth culture" became a dominating market force.  And when we grew up, we became the "Yuppies" that changed consumerism and our economy forever.

But now the first Baby Boomers are slated to retire.  Someone born in 1945 will be retiring in 5 years, and after that, the rate of retirement will accelerate rapidly.  If you look at the age pyramid charts of today, they look more like a minaret, with my generation (1960) forming the largest part of this bulge.  As our generation ages, the age pyramid is projected to turn into more of a cylinder, with more and more people residing above the 65 year-old line.

When that happens, in about 15 years, what will happen to our economy?  I suspect it will make the economic trials of today look tame, in comparison.  Why do I think this?  Consider the following:

1.  There isn't enough Social Security money to pay all these people:  Once large amounts of people start claiming benefits, the well will be pumped dry in no time.  The only solution, as I have noted before, is to increase the taxes (excuse me "contributions") or cut benefits, both of which are political suicide.  Since Seniors vote, and there will be more of them, expect contributions (taxes) to greatly increase, which will stifle the economy.

2.  Needs Tests and other cuts to Social Security will be enacted:  Social Security will finally drop the pretense that it is a "savings plan" that you "pay into" and just expose itself as the welfare (entitlement) program is has always been.  This means a lot of people who did all the right things - saving for retirement, learning to live on less, etc. will get the shaft, while the guy who spent it all on a new Hummer and a Penis boat, and is now broke, will get a full ride.  Our generation is already being told not to expect full Social Security - it is almost as if they are training us for it!

3.  While Retirement Jobs will Increase, caring for old people does not create wealth:  As Adam Smith noted, the wealth of a nation is measured in its productivity, and changing adult diapers does not generate wealth for a country.  With fewer and fewer people in the workforce, and less demand for consumer goods, an increasing share of the economy will be devoted to taking care of the old and infirm.  Our county could literally "retire" as a whole.

4.  When Baby Boomers cash in their 401(k) plans, the market will tank:  When we all sell our stocks at once, the market will take a huge hit.  And starting in about 10 years, those of us with IRAs and 401(k) plans will start selling off our stocks.  Perhaps only a little percentage at a time, but collectively, this means a continual sale of assets starting in five years and getting progressively worse for the next 25 years.   And the younger generation will not be in a position to buy.  So prices may plummet - big time.  Even those of us who saved for retirement may find ourselves behind the 8-ball.

5.  Many Baby Boomers have not saved much for Retirement:  #4 above assumes that they even bothered to save.   And the average American has a pathetic amount of money in his retirement plan - usually on the order of a few tens of thousands of dollars.  Even people who consider themselves "savers" have maybe $100,000 to $250,000 saved.  It is not clear to me how these folks will survive into retirement, particularly since so many are so heavily in debt.

6.  As the population shifts upward, sales of consumer goods will plummet:  The target demographic for all marketers is the 15 to 35 age group, who will buy anything.  These are the folks you can sell electronic gadgets to, or jet skis, motor homes, or sports cars.  As the baby boomers age, they will sell off their "toys" and thus flood the market with secondhand products, depressing the market further.  The next generation, being smaller and poorer, will not be able to pay much for these trinkets.  We already saw this in the recent downturn, as many boomers shed "unnecessary" expenses in anticipation of retirement down the road.  RV and boat makers went bankrupt, while the few left, struggle to remain solvent.  The good old days of those businesses are behind us, perhaps never to return.

And of course, this doesn't even address some other likely nightmare scenarios, such as the rampant inflation, such as we had in the late 1970's, that could wipe out the portfolios of many retirees.

Yea, yea, I know.  I am just Mr. Cheerful, aren't I?  But you do have to think about these things when investing and thinking about the future.  Our generation shaped the postwar history of this country, and as we lurch toward retirement, we are slated to shape it yet again.  Not until the last Boomer is safely in the grave, will the next generation be able to breathe a sigh of relief.

Of course, there are many mitigating circumstances that could help alleviate this looming event.  Seniors may work part-time, thus adding to the economy, instead of merely consuming from it.  Overseas retirement is becoming more and more popular (in places like Costa Rica, Panama, and elsewhere) and perhaps Retirees will be our next big Export item, helping economies overseas while reducing the cost of retirement for many.

Figuring out how this next big demographic event will play out - and then investing smartly based on the correct perception of the outcome - will be the key.

The other key is to prepare now for retirement, rather than waiting for the worst to happen.  Being debt-free is important, as is having savings.  Yes, you could lose much of your savings to a stock market downturn, or to inflation.  But you would still be better off than the fellow who has no savings at all.

It will be interesting to see how our generation approaches retirement.  It will be different, to be sure.  Just as the current generation seems to shun traditional retirement activities such as shuffleboard, the next may be less inclined to join bridge clubs and Mahjong tongs.

Already, as noted in a recent New Yorker article, hardly anyone plays bridge - a demographic shift that has gone largely unnoticed.  What will Boomers do in retirement? Play Frisbee?

Stay tuned..... it ought to be interesting.

Economics of Drug Dealing


You would think drug dealing would be a profitable pastime.  You'd be wrong.

When I was a kid, my older Brothers and Sister thought it would be a good idea to introduce me to the world of drug use.  It was not really a good idea, and what sort of idiot gives pot to a 13-year-old kid anyway?  It was, in retrospect, a bad decision that affected my entire life from that point onward.  I am glad I gave it up, but I can never take back those 10 years of my life.  Nor can I reverse the long-term affects the drug has on your psyche.

One thing about smoking pot or doing any other illegal drug (or legal one, either, and that includes alcohol) is the staggering cost involved.  When you are an unemployed teenager, scraping together enough cash to buy pot is pretty difficult, even back in 1972, when "Mexican" was selling at a market price of $20 an ounce, and more potent "Colombian" was selling for maybe $40 an ounce.  More esoteric forms of pot, such as Thai Stick, Hawaiian, and the like were rarely found or still on the horizon.

One way to offset the cost of using marijuana is to sell it, which of course is a path fraught with risk, as a stoner friend of mine found out the hard way.  Not only does selling drugs end up getting you into severe legal trouble, it also doesn't net you much money.  The profits, what little there are, usually end up going "up in smoke" as they say.  No matter how hard my friend tried, there were never any big profits in selling pot - no stacks of 100 dollar bills or suitcases full of money, as they show in the movies.

In fact, economists have commented on this phenomenon.   The average street-level gang drug dealer makes little more than someone working a regular job, but with a lot more attendant risk involved.  Most drug dealers live with their parents and are hardly rich.  Interestingly, like a law firm scenario, most dealers work at the trade hoping for future riches (promotion to gang leader) just as young Associates hope to someday make Partner.

As I noted in my Marijuana Trap and Marijuana Trap, Part Deux, postings, many users feel that "if only" the drug were legalized, the costs would drop down significantly.  However, a quick search online reveals that so-called medical marijuana is staggeringly expensive in most cities - on the order of $1000 to $4000 per pound, or several hundred dollars an ounce.  It is hardly an "affordable" drug at these rates, but rather expensive.  In fact, the only drug dealers who appear to be making money at the trade, are those engaged in the medical marijuana trade, as they have cut out a lot of middle-level dealers.

The conundrum as to why medical marijuana is so expensive is an interesting one.  Despite its illegality, the market seems to have selected a market price for the drug, one that reflects relative demand and value, rather than cost of production.  The delta for the risk-taking associated with its illegality apparently does not add much to the overall cost structure.  Medical marijuana producers have priced their drugs not far below "street-level" pricing, even though the cost of producing the drug should easily produce a 10X or 100X reduction in costs - or so one would think.

And it is not like Pfizer has the Patent or anything.  Medical marijuana is the ultimate "generic" prescription drug.  It should be cheap.

But why do illegal drug dealers not make a lot of dough at their trade?

Part of this is probably due to the fact that for most street-level dealers, the margins are slim.  Back in the 1970's, organized gangs of drug dealers were a rarity.  On most college campuses or in most high schools, you would find pot and other drugs, not from professional dealers, but from fellow students and friends.  It was sold on a friend-of-a-friend basis, perhaps the earliest example of a successful Multi-Level-Marketing (MLM) scheme.  One would buy pot from a friend, who in turn, bought it from another friend (and diluted or "stepped on" the product in the interim) and so on up the line.

At each stage in the transaction, the price would be padded and the product diluted.  Like a Japanese electronics distribution network of the 1970's, there were a lot of people involved, from importers, to regional distributors, local distributors, other intermediaries, and then finally the street-level dealers, which in turn lead to a padding of the prices.  There were no chain stores or "Best Buy" for pot back then - or even today.

A note to Pfizer:  Perhaps this is a marketing opportunity to get in on a prescription drug with a high mark-up (if you'll pardon the pun).  Just a thought.

In the 1980's, the emergence of the city street-corner drug dealer occurred, tied hand in hand with the prevalence of cocaine and also crack cocaine.  Suddenly, kids no longer bought pot from friends, but drove to the city to buy it from inner city youth.  In any major urban area, there are districts, usually minority districts, where suburban white youth drive to, in order to obtain drugs.  Many black youth have reported they are incensed by being asked to sell drugs on the street by outsiders, who "just assume" that because someone is Black and lives in the inner city, that they sell drugs.

This change in marketing lead to a great increase in gang activity and the associated violence that accompanies gang activity - as well as violence and gang activity by suppliers across the border in Mexico and in other countries.  In a neat mirror to the excesses of prohibition, the "drug wars" have served only to create an underground economy and empower organized criminal gangs.

Such gangs have made money from the drug business, unlike the intermediaries in the basic drug transactions.  Street-level dealers, smuggling "mules" and other low-level workers rarely make much, if anything from their efforts (some "mules" are drafted into the job under threats of death or harm to family members, and receive little, if anything, in compensation).  As a result, the drug business has become big money - but only for a select few at the top.

My stoner friend's attempts at drug dealing fell far short of that of the narco gangs.  Partnering with a buddy, they bought a quantity of marijuana and LSD, which they unwisely kept in a locked glove box in my friend's car.  His partner kept the key, due to the all-too-understandable fear that my friend would tap into his profit base for recreational use.  Of course, the entire scheme came undone when my friend was pulled over for a traffic stop, and, well, the inevitable happened.

With the legalization or quasi-legalization of marijuana through the medical marijuana movement, one would think that these issues would become a thing of the past.  It is not difficult to obtain a "prescription" for marijuana under a number of pretenses from a friendly doctor, and then legally obtain the drug from an outlet in a number of States.

However, the cost of the drug still remains very high.  As I noted in an earlier post on the subject, one dispensary has a Facebook page for its colorfully named wares.  What was interesting about the page was the postings from the users, who often lamented that they could not afford to obtain their drug of choice, even legally as medical marijuana, as it was too costly and they were broke.

So....wait for it.... I am sure that the next thing you will hear from marijuana users is not only should the drug be legalized, but subsidized as well.  For pot smokers, the oppression never ends, does it?

The cost of the drug is fairly high, as although it may grow as a "weed" in the wild, tending and nurturing the plants to produce potent varieties and resulting buds, takes a little more care and time than merely throwing some seeds in the ground and watering them.  The cultivation of marijuana for drug use can be a time-consuming, labor-consuming, and energy-consuming process that involves a lot of expensive equipment, fertilizers, and the like.

The long and the short of it is that pot will remain elusively expensive for its users, as the price will never come down to the price of "a pack of cigarettes" (or conversely, the price of cigarettes has risen to that of pot, and people still smoke those!).  Compounding this pricing problem is that most pot users, being chronic underachievers (as well as "chronic" a lot of things) never will be able to scrape the dough together to do little more that "get by".  Pot will always be expensive to the pot user, it would appear.


UPDATE March 2015:  Now that marijuana is legalized in more than one State, the price of the drug has.... not gone down.   In fact, in Colorado, they are saying that illegal drug sales still account for about half the traffic, as the price is lower than at a "legal" dispensary.

When you don't have to pay taxes, any enterprise can be profitable.  And for folks at the top of the drug distribution chain, there are a lot of profits - that are tax-free.   The only problem they have, of course, is in laundering all this money.  For the street level dealer, lowly mule or whatever, the big money never materializes - just the big jail sentence.