Darwin's Finance — Financial Evolution: Education, Adaptation, Achievement

Why the Rich Keep Getting Richer

by Darwin on April 30, 2013

There’s a recent headline making the rounds of late showing that the rich keep getting richer while the rest either tread water or fall behind. Consider this recent report by Pew Research and I’ll share my thoughts below:

During the first two years of the nation’s economic recovery, the mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%, according to a Pew Research Center analysis of newly released Census Bureau data.

From 2009 to 2011, the mean wealth of the 8 million households in the more affluent group rose to an estimated $3,173,895 from an estimated $2,476,244, while the mean wealth of the 111 million households in the less affluent group fell to an estimated $133,817 from an estimated $139,896.

This should not come as a surprise at all to anyone, nor should it be “shocking” or even create the anger and resentment that the typical MSM outlets use to foment class warfare. See, this is completely to be expected and it has nothing to do with “fairness”, the rich not being taxed enough or attempts to hike the minimum wage, etc. Here’s why:

Again, from Pew (I was going to say this before I even read beyond their headline, but they summed it up nicely):

These wide variances were driven by the fact that the stock and bond market rallied during the 2009 to 2011 period while the housing market remained flat.

Affluent households typically have their assets concentrated in stocks and other financial holdings, while less affluent households typically have their wealth more heavily concentrated in the value of their home.

Is This Fair?

Of course it is. You can debate whether you think the rich should be paying even higher taxes than they do and since half the country doesn’t even pay any federal income tax, it’s tough to argue that the middle class and poor are “over-taxed”. But that aside, regardless of the tax rate you levy upon well-off Americans, they’re still going to make the same investments – higher risk, higher returns. Note that this report conveniently chooses as its starting point 2009. That spring is when the stock market reached pivot bottom, so anybody invested in equities from early 2009 onward has seen their holdings virtually double in the years following. If minimum wage was an arbitrary $12 instead of what it is in your state, people at the lower end of the spectrum would broadly follow the same behaviors. People tend to live up to their income, spend what they make (often more, incurring debt) and don’t invest in these same assets that the affluent do anyway. Right, wrong or indifferent, the only way to get more Americans into the right gear is for them to earn more (which requires higher paying job creation, not the retail and service sector jobs this recovery is generating) and a change in behavior from consumption to investment.

Wealth Inequality Continues to Widen

This is a natural outcome of two broadly divergent situations: those with wealth who invest in positive-gain asset classes versus those with little to no investments where the only gains to net worth would come from real estate (which was stagnant at that time). So, of course, we’d expect to see the wealth disparity widen.

Don’t forget that these wealthy individuals are also taking on risk by investing in stocks, bonds, real estate, and other alternative investments. So, during a major stock market crash, you could tell a different story – the wealth gap shrinking, as again, middle and lower income Americans don’t see much change at all in their net worth while the affluent sample set sees their net worth decline dramatically.

So, in summary, these findings are not shocking or disappointing to me at all. I’m not even in that top 7%, but I saw my net worth go way up since 2009 for the same reasons cited in the study. I put away what I can in highly volatile, yet higher return asset classes since my time horizon is decades.

What Are Your Thoughts?

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How Obama Goosed the Jobs Numbers and Why It’s Much Worse Than Media Portrayals

by Darwin on March 29, 2013

As long as I can remember, people have always complained about the accuracy of government-reported statistics and claims. For instance, every year, the government reports that the measure generally regarded as a barometer for inflation everyday Americans face, the CPI, is always much lower than people feel they’re experiencing in their everyday lives. Sure, while flatscreen TVs and crap toys continue to get cheaper each and every year, we’re paying record prices at the pump, for healthcare and other daily expenses. And these annual increases are WAY above the low single digit inflation reported in the CPI (here’s the source data from BLS). Anyway, while those complaints may seem to have merit, the bottom line is that at least the index is based on a pre-set mix of categories and the government can’t really do too much to manipulate them. And administration after administration has been criticized for using a crappy mix of indicators to consistently report a low inflation rate, so at least it’s not even a partisan issue. However, the jobs numbers have been grossly manipulated by Obama’s policies and it’s easy to see how, but supporters choose to ignore it. Here’s how he does it:

Definition: First, starting with how the mainstream media reports the “unemployment rate”, they tend to report only the U-3 measure which is the most favorable. It excludes discouraged workers who have stopped looking for work from the equation. So, when a long-term unemployed worker throws in the towel because there’s no hope, they no longer count in the equation. Let’s see how easy it is though to enact policies that entice people to behave in a manner that improves the reported U-3 rate.
Artificially Increasing the Numerator – Obamacare: Aside from the monstrosity that will ultimately bankrupt the country, let’s consider for a moment what impact Obamacare has on the unemployment rate. Because a provision requires that healthcare coverage or penalty kicks in for workers clocking over 30 hours per week, guess what employers do to get around it? They simply cut all their full-time 40 hour workers down to 30. Pretty crappy for the employees, but as a business owner, why not? After all, why would you voluntarily pay for your employees’ health care if there’s this easy solution out there – and if your competition is doing it? Heck, aside from corporations, even STATES are cutting worker hours to 29 per week to avoid the costs involved. What is the net impact? Well, if you have 100 workers at 40 hours per week, you need to hire a few more if they’re all working only 30, right? While you might lose some efficiency in training, sick days per worker, etc., roughly, you’d think companies have to hire about 25% more employees in the retail/lower-end sectors to maintain the same coverage. So, that’s what we’re seeing. Increased hiring in low-paying jobs, thus artificially increasing the number of people reporting income. So, that’s a fake improvement in the numerator brought about by Obama, now here’s how the denominator keeps being suppressed.
Artificially Decreasing the Denominator with Disability Fraud and Government Gimmes: There have never been more people (net number or as a percentage of any ratio you can think of) on disability. It’s simple, if you don’t want to work or can’t find work, but want to collect a check, just claim you’re disabled. In this economy, where the only jobs are crappy ones, you can appreciate why people are incentivized to do this. If you don’t believe me, just read about the facts – it’s a giant scam. There’s an example of a whole county in Alabama where 1 in 4 (yes, a full 25% of the population) receives disability checks. That is insane. And the states love it. They actually pay firms to find people they can shift off their own welfare rolls into the federal disability assistance system. It’s shocking, shameful, and it’s in full-swing. If people were already not counted, no change, but when people see everyone around them living off disability, they decide to throw in the towel and join up as well – after all, it pays about the same as a crappy minimum wage job anyway. So, by jumping onto the bandwagon, these people all drop out of the numerator of the equation, artificially improving the reported jobs number as well.

Has the administration done anything to try to combat this abuse? Of course not! Why would they? This sort of handout forces people to get out and vote – they can at least get out of the house to do that! And it would hurt the reported unemployment rate if, you know, able-bodied Americans actually counted in the equation.

Now, anyone can surmise just what the real unemployment rate would be if able-bodied people were actually looking for work (or working) instead of living off the government dime and whether companies would really be hiring more people if they didn’t have to chop 40-hr/wk workers down to 30 hours per week to avoid Obamacare penalties but the bottom line is, the reported rate would be WAY worse each month. So bad, that we’d look more like some struggling European countries rather than what you might derive from the rallying US stock market. People tend to equate strong equity performance with a strong economy and jobs market but nothing could be further from the truth. You can thank relentless job-cutting and Uncle Ben for investors throwing money at the risk trade since there’s nowhere else for capital to flow.

Do You Really Believe the Unemployment Rate Tells the True Story?

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Yahoo’s Work From Home Controversy – Thoughts and Your Opinions

by Darwin on February 26, 2013

This past week, Yahoo’s CEO Marissa Mayer announced a ban on employees working from home. This, in a culture where many, many employees were used to doing this for years. Here are a few thoughts on this particular announcement, implications for businesses elsewhere and then I’ll share a few thoughts on my personal experience with working from home flexibility in my role:

Yahoo’s Announcement:

Going Backward? It seems kind of odd for a company that was once at the forefront of the web/tech movement to be moving in the opposite direction of US companies in general. Many companies are moving MORE toward remote work whereas this one-time beacon of lavish benefits and perks is now going back to 1990. However, consider that Facebook, Google and many other “competitors” don’t actually have widespread remote work. Yahoo’s leadership cites that they’re in a very collaborative space so it doesn’t work. At the end of the day, I can’t judge them. If they sense that they’re not getting as much collaboration and productivity out of their workforce, they have to do what they have to do.

Changing the Rules – This is surely going to piss off a lot of existing employees that were hired under a set of rules which was probably a key determinant in taking the job, compensation and possibly, over the years, passing on other opportunities. That leads me to my next point…

Saves on Severance -The moment I saw the headline, I’d tweeted that this will surely have a hidden benefit of saving on severance costs. I’m seeing this in my company. When you have more employees than you need, you either lay off or force them out by making them unhappy. We’ve seen all kinds of cuts to bonuses, annual raises, increasing workloads and other factors that are slowly forcing employees out the door to “greener pastures”. That’s saving millions each year in severance packages! Surely, Yahoo will experience the same “benefit”.

My Experience With Work from Home

The Hours are Blurred – I’ve written in the past about being a Project Manager, but essentially, it’s a very self-directed, matrix-reporting structure job where there’s really not much difference whether I’m in the office or in my home. The reason is, most of my team members are in Europe, Latin America and Asia-Pacific. So, I end up on the phone at home or on the phone at work. If all my team members were local, I could see going in each day, but since most of my work is over the phone, the only benefit I derive by going into work a few days a week is collaboration with my other peer project managers to see what they’re experiencing or the occasional meeting with a higher up. But the key issue that drives work from home also is the crazy hours due to time zone differences. I’ve had some calls at 6AM and sometimes have calls at 9PM or 10PM. Surely you would agree it would be unreasonable to expect people to be in their offices at those times, so I’d argue if it’s OK to do those calls from home, why not do a 9AM or 1PM call from home? It’s the same work. Additionally, since the hours are so blurred, there’s no real scrutiny or poor perception if you run to the gym over lunch or even run an errand during the day since you’re often working at night or before normal work hours. They know they’re getting well over 40 hours per week out of us, so the hours are a bit blurred. The expectation is you’re normally reachable and online during normal business hours but if you’re not occasionally, it’s understood that your off-hours work is making up for it.

Prove Yourself and Make it Work – Our group of Project Managers likes to work from home usually 1-2 days per week. Nobody does it everyday so as to not give the impression it’s being abused, but at the same time, we all make it work. If our output or results were lacking, it might cause our management to rethink their position. By continuously turning in strong results and meeting all requirements (being online most of the day, executing projects well, etc.), this perk continues.

HUGE Retention Benefit – I’ve been in the same role for 4 years now. I’ve usually jumped around to new roles every 2-3 years but I have to admit I’ll hate losing this perk since most other jobs at my company don’t have the same capability. I’ve been looking this year, but at this point, I’m only leaving for a promotion, not a lateral. I enjoy the work, and being able to work from home once per week lets me get to my kids’ school events, save a few bucks on gas/dry cleaning, get a jog in over lunch and any number of other benefits that I wouldn’t enjoy otherwise.

What Are Your Thoughts on Work From Home Arrangements?

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Advice to a New Investor

by Darwin on January 31, 2013

Nothing gets a new investor more excited than reading glorious stories of great market picks, turning $50,000 into $1 Million and day trading in your pajamas for a living. I don’t mean to be a downer, but a pragmatist. Here are my learnings I felt worth sharing:

Fees/Expenses Matter More Than Most Other Factors – As a starting investor, we all dream about hitting the 20-bagger. You know, the old Microsoft at $1, or Apple back when it was on the verge of bankruptcy? Well, that’s all well and good, but the likelihood of you identifying a stock like that, buying at the right time and then holding it for 10 or more years is exceedingly low. In chasing opportunities like that, you may well be spending hundreds, or even thousands of dollars a year in trading fees. Likewise, chasing hot mutual fund returns with high fees based on past performance is a loser’s game as well. Over long periods of time, you’re much better off just focusing on low fees. That could be low cost ETFs instead of mutual funds and stock trading or limiting your number of individual stock trades each year and also using a low cost online broker. Fees matter! Most of the “selection” doesn’t so much, as it’s pretty random and markets are surprisingly efficient.

Diversification is Not for Old Farts – I used to abhor diversification, figuring if you own enough stocks in enough different sectors, you’re just diversifying yourself into “average” returns. If that’s your goal, then why even both individual investing? You might as well just buy an S&P500 index ETF like SPY. Well, there’s nothing wrong with that. But I’d take it even further and look for diversification of asset classes (own some commodities, bonds, REITs, etc.) as well. I can’t tell you the number of times I’ve held a “can’t lose” stock only to see it plummet (Apple as a recent example). The same can happen with entire asset classes like when stocks slid during the financial collapse, Treasuries rallied. It’s good to have a few asset classes handy so you can liquidate winners and buy losers when the markets panic. Or, if you’re more passive, you can just sit back and enjoy at least some portions of your total holdings moving in the right direction. You never know when you’re going to need those funds!

Ignore the Noise, Experts are Usually Wrong – CNBC can be your worst enemy. They bring on these so-called experts and they present the most compelling, believable thesis for a particular investment such that it seems like a no-lose proposition. It makes total sense! I’ll admit it, I’ve bought stocks based on recommendations and compelling investment themes I’ve seen on their shows. But they don’t work out any better than a monkey throwing darts at a business section of a newspaper with ticker symbols. While you might get some ideas or even a sense of what stocks “everyone” is talking about, you might actually want to be more apt to avoid common themes, rather than throw money at them.

Markets Don’t Do What They “Should” – Markets do absurd things. They behave in a manner which seems so irrational that it’s maddening. They do things that make you say people are just being stupid; it’s sometimes as if massive amounts of trades have conspired against common sense and decency. And then they revert back. We saw this with everything from the dotcom bubble to euphoria over Apple (which I called the months ago) to the social media craze. Personally, unless you plan on being a momentum trader and can watch for signs of a bubble deflating and exit quickly, it’s probably best to ignore hot sectors altogether.

I’m sorry, I can’t honestly provide you “hot stock tips” and tell you what to do. If I did, it would be disingenuous. What I did do, was warn you and share lessons learned over close to 2 decades of individual retail investing.

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Manufacturing: What It’s Like to Work in a Factory, Why Jobs Are Leaving the US, and Trends

by Darwin on December 26, 2012

Now that the election’s over, we can stop debating tax rates, repealing Obamacare and whether Mitt’s dog rode on the roof of his car. Aside from gun laws now – which DO require serious consideration, the other key issue both Americans and politicians should be focusing on is job creation. One of the key sectors often discussed is “Manufacturing”. Manufacturing means many things, has many implications and I wanted to provide some insight into what it actually means to spend a career in manufacturing, why certain jobs continue to leave, and why some are coming back.

Manufacturing “High Paying Jobs” – One of the oft-quoted reasons manufacturing jobs are viewed as important to the economy is because they are traditionally referred to as “high paying”. In my assessment, this should be qualified with “high paying compared to other jobs with a similar skill level”. So, an engineer working in a manufacturing plant probably makes roughly the same as an engineer working for a design firm, a nuclear plant, or some other employer in the same locale. However, the unskilled labor can tend to make a killing compared to their peers outside the firm. Take a typical entry level blue-collar manufacturing role with a large multinational. You can basically have a high school degree, often with no prior work experience or no relevant experience for that matter, and make double what someone else working minimum wage in town makes. That’s just starting pay. Often times in manufacturing, there are opportunities for overtime which can widen this gap. And if you’re in a union? Forget about it – the disparity is huge. I’m not exaggerating at all, but I used to work in a plant where non-degreed employees were making well into the six figures in their twenties. Granted, they were often working a lot of overtime to do it, but if you’re pumping gas at the local gas station, you can work all the nights and weekends you want but you’re never going to make that kind of money. This translates into a lot of opportunity for people that wouldn’t have had it otherwise, and a lot of money for the local economy.

Manufacturing is NOT Glamorous – In So Many Ways – Aside from the fact that many manufacturing roles entail physical labor, getting dirty, sweaty, possibly injuring yourself, or just not having a cushy “desk job”, it’s usually not the type of job people think of as “cool” or a hot job. Ask a hundred college-aged kids what they want to do for a career and the answers will range from doctors and lawyers to Silicon Valley-types to marketing to the world of high finance to teachers. But you probably won’t hear many say they’re looking forward to a career in manufacturing. I’ll just say in my early years, I missed tons of social events, family events, holidays and basically, some of the best years of my life working. Sometimes, it was voluntary (like getting double time for working the day after Thanksgiving? why not?); whereas some holidays and many a weekend for mandatory since we just didn’t have weekend or holiday coverage. I traded my career and overtime dollars for experiences. I don’t have a ton of regrets and I’m glad I did it when I was young as opposed to having the same type of direct oversight role as a late thirties dad of three.

Manufacturing That’s Coming and Going -

As you can see, there’s been a long secular trend of declining jobs in manufacturing for decades now. However, with the economy improving slowly, we’re seeing an uptick. There’s the occasional headline like Apple bringing jobs back to the US for some of their units, but that’s purely a gimmick; it’s a few hundred jobs, while each plant that closes takes hundred with it.

The decline in manufacturing jobs isn’t solely due to the proverbial “greedy corporations” but there are numerous causes. For one, productivity continues to increase substantially year over year, meaning it requires fewer workers to produce the same output. We can thank technology, robotics, innovation, and competition for that. It’s a force that will continue unabated as long as there is innovation and competition in the world. The upside is that many jobs that continue to leave are the least desirable in many respects. We now have robotics for lifting, picking and placing, welding, pushing, pulling, sorting, assembling, inspecting and many other physical jobs that are either dangerous or quite boring. This pushes people into higher complexity roles and/or other careers altogether. You might think we’d be in a constant state of decline, but higher tech manufacturing brings jobs that have higher qualifications, higher pay and often provide employees with greater skills they can take elsewhere than if they were just inspecting widgets for defects on a line for 20 years. The other forces driving jobs into or back to the US are some benefits to doing business in the US. Namely, very cheap energy costs, being closer to the customer and lower landed costs (total of shipping, avoiding taxes/duties, etc). Even though Americans demand higher wages and now, with Obamacare, higher costs in general, this can still be offset by having a shorter supply chain, reduced inventory, lower transportation costs, avoiding some of the quality and timeline problems in dealing with China, India, Vietnam, etc. Just look at what’s going on with the port strikes. If you’re manufacturing in the midwest, you don’t have to contend with importing finished product into the US. While there are many headwinds, there are some things we still have going for us – for the people who want to make a career in manufacturing.

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All Good Things Come to and End – Apple Implosion Reality Check

No, I’m not giving up blogging! LOL; I’m talking about investing euphoria. Namely, Apple. Apple had grown to become the largest publicly traded stock in the world and a true household name over just the past few years. They’ve launched world-changing devices with huge profit margins and had the share price performance to prove it. [...]

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The Election and the Stock Market

With the US Presidential election just weeks away, by now, you’re likely being bombarded with not only ads, but also, pundits surmising what a win or either candidate will do for various stocks, sectors or the stock market in general. While seeking to silence my own personal bias (although admittedly, I am relatively agnostic on [...]

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5 Things I Didn’t Know About Being a Landlord Until Now

I haven’t talked about my recent property investment too much, so I thought I’d share a brief background on the investment I made last year and then highlight a few things I wasn’t aware of going in that I wanted to pass on. Overall, it’s been a net neutral venture financially, but next year is [...]

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The Fiscal Cliff is Looming! You Should Just Yawn. Here’s Why

You’ve surely heard the term by now, but the premise of the fiscal cliff is that there are several different parts of the tax code expiring and spending cuts set to kick in first thing next year. Conveniently, this occurs right AFTER the next presidential election, so we have to pretty much vote on faith [...]

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