J.C.’s Money Blog

I mentioned that I love to read Robert Kiyosaki articles on Yahoo!, because I hate them so much. On the other hand, I love to read articles by Charles Wheelen articles there, because they are usually pretty good, albeit a little less sensationalist than Bob’s.

He has an article on why limiting free trade in your country isn’t really different than having trade embargos forced on you as punishment.

He argues that trade restriction both creates and destroys jobs, but that the net result is negative for the country. The jobs created are in industries where the country would rather import, and the jobs lost are in the industries where the country would rather export.

When you import, it is because some other market is more effective at producing the goods you want. When you export, it is because your country is more effective at producing the goods than the rest of the world.

In effect then, limiting free trade creates jobs that your country isn’t good at, and in turn destroys jobs in industries your country is great at.

If trade embargos are a punishment, lets not punish ourselves by limiting free tade!

My portfolio is pretty boring right now, but I imagine it will get more interesting as I shift from focusing on my career to growing my assets.

Right now I have nothing but this index fund, since I have been focusing on my career, instead of focusing on my portfolio.

SPDRs is a low cost index fund that simply mirrors the S&P500. This is a completely automatic investment scheme, whose performance trounces every investment option open to me in my 401k !

My 401k is my biggest asset, and the one I have the least control over. Another reason I want to quit my job!

Looks like I have discovered my first programming project for the blog, an automatic portfolio HTML table generator…

MM from pfblog.com just wrote an article about why he is not a dividend investor.

His arguments are:
Share buy back possibility
Companies can buy back their own shares when they have the cash, instead of giving it out as dividends. This makes the percentage of company ownership a bit higher for every share, making the shares each worth more. This is a great way to maximize shareholder value when the company’s stock is undervalued.

Double taxation of dividends
The company pays taxes on earnings, then you as the investor pay taxes on the dividends. It’s better to just let the money grow without the “frictional losses” of changing ownership of the cash.

Good arguments, MM.

Today a colleague retired after working at my company over 40 years. It was very unceremonius. The management didn’t make any kind of announcement, and they seemed pleased to have his head count out off their books. He hadn’t been planning to retire, but they offered an early retirement package, which he accepted.

He never really smiled, on a day that should be one of the happiest, I would imagine. I left the office with him to help carry his belongings to his car, and he simply told me that it goes by much faster than I can imagine.

Two years ago, I accepted what I thought was my dream job, and now I am ready to quit. My experience today shores up my confidence that I am making the right decision. This colleague spent the majority of his life, and actually the entirety of his career working for this corporation, and he still feels like just a number to a cold corporation. I don’t want that to happen to me. As he said, life is too short.

So why do I want to quit my job, well lets see:

Scheduling freedom

Even as a white collar guy with some flexibility in my schedule, I still have to be at work doing work during core hours. Whether or not these are the best hours of productivity is irrelevant.

I want to work when I am feeling productive.

Ability to concentrate

Working at my big corporation makes concentrating on a task impossible. One problem is the endless meetings to attend, which means you have to get started on a task, then put it away for a meeting, then get back to the task, only to be interrupted by the next meeting. Often I won’t even start a task because I know I will be interrupted.

Worse than that is my desk crammed into a very loud, very annoying office. In my office there are about 30 people working around me, and concentrating on a task while hearing 10 different conversation simultaneously is impossible.

My own IT

My IT department destroys my productivity. They limit my email account to < 50 MB, so that I have to start archiving everything locally every few days or I cannot send or receive emails. My PC has just enough memory to load the operating system, so that I am constantly bogged down by lack of resources, by the time I load one single office program. If I tried to buy a weaker computer at Wal-Mart, they would laugh at me. And this is our corporate standard in 2007.

Salary
My profession is generally a salaried job. Which means I am expected to stick around until I get the “job” done. Of course there is no measurable quantity that defines when the job is done, so I am supposed to get lot done. Well, since my corporation limits my ability to be productive, the only way to get lots done is to spend lots of time at work. But spending lots of time at work doesn’t earn you anything extra, unless your corporation decides you deserve it, and hopefully rewards you in the future.

Well, I’ve worked hard and personally sacrificed for my corporation and haven’t received the rewards.

Limited upside income potential
I can do great things for my company, finding ways to save millions. However, I don’t have the chance to directly benefit from my actions. My company will simply use the market price for my position to determine my compensation. I have to bear the full downside potential, they could close down my branch and get rid of me.

If choosing a job were like a stock, noone would pick it, since it has very limited upside potential and 100% downside potential.

Choose my colleagues
I have a few colleagues that are really good. I have tons of colleagues that are average at best, and plenty of complete loser colleagues. I spend the majority of my time at work. I want to be able to choose who I spend the majority of my time with.

Choose my bennies
I got Lasik eye surgery, so I don’t need the vision insurance offered to me. I don’t have a family, so I don’t need the life insurance. I don’t need a family health plan. Why are all my investment options in my 401k so terrible?

Benefits are great, but hey, they’re really just part of your compensation. If you don’t take advantage of them, then they are lost compensation. Forget company benefits! Give me the cash, and let me choose how I want to spend my money. Let me decide how to insure myself.

I don’t want my company telling me what my health and retirement priorities are. I know what’s best for me.

Less than two working weeks left, till I get to turn in my notice. I can’t wait.

I noticed a few personal finance bloggers are listing the dividends that they earned over the course of 2007. Dividends fit nicely into the idea of “passive income”, where you basically build up enough assets that pay you back at certain periods, and hopefully you can accumulate enough to meet all your expenses, and voila, you are financially free.

People love dividends, and I would assume that a large majority of people think that’s the only legitimate way to make money from a stock on a long term strategy.

But when you think about it, when a company pays its shareholders a dividend, the company is really declaring that they don’t have investment opportunities that will provide an above average return.

Warren Buffet states clearly why his corporation Berkshire Hathaway doesn’t pay a dividend. If they did, he would personally have to invest the money he got from the dividends. And he would invest in the same companies that Berkshire invests in, so it doesn’t make any sense. He doesn’t have better investment opportunities personally than he does managing the same money within the corporation.

Why would you want to park your capital in a company that doesn’t have a good use for it? Why give your money to someone who says they have more than they need, and they just want to give it back to you?

Think about it this way, lets say you own 75% of a corporation through their stock. This corporation has $1,000 sitting in its bank account, and as the majority shareholder, you get to decide whether the company should pay dividends or invest in its own business ventures. You would only vote to pay dividends if you didn’t think the business had a position to make good use of the cash. If your corporation paid you the dividend, and then you reinvested the dividend in the corporation, it wouldn’t be worth the hassle, plus its not tax efficient. You have to pay personal taxes on the dividend income before reinvesting, which is a major waste of money.

So the way I see it, seeking wealth by investing in strong dividend paying companies is a viable path, but it is certainly not the optimal path.

By the way, I have made $73.90 from dividends so far this year. Getting paid a dividend feels pretty nice. But so do a lot of other things that aren’t the smartest things to do with your money.

I started my webpages in November, and have generated:

Nov 2007: $0.43

Better luck next month I hope.

Here’s my first net worth “update”:

Notes:
I have a low interest car loan that will be paid off at the end of this month. through automatic bill payment. Its an old used car, only worth about $5,000, so its not included in my assets.

I have a bit of money in my 401k that I will lose when I quit my job, so it is shown as an asset and a liability, so that it shows up on my balance sheet with no impact on my net worth.

I watch with glee to see when Robert Kiyosaki will write another article for Yahoo Finance! This morning I found a fresh article from him.

Kiyosaki has managed to write another article for Yahoo!, which is more of the same drivel. And would you believe it, his outlook is glim again! Once again you should be scared! The price of oil is skyrocketing, the value of the US dollar is plummeting! Oh no! Robert has the keys to financial success, but you probably need to buy one of his products to get all the financial education you need to get out of the rat race.

Robert’s advice this month laid out plain and simple:

1. Worry There is so much bad stuff going on with the economy for Americans, that you should be deeply concerned.
2. Be rich The rich will get richer in these turbulent times.
3. Buy stock in food exporters With a weak dollar, our food will get eaten by Indians and Chinese.

Wait a minute! We’re going to export stuff to China? It wasn’t too long ago that you were telling us how bad our trade deficit is, Bob? Shouldn’t we be happy to start buying back America from them?

While Kiyosaki didn’t state it so explicitly, his only real insight is that a weaker dollar means companies that are net exporters benefit. Whether that’s food or software, think about buying interest in a company that hawks its wares in other currencies.

Kiyosaki is my favorite person to hate. And when Casey Serin (everyone else’s favorite person to hate) teamed up with him, well it was pure magic.

I know, enjoying that video is like enjoying watching a train wreck.

The market was up quite a bit the last two days, so for now my SPY purchase looks like impeccable market timing: +3.85% in two days. That always feels good, even though I know I can’t do it repeatedly. I am tempted to dump the shares I just bought for a quick profit. So I need some wisdom to keep me in line:

“Success in investing doesn’t correlate with I.Q. once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

- Warren Buffet

I’ll hold on a little longer, since my IQ is at least twice Warren Buffet’s requirement, my main problem is temperament control.

Also, even though I just bought some stock, I should be hoping for the stock market prices to go down further.

“If you expect to be a net saver during the next 5 years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

- Warren Buffet

If I were asked, I would get this question right, but I still love to watch my portfolio gain in value, and get a bit disturbed after it loses value (but then I tell myself that’s good for me and I’m happy again).

Yesterday, I realized I have exactly 3 work weeks left, until the day I plan to turn in my notice to quit my job. A kind of chill went over me with that thought. These could be the last 5 weeks of ever working at a job, something I had counted on doing through high school and college.

My excitement about my plan and my confidence is my success is growing.

One reason why I decided to quit my corporate job, is that I have a valuable asset, which I am not taking advantage of. This asset is risk tolerance.

I work at a huge, stable global corporation. The risk that my company will not send me my paycheck each month is essentially zero. My paycheck is ensured through corporate stability.

If you believe in mostly efficient markets, like I do, then you also believe I have to pay for this insurance some how. If another company wanted to hire me for the same position, they would have to offer me something better than what I have now. If I weren’t confident in the prospects of the company, I would expect at least higher compensation now.

This is just like a credit card company, they will give credit cards out to less credit-worthy people, but only at a higher interest rate. The credit card company must be compensated for the higher risk.

I am a young, able-bodied, unmarried, childless guy with virtually no financial obligations. I have a decent emergency savings fund, and no debt. The worst that could happen to me is that I temporarily have to find a job as a bartender or something to pay my minimal bills.

So why should I risk the stability of my corporate check each month?

Because I am paying for insurance that I don’t need.

There is one major hitch. In general, if you want to seek better returns you have to increase the risk you are willing to take. However, the reverse is in no way guaranteed. Simply taking on more risk does not necessarily translate into better returns, it only gives you the potential.

So, lets see if some risk taking pays off in the end…

Up till now, I have mostly accumulated mutual funds through my retirement account, and an index fund in my taxable trading account. I have dabbled in individual stocks with moderate success, but always thought I should focus on my career until I have enough net worth to make actively managing my portfolio worth my time.

How big should the portfolio be?

“If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”

Warren Buffet claims he could make 50% returns on a small enough portfolio. I tend to believe him, I’m not that good though. Lets assume I could make 30% returns from investing a small portfolio, or $100,000 / year concentrating on a career.

By passively investing (index funds, etc.), I would make 10%, so the difference in actively managing and passively managing would be 20%. My portfolio would have to be $500,000 to make it worth it to persue full time portfolio management.

That’s going to take a while.