Darwin's Finance » Criticism

Charitable Contributions – Avoid being Ripped Off

Darwin — Tue, 20 Jul 2010 02:56:42 +0000

While people mean well by donating money to seemingly noble causes, often times that money ends up being eaten up by administrative costs, waste, or outright fraud. The other day, I came home from work and my wife was at the door with a teenage kid holding a clipboard talking about clean water and pollution in our state. My wife, being the trusting do-gooder she is had already signed a petition the guy had and was mulling over writing him a check when I intervened and asked him to leave. For all I know, his charity was legit, but look, we donate all kinds of money and wares to legitimate organizations like the Red Cross, American Cancer Society, Humane Society, Purple Heart Veterans and others, and with thousands upon thousands of organizations out there looking for your dime, we can’t be forking over money to every foot soldier showing up on your doorstep.

I asked my wife if she had ever even heard of this organization and if she knew what she was signing. She had no idea. And for all I know, even if it were a legit organization, often times, most of the money goes to a select few people and waste, as opposed to dealing with the issue they purport to be experts in. Often times, people associate with term “non-profit” with a nice little charity where people are doing things like volunteering and saving the world. Well, a non-profit just means they can’t distribute a profit to shareholders – but they CAN pay officers exorbitant sums of money for doing essentially nothing. Because they are tax exempt and can draw huge sums of money, they can often be ground zero for waste and fraud. As the NY Times points out, they tallied up a fraud and embezzlement tally of $40 Billion per year or 13% of all giving!

How to Avoid Charitable Giving Scams and Waste

As a sad commentary on greed and human nature, we can surely recall the various scams and riches achieved in the process by plying on your sentiments for every disaster from Katrina and 9/11 to the tsunami and Haiti’s earthquake. With every catastrophe comes the scam artists. Well, here are a few tools to help you combat both outright fraud as well as leakage for some legally legit outfits that are just not good with money:

Between these two sources, you can search out everything from complaints and resolution to just how efficient thousands of charitable organizations are. Does it bother you when your pastor lives like a king? Would it bother you if a medium-sized charity were paying its directors $250,000 per year? Well, I guess it depends on what they’re doing for the charity and how you view the fairness of such compensation. But if efficiency and frugality are your priorities, it’s definitely worth investigating before you give.

Do you even wonder by Bill Gates, Warren Buffet and now, Steve Ballmer have announced they over the next several years, they will donate the substantial portions of their wealth to charitable organizations they either approve of or oversee? Because they know if they pass it on to their kin it may be squandered, the remaining estate taxes collected will be squandered by the government and because they have confidence in the efficiency and expertise of the organizations they are affiliated with. Small pop-up outfits are often frauds and the government has proven over and over again to be a horrible steward of money.

Elliott Wave: Dow 1,000 Here We Come?

Darwin — Fri, 09 Jul 2010 12:46:16 +0000

There are often obscenely optimistic, pessimistic or outright ridiculous titles to get clicks in major financial outlets and the vast majority of the time it’s complete bunk. From the book Dow 36,000 to predictions of gold prices at astronomical levels, it’s a game of one-upmanship to see who can devise the most outrageous theorem and use some estimates and historical black swans to make the numbers fit the title. Well, this week, the New York Times ran an article on a chartist predicting that the Dow will drop below 1,000, losing over 90% of its value over the next several years. That’s right, a 90% correction from here.

On one hand, you’ve gotta question why someone like this even gets any press, but on the other, what if he’s right? And he does hold some legitimacy in trading circles as the head of Elliott Wave International and heads the Market Technicians Association. In decades past, Elliott Wave theory caught on by predicting trends in the market based on technical analysis, but logic and history dictate that more recently, the predictions are not as accurate given the vast amount of information available to all participants and the notion that “if everyone can predict it, it would have happened already” right? If you knew with high assurance that the market would be 20% lower in a month, wouldn’t you be selling already instead of next month?

How to Invest in Dow 1000 Scenario

The best way to invest is to not really invest at all under a scenario like this. If we encounter a situations where prices decline precipitously, you’d want every dollar you have at your disposal within your possession. In a deflationary environment, just having cash under the mattress is earning a positive return when all other asset prices are declining. This is hard to envision since most of us have never seen a truly deflationary environment for a sustained period of time. However, note that those holding cash from the lows of last march missed a nice upward move in excess of 60% from the bottom. Some joke that the best investment would be a gun and lots of bottled water since it would mean the world has pretty much come to an end.

Could Dow 1000 Really Happen?

Well, anything can happen. But technical mumbo-jumbo aside I don’t see how such a scenario is plausible, even under a double-dip recession scenario. For equities to be worth 10% of their current value, dividend yields would become astronomical (for those companies still paying out a dividend) and with companies with any earnings whatsoever (surely there would be some), their price-to-earnings ratios would be so low that savvy investors would be forced to continue buying at those values. There’s a natural ebb and flow of buying and selling in a free market, with overshoots in between, as we saw during the financial collapse. When it was evident that Armageddon was not upon us, stocks rocketed back within months. I do envision if the economy falters, unemployment stays high and we enter a new Recession, it’s plausible that stocks decline substantially again, but they’ll be back. Much of the bad news is currently baked into stocks now. And I don’t make predictions on “price targets”, but I will predict what WON’T happen – Dow 1000.

Thoughts?

Stolen Driver’s License? How to Protect Your Identity and Credit

Darwin — Wed, 30 Jun 2010 02:53:34 +0000

The other day, my wife was at the town pool with the kids (for the first time ironically), and she had her Driver’s License stolen out of her beach bag, presumably because it was in a plastic bag with a few bucks. She had her guard down because she was sitting with other moms she knew and it’s not the type of community where you generally worry about petty theft, but in retrospect, she recalled one teenage girl sitting a few feet away who seemed to fit the mold (texting away while she was supposed to be watching a kid, acting like kind of a punk, etc). While all the moms got up to hit the pool out of site of their bags, the teenager was still there and when she returned, said teenager was gone – presumably with the cash and license.

As soon as my wife noticed it was missing, she initially called the pool and asked if it was returned, which unfortunately, it wasn’t. Occasionally, if someone doesn’t have any use for a license, they’ll keep the cash and toss everything else. However, we were concerned that if it were sold or fell into the wrong hands, it could be used for some sort of identity theft or fraud of some sort.

What To Do When Your Driver’s License is Stolen

Be Careful Driving! First off, it’s illegal in many states to drive without a license. So, my wife didn’t drive until the day she was headed to the DMV to get a new one figuring that was a manageable risk. Apparently, you’re allowed 24 hours to produce one (which seems a little counter-intuitive and defeats the purpose of having one on you when the cop wants to see it), but it varies state by state.

Online or In-Person? You can actually handle this online in some states like Florida and New York. Check out your state’s DMV to see which makes the most sense.

New License Number? Depending on your state, sometimes they’ll actually generate a new license number for you. This is helpful in that it draws a distinct line in the sand if someone tries to use your license later for nefarious purposes.

Fraud Alerts ASAP – There are two different types of fraud alerts that you should immediately pursue with credit agencies. First, there’s a short-term fraud alert. By contacting any one of the three major firms, they are obliged to share this information with the other agencies. We utilized Experian’s Fraud Reporting (not an affiliate link and the service is FREE) to put a 90 day fraud alert on her account. What this does is it makes it harder for anyone to obtain credit in her name in the near term. For instance, if someone wants to open up a new Sears credit card with her license and buy a bunch of big-screen TVs, they won’t be approved for instantaneous credit. My wife would receive a phone call and the cell we listed and have to authorize the credit approval. Basically, it slows things down to stop an identity thief from quickly wrecking your credit. It also increases the likelihood they’ll be caught. Next, there’s a long-term credit alert which will impose the same restrictions for 7 years. This provision requires a call or a notice in writing to the agency(ies).

Check Those Credit Reports – When initiating the fraud alert, we immediately obtained a free credit report, which is kind of useless now since it was just stolen, but given the account we generated, we’re able to go back and check it and now, under law, each agency must furnish a free report each year anyway, so you could space it out and get a new one every 4 months.

And What of that Teenager?

Admittedly, it is presumptuous and unfair to accuse the teenager of theft with no evidence, so we didn’t try and get the police to investigate the matter further. Through enough effort, surely they could have dug up who it was or my wife could identify her later in the summer. However, just to gauge her reaction, my wife does plan on approaching her next time she sees her and objectively relay what happened and say something like, “I lost my license the other day when we met, I was wondering if you happened to see anyone in the area or notice anything abnormal” or something along those lines and see if she freaks out or is genuinely unaware of the situation. Perhaps she’s just getting a bad rap because of the way she looked, the way she was acting and her age. But, it was likely her or a mom, leaving for former the most likely explanation.

Did We Miss Anything?

With Rates This Low, Should You be Borrowing to Invest?

Darwin — Tue, 22 Jun 2010 01:47:40 +0000

I read a rather controversial article recently in the Wall Street Journal aptly entitled “Leverage Baby!” outlining the case for taking on debt to invest it at a higher rate. The main premise of the article was that now may be an optimal time to actually take out loans at extremely low interest rates, use that money for higher yielding investments and keep the proceeds. While this concept sounds plausible and this practice is actually being employed en force by the country’s largest banks (borrowing Fed Funds at 0% and investing it and loaning it out at higher rates), you’re not Goldman Sachs and neither am I. I think this is a risky proposition, especially for routine retail investors.

Stocks May Have Seen Their Best Days – With markets rocketing 70% off their lows in March 2009, what would make you think they’re going to continue to proceed at the “historical” long-term return rates of 8-9% annually? The S&P500 went basically nowhere from 2000-2010 in what will forever be dubbed the “Lost Decade”. There’s no reason to believe the next decade will be any different. In light of the fact that income producing instruments are delivering virtually zero returns, then yes, I do choose to have my investable assets in stocks. But I’m not leveraging up to do so. I just view stocks as the most aggressive asset most likely to exceed inflation, not necessarily that I’d mortgage my house to throw more money at the next BP.

You’re Not a Sophisticated Investor – Even investors who do qualify under the conventional “sophisticated investor” are virtually never sophisticated enough to protect themselves from themselves. Thousands of investors were taken for a ride by the various Ponzi schemes the collapsed in the past 2 years (Madoff was just one of dozens) and many more lost millions in exotic CDOs, MBS and other acronyms they probably didn’t understand. While many of us think we’re smart investors, what the data tells us is that most of us (professional money managers included) aren’t any better at picking stocks than a monkey throwing darts at the stock section of a newspaper. Making the presumption that by leveraging up and investing with any particular assumed return in mind is ludicrous. Stocks could be up, down or flat over the next decade in aggregate. And individual equities? It’s anyone’s guess.

Leverage Can Kill If You’re Called Early – What about if it’s the harmless borrowing from a 401K or a home equity line of credit? That can’t hurt, right? Well, it can, especially if the market implodes again and you have to pay back those funds immediately. For instance, if you took out a 401K loan with your employer and you leave the company or are separated, in most cases, that money is due back immediately or it counts as a distribution subject to a painful penalty with taxes to boot. Also, many borrowers were shocked during the financial meltdown to learn that their lines of credit were being called in. This could very well happen again in 2011. The economy isn’t exactly firing on all cylinders and the Euro zone could well have ripple effects elsewhere in the world.

This kind of reminds me of when I used to engage in peer lending on Prosper.com (subject of a whole other post someday). I used to come across some borrowers who would state that they were looking to borrow on Prosper and use that money to invest at higher returns. I couldn’t help but laugh. This 20 year old guys is going to borrow money at 9% and make a positive return? What is he investing in? And who are the fools willing to lend him the money in an unsecured loan assuming they’ll ever see that money back? Well, the ideas proposed in the WSJ article aren’t that much more far-fetched. Borrow at 4-5%, make 8-10% in stocks and keep the rest. If only it were that simple…

Billion Dollar Inheritance: Heirs Pay NO Tax – Right or Wrong?

Darwin — Tue, 15 Jun 2010 02:51:40 +0000

There was an interesting new item the other day (here) on a Billionaire that was able to bequeath his entire fortune of 9 Billions dollars to his heirs and they got to keep it all – not one red cent went to the taxpayers. This is all possible by the “luck” (if you’d call it that) that he died during calendar year 2010. Since the Bush tax cuts had scaled changes to the inheritance tax threshold across multiple years with 2010 being an infinite amount allowed without taxation “sunset provision”, jokes about about the number of elderly that are going to “mysteriously” pass away this year or the number of plugs pulled on New Year’s Eve this year on breathing machines, etc. Jokes aside, 2010 is the optimal year to die from an estate planning standpoint. Since his estate would have been taxed at 45%, that’s $4 Billion that would have gone into federal coffers in the past that won’t this year. Starting in 2011, the exclusion reverts back to $1 Million again unless new legislation is enacted by then.

Regardless of whether the inheritance was Billions, Millions or barely enough to cover funeral expenses, without considering scale, how about considering the concept of taxing inheritance itself?

Pros and Cons of the Inheritance Tax

Caste Systems in the US – Many feel that by allowing families to continue to amass wealth and pass it on generation after generation, there will always be classes of haves and have-nots. Those in the elite class will always have virtually infinite funds to continue their domination while those borne to ordinary citizens will never have parity with the inheritance class. This is an extreme view and over-generalized but you get the point.

Many point to the impact this tax has on small businesses. If heirs inherit a small business with a sizable estate but little liquid assets, there’s no feasible way to pay the estate tax without liquidating the family business. This is in some cases an unfortunate side effect. While some make this claim about family farms as well, there is a provision to address family-owned farms specifically.

Double Taxation – Another common argument is that one’s wages, earnings, investment gains, (even a prior inheritance) were already taxed DURING one’s lifetime, and now it’s being taxed again. That’s true.

Loopholes - Like virtually everything in life tied to either legal or financial matters, there are myriad ways to avoid, mitigate or alter the intent of the estate tax. With crafty estate planning, gifting, actions leading up to death, etc., there is the routine cat and mouse game with the taxman which is probably a net loss to society and heirs and a boon to lawyers and financial planners. If the code were more clear or devoid of loopholes, perhaps money could be passed more efficiently, to both heirs and taxpayers.

You Didn’t Earn It – There’s just something different about earning money versus being given money just because of who you are or what situation you were in. Earning a $10,000 bonus for hard work just seems more “moral” or appropriate than knowing that you’re being gifted $10,000 by mom every year for the rest of your life, just because mom has some bucks. It’s akin to being entitled vs. having some skin in the game. This touches on some of the concepts above.

Where Do I Stand on the Inheritance Tax?

I don’t believe everything in life needs to be a binary decision – like either no tax whatsoever, or tax the heck out of everything over $500K or something along those lines. While the theory of basically usurping family money and redistributing it to taxpayers sounds unfair, at some point, you’ve gotta admit it becomes rather absurd to pass on Billions upon Billions of dollars to heirs creating generational wealth that seems rather ridiculous. Consider when Warren Buffett dies (he’s actually in favor of the estate tax), should Billions go to his children untaxed? Billions? I think it’s fair to impose a nominal tax on massive fortunes, but with a few provisions. At the lower levels, it should certainly be indexed to inflation, which pre-Bush was a problem, because the thresholds were relatively low, especially given inflation and home price appreciation. While I struggle a little bit with a redistribution of wealth earned by a particular family member just because they died, the estate tax is a rather common and accepted practice in other western societies and taxes are needed to fund the country’s needs after all. Something’s gotta give and since the estate tax has always been (ex-2010) and likely will always be at least some part of the tax system, if trying to abolish it, who pays for the loss in tax revenue? Where’s that money coming from? I’ve gotta lean toward being in favor of it, but perhaps with higher limits at the lower end.

Where Are You on the Inheritance Tax?

Should BP Fold and Suspend Dividend Payments to Shareholders?

Darwin — Fri, 04 Jun 2010 01:44:23 +0000

There is a growing chorus of angry groups calling on BP to suspend its dividend payments to shareholders until this whole matter is settled and all parties affected are made whole, however that is ultimately determined. As any cause that has a tinge of populist support, politicians jump on the bandwagon. So, now various members of Congress are calling for BP to suspend its dividend. There are a few schools of thought here and I’m interested in where you stand.

Why BP Should Suspend Its Dividend

There’s Going to be a Very Big Bill – The total tally for this disaster ranges from anywhere from a few Billion dollars to over 30 Billion dollars over multiple years. It’s very early in the game and these numbers could easily increase dramatically. What if there are multiple health claims to be paid to workers involved in the cleanup? What if the underwater plumes that are so poorly understood now turn out to linger for decades and destroy even more wildlife and beaches? What if the leak can’t be stopped? Many feel that every dime should be preserved now to atone for the disaster as viable calculations of claims are determined.

It Just Smells Rotten – While fishermen and cleanup workers are inhaling potentially deadly fumes and miles upon miles of beaches and wildlife are destroyed, BP continues to shell out Billions of dollars in dividend payments each quarter? Regardless of the financial viability of the company, it just smells rotten. While not totally related, it’s akin to the banks that received TARP funds cutting their dividends previously and only reinstating them once the dust settled. Some feel that BP should only reinstate its dividend once it’s clear that all remediative activities have been accounted for and all claimants have been paid.

Why Congress Should Butt Out of BP’s Dividend Payment Practices

Congress Should Butt out – Congress should not be involved. BP will ultimately be held liable for all viable claims and will pay accordingly. What happens to their dividend between now and then is really no business of theirs. The company is on sound financial ground, has a relatively low debt load and this artificial intervention could actually cause panic and further declines in shares if investors view a dividend cut as a true sign of concerns over financial solvency.

Shareholders Have Been Punished Enough – As noted above, investors took on the risk commensurate with buying a single issue, in this case, BP, but they should not be subject to governmental intervention and manipulation of share prices.

Law of Unintended Consequences – As a friend of mine over at Money Energy so eloquently pointed out, further declines in BP’s share price will have a ripple effect on the broader economy as a whole, especially in Europe where there are substantial holdings in pensions and other coffers tied to BP. On one hand, one could say, “Well, that’s business and perhaps all their eggs shouldn’t have been in one basket”. On the other hand though, artificial intervention from the US in BP’s dividend practices is inappropriate (aside from whatever legal proceedings will cost for years to come).

The Reality of BP’s Dividend

Ultimately, I don’t believe any entity can “force” BP to cut its dividend. If anything, they may be shamed into doing so and to try and help preserve what little public image they have remaining, perhaps they’ll do so. But at this point, it doesn’t appear as though this disaster will drive BP into insolvency and force liquidation later where plaintiffs could have used the money being paid out this quarter. I think if they do ultimately cut their dividend, the stock will take a bit of a haircut because the rich dividend is the only reason many investors are in the stock now, but I don’t think BP will ultimately need the money, even if the bill hits tens of billions over the next decade. Their cash flow and revenues from oil are just too great for this to wipe out the company unless this thing goes worse by a full order of magnitude.

What Are Your Thoughts?

The Cost of Revenge is Staggering: A Tale of Divorce and Financial Ruin

Darwin — Fri, 28 May 2010 01:11:37 +0000

Sometimes I’m amazed by what people do to each other – and their children. What started off as a somewhat typical occurrence in American culture (sadly) resulted in the complete ruination of a family’s future due to poor choices and impulsive behavior. I bumped in to an old friend of mine the other day and he was telling me about an old friend we hadn’t seen in a while. The story goes like this:

Background:

Man and wife both work at a fairly large successful company. Neither of them have a college degree, but with their highschool backgrounds and hard work over the years, they’d both worked their way up to well-paying jobs within the company. These jobs were their meal ticket – to attain a similar position or salary at another company would be highly unlikely given similar competition with college degrees, etc. I’d venture they were each making mid-high 5 figures at said company and could make probably half that if starting over as a semi-skilled employee at a new firm if they were lucky enough to land a job in this economy.

The Affair:

It turns out (allegedly), one of the spouses was cheating on the other, then vice-versa, then one left the house and they continued to fight. This on and off fighting, reconciling and fighting went on for over a year. At one point, the fighting became so acrimonious that our old friend sent some profanity-laden emails and Facebook messages to his wife with threats and all kinds of other inappropriate messages. Apparently, some of this occurred using company computers as well.

She ends up reporting him to the company. Upon review of the details, he is summarily fired. Well, guess what? Then comes the nuclear option. He claims in retaliation that she is just as guilty of the same behavior and turns over similarly inappropriate and offensive materials – apparently sent from a company computer as well. She is summarily fired.

The Financial Impact:

They’re both out of work. He’s not even trying to find a new job apparently and I don’t know what she’s up to. They have 4 children. Who really got hurt here? If you step back a year, they were (possibly, I don’t know what their spending/savings habits were) in a position to be able to send their kids to college and provide for an upper-middle income lifestyle in comparison to much of the country. Now, their family life is a mess, their financial situation is a mess, and in my mind, it would be highly improbable that these kids will have a shot at college help from mom or dad in the future given the dim prospects of finding similar employment opportunities in the future.

This situation manifests itself everyday – you probably know someone who’s been through something very similar. Divorces can get so ugly that one side is willing to throw away as much money as is available at legal fees just to “punish” their spouse. But who suffers?

The intent of this story isn’t just to reflect on how good you may have it now and to appreciate some stability in your personal and financial life, but also, to provide some insight into how quickly things can go from bad to worse if you don’t step back and take a deep breath before acting impulsively. Just a few keystrokes, text messages or phone calls in anger can destroy the lives of the ones you love most – no matter how angry you are at someone else that hurt you.

Any similar stories come to mind?