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IPOs. Should You Bite?

After reading an article about the upcoming Initial Public Offering (‘IPO’) of Roots Ltd., a Toronto based clothing company, Mermaid, a friend of mine, called to ask for my thoughts. She was familiar with the Roots brand, had shopped there over the years, and wanted to know if this beaver sporting Canadian retailer presents a good investment opportunity? So I checked it out.


Chewy Bit

‘IPO’ refers to the first sale to the public of company issued stock. Prior to an IPO, the company is not listed on a stock exchange, and it is virtually impossible for Joe /Jane Investor to buy stock of a private company. Although private companies do have shareholders, they are few in number and there does not exist any sort of market where their shares may be bought and sold.

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Be Wary The Hype

A whole mess of companies ‘go public’ every year. And for the biggest of the bunch, there’s extraordinary hype. Why the hype? To generate investor interest. The more interest, the more buyers, the higher the price climbs, the more money made by the company, insiders, and underwriters, so the thinking goes.

Who’s responsible for the hype? The company that is going public plays a role of course. But the bigger role is played by investment banks who ferociously vie for a piece of the action. And when we’re talking about a company that presents juicy profit opportunity, the big boys come to the table: JP Morgan, Goldman Sachs, RBC Capital Markets, Barclays, and the like. And they talk up the company like it’s the greatest thing since Muhammed Ali. Master salesmen, these bankers are.

Journalists also play a role, and so they should. When Roots or Snap or Blue Apron morph from private to public status, it’s a matter of public concern. And when media presents a balanced take on a company’s current business and future prospects, this helps investors weigh the pros and cons of whether or not to add shares to their portfolio. But when media cheerleads, this is where you have to be careful. This is where you have to recognize noise for what it is and not get swept up by the hype.

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How Do Investment Banks Make Money On An IPO?

The company going public often uses more than one investment bank to underwrite the IPO. Here’s how it works: the banks and the company agree upon a price at which shares of the company will be purchased. This happens before shares are actually listed on a stock exchange, i.e., before shares are made available to the public.

Profit is to be made on the difference between the purchase price paid by the banks and the price they sell the shares to the public. For example, let’s say Roots Inc. goes public at $15/share. This means that the banks bought the shares at $15.

Now let’s say that investor interest has been stoked in the lead up to the IPO, bids come pouring in, and the stock ends the day at $22. So, banks made a profit here of $7/share. If they sold one million shares, that’s $7m bucks.

Still, IPOs are by no means a slam dunk for investment banks as they do take on significant risk. Facebook was enormously hyped prior to its IPO. In retrospect, for good reason. But in the beginning, it looked like a dud.

One of the largest IPOs ever, more than half a billion shares traded on the first day. The opening price was $38, rising to $45 during the day, and closing at $38.23. Shortly thereafter, share price dropped to about $18 and wouldn’t see $38 again until 15 months after the first day of trading.

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What The Company Does With The Money

Plain and simple, companies go public to make money. The idea being to raise funds by selling shares to the public. Companies often use IPO proceeds for one of two reasons.

First, to raise money that is reinvested in the company’s infrastructure or expanding the business, the underlying purpose being to accelerate growth leading to higher revenues and profit.

Second, the IPO is an exit strategy, a way for founding shareholders to cash in their chips, so to speak, and sell all or part of their shares to the public.

Is one reason better then the other? Well, you can’t really make this call without knowing a companies specific situation. When management reinvests most or all IPO proceeds into the business, this tells me that they’re aligning their personal financial interest with that of new shareholders, and they’re committed to growing the business.

That said, I wouldn’t touch an IPO based exclusively on founding shareholders cashing out. As a shareholder, I want to know the company is working for the benefit of all shareholders, not merely to enrich the founders.

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Roots is Flawed

Roots Inc. has been around as a private company since 1973. After decking out Canadian athletes in Roots apparel for the 2010 Olympics in Vancouver, the company’s brand recognition soared, not just in Canada but globally. And in 2015, the company sold a majority stake to Searchlight Capital LP, a private investment firm based in New York.

Here’s the thing about private investment firms: their purpose is to increase the value of companies in which they invest. A good thing? Maybe. Really depends on your perspective. Because ‘value’ is subjective. And investment firms are all about financial value, how much money is the company worth, how much profit may be generated.

In contrast, business founders are rarely so myopic in their definition of ‘value’. Not looking to turn a quick buck, founders have a long-term outlook, and take personal interest in relationships with their employees, customers and their reputation. They care.

Based on available information, Searchlight is typical, taking Roots public in order to cash out. How do I come to this opinion? Well, when companies file for an IPO with the Securities and Exchange Commission, they craft a lengthy document known as a prospectus. And in their prospectus, Roots baldly states that money raised will not be used to assist with expanding the business. Instead, and this is chutzpah for you, Searchlight will be selling its shares to the public and pocketing the proceeds.

Outraged at the nerve of Searchlight? Don’t be. This is how the game sometimes works. But the thing is, you don’t have to play. Playing is optional. And unless the line of suckers who want to buy shares at any price on the first day of trading is endless, the only people virtually guaranteed to be smiling when markets close will be those employed by Searchlight.

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Moths To A Flame

Will thousands of people still buy Roots shares on their first day of  trading? You bet they will. Because the hype will only grow in the weeks and days leading up to the companies reincarnation as a public company. And some people will read about the ‘opportunity’ in newspapers or listen to talking heads on business news programs and they’ll trust what they read and hear.

As I said to my friend, Mermaid, maybe investing in Roots will turn out well for early investors. Maybe it won’t. We really don’t know. But for me, the unknowns of a relatively small clothing company don’t inspire confidence. And the known of a private investment firm selling their shares to Joe/Jane investor and pocketing their money convinces me to watch from the sidelines.

Inside The Happiest Country: Denmark

Back in July, I posted an article titled, The Danish Way of Wealth. The article was a hit, with readers sending me oodles of positive feedback. And included in the feedback were comments from a few kind souls who were born and raised in Denmark.

Not being an expert on the home of Hans Christian Andersen, I invited one such friendly, bicycle loving soul, Carl, (who maintains his own personal finance blog: www.moneymow.com) into my virtual world to provide his take on Denmark, and why its citizens are consistently rated as the happiest folks on the planet.

Oh, but before I welcome you to our discussion, you should know that no money or other compensation will change hands between Carl and myself. We’re just having fun here, hoping to provide you with an informative, enlightening and entertaining read.

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Enter Thy Kingdom!

Welcome to the Kingdom of Denmark! (is that introduction okay, Carl? Too hokey? Do tour guides speak like that in Denmark? No? I should stop now, shouldn’t I? Right.)

BuddhaMoney (BM, from here on in): Hey Carl, in the spirit of talk show hosts, welcome to the BM community! No, scratch that. It sounds ridiculous. I’m trying too hard. Let’s just dive right in, okay? How about we start with you filling in some general background about Denmark?

Carl: Sure! Here’s some general tidbits:

  • We’re a small country, about 5.5 million people living on land that’s about twice the size of the State of Massachusetts (the 7th smallest State of the Union).
  • Our native tongue is Danish, a useless language that pretty much no one speaks outside of Denmark. But mostly everyone speaks English as a second language, which is taught in school from third grade onward.
  • As for placing us on a map, our neighbors are Sweden to one side and Germany to the other.
  • And yes, as you already mentioned, I do love biking! And it’s made so much easier by the fact that Denmark is as flat as North Dakota.

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The (Horrors!) Welfare State

BM: Tell me about the so-called ‘welfare state’, as some North Americans pejoratively label Denmark and the other Scandinavian countries.

Carl: Denmark is definitely a welfare state! But unlike residents of countries that favour more capitalist systems, we’re good with this. I mean, close to 100% of Danish citizens approve of our political system, a system that ensures an acceptable level of welfare for all people living in Denmark.

Not to be cute here, but think about the word, ‘welfare’. Divided in two parts, you have ‘well’ and ‘fare’. We want all of our residents to live well as they travel through life. Because we see this as society’s responsibility, and we are all a part of society. Why this is seen as a negative in some parts of the world is beyond my understanding.

BM: There’s complete consensus then about government support given to people?

Carl: There’s close to 100% agreement that taking care of all members of society is everyone’s responsibility. Sure, there’s quibbling about the degree to which the welfare state should support people but not the fact that it should.

BM: Based on what you’re saying, it comes across as though your political parties are generally in agreement on most issues.

Carl: Hey, politicians are politicians, right? Meaning there will always be differences between the party holding power and minority status parties. But I will say that our political landscape is way less fragmented than that of many other democracies. For the most part, all of our political parties are social democratic. And within the social democratic framework, some parties lean left, others right.

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Free Education For All and Virtually No Debt!

BM: I hear that all education is free. Is this right?

Carl: Yup. 100% free tuition from elementary school through to completion of university studies. Bernie Sanders totally envies us! Hah! Know what else? From the age of 18, as long as we are in school and not living with our family, we get paid $1,000 / month. For those who still live with their family, the monthly stipend is slightly lower.

BM: What! Why?

Carl: The thinking is that this money allows us to focus on our studies rather than working a part-time job to support ourselves, which takes away from study time. Still, we are not prevented from working and some people do choose to work part-time jobs.

Also, unlike North America where so may people live with their parents into their mid and late 20s, most Danish people live on their own by the time they’re 20. Simply because, to a large extent, most people can afford to do so with the government giving them $1,000/month.

BM: It follows then that students graduate from university without any debt?

Carl: Correct. Student loans are available from the government at low interest rates but few people see any reason to take a loan.

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Know What Else is Free? Health Care

BM: Tell me about health care in Denmark.

Carl: Like education, there’s no political debate about the provision of health care. It’s free and we all agree it should be free.

BM: Well, it’s not really ‘free’. Health care is paid for through income taxes, yes?

Carl: Fair enough. That’s right. Just like in Canada. The only medical procedures you’ll pay out of pocket for are cosmetic services. And included in health care is dental treatment. Although this is free only until age 18, after which you pay out of pocket.

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We’re Not Utopia

BM: Not that I want to bring down this feel good story about your homeland, but are there any negatives you see about Denmark?

Carl: No problem, BM! Sure, Denmark isn’t utopia. We have our share of problems too. And the big time problems are similar to what other countries are experiencing.

Take immigration. Owing to increased immigration to Denmark, there has been a considerable rise in support for the right wing (nut) parties, with about 25% of Danish voters backing parties with a nationalist, close the border bent. The unfortunate response from mainstream political parties has been to make it increasingly difficult to immigrate to Denmark. I see this development as shameful. Because people from all over the world make positive contributions to Danish society. We used to be a more open country. Sadly, this is changing.

Then there’s the urban/rural divide. Politically and socially, Denmark is becoming more divided between people living in large urban centres and those living in small towns. Again, sadly, this divide creates more conflict and tension within our society.

And of course, there is the issue of taxes. While we benefit greatly from free education and health care, we pay an enormous amount of taxes! Our tax system is progressive so the more you earn the more you pay in income tax. The downside here is that, as you earn more and pay more in taxes, the incentive to work harder diminishes, because so much of your earnings will have to be paid in taxes.

Like any country with excessively high rates of taxation, some really talented people opt to leave Denmark to avoid paying high taxes the rest of their life.

And the same goes for successful companies. I mean, what’s the incentive to remain in Denmark if an unfair portion of earnings goes to taxes and not to employees or shareholders? Also, high tax rates make it more difficult for companies to attract talent from outside of Denmark, which of course reduces our global competitiveness.

BM: You mentioned that few Danish residents take on student debt, which is amazing when compared to skyrocketing debt rates among North American college students. What about credit card debt? Is this an issue?

Carl: Credit cards are used somewhat but much less than cash and debit, which is much more common. So to answer your question, owing to limited use of credit cards, there’s not much credit card debt. For me, this is a result of strict financial regulation and a culture of low debt that is ingrained in us from the time we are children.

BM: That’s amazing. And smart. And with no to minimal debt, surely this contributes to Denmark consistently rating as one of the happiness countries in the world. What about bicycling? This I suppose also contributes to happiness?

Carl: When was the last time you rode a bike and did not smile? See what I mean! Yes, we love our bikes. Most everyone owns a bike here and rides it! Think of Denmark as having a bicycle culture, whereas you have a car culture in North America. The whole country is flat as a pancake, and the biking infrastructure in the bigger cities, like Copenhagen, is fantastic with whole streets having been cleared to make for larger bike lanes. Like many Danes, I bike to and from work daily wearing my work gear which, for me, is a suit.

Also, and this ties back to taxes, when you consider the amount of import taxes on cars, I totally understand why people choose to ride bikes instead! For example, a Tesla model S that costs $69,500 (USD) in the USA would cost about $118,000 (USD) in Denmark. As for a bike, there are no additional taxes and I assure you that the initial cost, and maintenance fees, are nowhere near the cost of a car.

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Hygge. What’s That?

BM: As you know, one of my recent posts talked about hygge. As you also know, I’m not Danish. Being an authentic Dane, and me being the pretend King of Denmark, I anoint you an automatic expert on this subject. So, please, tell us about hygge.

Carl: Glad to! Hygge is a subject that has been discussed a lot abroad; there are plenty of books about hygge being sold everywhere at the moment. For us in Denmark, it’s part of everyone’s daily life, but we rarely discuss what the concept of hygge means. Everyone just seems to know what it means.

To me, hygge describes a special mood. The closest English word is probably “cozy”, but it is much more than that. I often associate hygge with the picture of being inside during a snowstorm in front of a fireplace with a cup of hot chocolate. It is about the feeling of happiness, trust/safety, fun and relaxation all at once.

We use it mostly as an adjective for different situations. For example, when I describe a nice dinner with some of my friends, I might say that it was ‘hyggeligt’.

BM: Well my new friend, your insights are much appreciated. May your days continue to be filled with hygge!

Carl: Thanks for listening to all my babbling about this tiny country, and may your days be filled with enormous amounts of hygge too!

$1,000 For Apple iPhone 8? Really?

About one year ago, my cell phone contract expired allowing me to upgrade my phone. At the urging of my totally plugged in teenage son, who threatened incessant ridiculing of me for using ancient technology, I upgraded from an iPhone 5c to an iPhone 6. Sure, I had the option of choosing the current model, the iPhone 7, which offered the latest and greatest tech improvements. But I couldn’t fathom one good reason to do so.

The thing is, the 5c was working just fine. It suited my needs, being fast and smart enough (I mean it’s called a ‘smart’ phone for a reason other than being an in your face, silly little marketing ploy, right?). So, just as I had no reason to exchange a 5c for a 7, nor did I have reason to upgrade to an iPhone 6.

But I did exactly that for one reason: cost (so sorry, Teenage Son, my Dad coat of armor makes me impervious to your ridicule!). Not only was there no cost for the new phone but I was able to change my phone plan resulting in reduced monthly charges.

At the end of the day, I had lowered monthly expenses, added more money to my pocket, and was the proud owner of a shiny new piece of stainless steel, glass, plastic, etc, that Teenage Son grudgingly accepted as an improvement, though certainly not worthy of any sort of excitement.

‘Excitement? You want me to get excited? You bring home the iPhone 8. Now THAT’s a PHONE to get excited about! said Teenage Son.

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Bitten To The Core

From 2009 through 2016, new model iPhones rose in sticker price from an average of $629 to $645; a reasonable increase of 2.5%. Then came 2017.

While the retail price of the least expensive iPhone 7 model was $649, Apple tested the waters for big time price jumps by slapping the 7 plus with a $769 tag, an 18.5% jump from the non-plus 7.

And how did consumers respond? They loved it! Expensive or not, beyond their means or not, the 7 was gobbled up faster than a juicy stuffed turkey at Thanksgiving dinner.

And Apple execs loved it, counting profits hand over fist and watching the company’s share price (NYSE:AAPL) soar more than 60% in the past year, from about $100 to more than $160.

So the boardroom thinking went, ‘if the masses are willing to digest an 18% price increase with barely a burp, well, how about we really rock this world by moving the needle to 4 digits for the new iPhone 8, making it the first $1,000 phone?’

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Justified? Reasonable? Or Not?

Oh yes. How exciting. To drop a cool grand on a phone. Who wouldn’t buy in? Who in their financially sensible mind would object to paying a whopping 50% more than the iPhone 7 for a new phone which is substantially the same save for a few new optional, admittedly cutting edge, yet entirely unnecessary features?

Because, let’s face it, this isn’t your father’s 1980s rotary phone (you mean all it did was make phone calls? How quaint. How … how did you survive?), it isn’t the laughable flip phone of the early aughts, and it isn’t even the iPhone 7 for that matter.

Dudes! Dudesses! The iPhone 8 is from the greatest of all tech companies, APPLE, and it’s their new flagship out of this universe cool product that offers infrared facial recognition and wireless charging!

Okay, look, sarcasm aside, here’s the deal: Apple’s making a bet that it can move enough consumers into the luxury phone market. (To be fair, Apple isn’t the only one looking to juice gigantic profits; Samsung, is not far behind. Later this week, Samsung will introduce its Galaxy Note 8, priced at $950). You see, companies in the know understand that if you want to plant your flag in the luxury market, no matter how well built or designed your product, involuntary salivation is triggered in a certain kind of human animal only if product price is moved beyond easy reach of the masses.

Luxury buyers WANT a higher price. I mean, how else would people be able to judge and compare themselves against others? How would they set themselves apart from the riff raff? How would they know who has more money except by what kind of phone you flash to strangers and lovingly kiss good night? (Ooops, sarcasm creeping back in).

So what’s going on? Is Apple gouging? Is this pure corporate greed at play? Is it not enough that Apple is the planet’s most valuable company? That they have more than $260 Billion sitting in the bank (you read that right)? Or … is Apple simply satisfying demand, giving a segment of consumers what they want, and in the process being a good corporate citizen?

Apple’s bet is informed by their belief that consumers will cough up a premium price for a cutting edge product. That increasing price will increase sales. And this thinking is informed by knowing that US consumers spend an average of three hours per day (three hours!!!) on a mobile device, that the Apple name commands a premium, and that consumers will pay to associate with the Apple image.

Because only at its margin is the device a phone. Moreso, it serves as a personal computer, video player, camera, gaming player, GPS system, music player, reader, wallet … and status symbol. And in the minds of tens of millions of people, its become vital to their daily existence. Not only vital, but for some “the iPhone is your dream phone,” according to Satish Meena, analyst at Forrester, a research and advisory firm to big tech corporations.

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Dangerous Dreams

Okay I’m totally out of the loop. Who knew that people have dream phones?! Talk about a marketing home run. Apple, Samsung and their competitors are now burrowed in our subconscious, seemingly as essential to life as oxygen. Or so it seems for some.

And for those folks who gasp for breath when their phone isn’t within reach, the dream is often a financial burden. Because too many folks buy these devices owing to the cool factor generated by tech companies in cahoots with fawning media types.

Sure, for the true techies out there who live for the next digital advance, new model phones may be a must have. But for most of us casual device users, there is no need to buy a new model every year or two or three assuming the current model its functioning well.

But there’s want. And the want is driven by NEW and SHINY and EXCLUSIVE things that inflate our sense of status (well, really, only delusions are inflated, but too many folks derive feelings of being ‘better’ (empty as the feeling is) than others because they own a THING that’s available to relatively few.

Apple knows all about want. Same with Samsung. Any tech corporation worth its motherboard knows that phenomenal sales happen only when there exists emotional attachment. And this kind of attachment is manufactured through savvy marketing.

As corporations go deeper inside consumers heads, vulnerable consumers suffer. Because they convince themselves of the need for an expensive phone that they can’t afford. So credit cards are used for purchases. And when the full balance owing isn’t paid, the consumer incurs interest charges, adding to the total phone cost.

Or wireless carriers offer financing plans, as if this is an excellent solution. I’m here to tell you: NO, IT’S NOT! When purchases are financed, you’re charged interest and interest adds to indebtedness. And as debt grows, savings are depleted or at least not increased, and the consumer’s financial situation only worsens.

So before you chase the dream, do an inventory check of your wants and needs. Measure any desire for a ridiculously expensive electronic device against your inner values. Consider whether you enjoy being played by a giant corporation with an insatiable appetite for more. Ask your self whether you prefer to add to Apple’s monstrous cash pile or whether you prefer to build your own cash pile, through wise spending, saving and investing.

 

 

 

 

 

Expert, Shmexpert: What Do They Know?

Financial experts aren’t shy about telling you which way the wind will blow. Confident, at times brash, they broadcast insights into the future. Deliver crystal ball readings. And talk as if predictions and reality are one and the same. As if they KNOW what will happen tomorrow.

How kind. How thoughtful. How generous. To play nice and share such valuable information. How, um, uh … wait a second here! Unless comic book super heroes have transmogrified into living, breathing beings plying their usual trademark scaling of tall buildings, saving our planet from evil dictators and, notable for our immediate purposes, reversing the globe’s spin, peering into the future is little more than a step right up and place your betscrapshoot.

02fin3So when you read about, or listen to, a financial advisor, hedge fund manager, stock analyst, journalist, economist, media savvy CEO or any other self-appointed expert serve up their predictions hot off the press, please, for the good of your portfolio health, take it with an ever so large grain of salt.

Because predictions are just that: guesses, extrapolations, prophesies. Whether spoken by a rich guy or corporate big shot, whether published in a reputable publication such as the Wall Street Journal, Bloomberg, or Barrons, or a fly by night investor newsletter baldly touting the latest and greatest crypto-currency, understand that the only certainty about investing is that the future cannot be foretold.

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Certainly, There Is No Certainty

In my humble opinion, Barrons is one of the few excellent investor friendly daily publications. And while I do glean helpful investment related tidbits from their articles, I nevertheless read them with a critical eye. Because if I didn’t, if I swallowed whole what someone else was serving up, well then, shame on me for blindly following, for responding no different than sheep (or llama!) waiting to be fleeced. Baaaa, Baaaa.

Here’s the reality: there is no certainty when it comes to predicting movements in the price of securities or growth of economies. So when someone, anyone, offers certainty in their analysis of the future, know that the offer falls under the category of HOOEY.

Now, this doesn’t necessarily mean that there is active intent to deceive on the part of the person providing information. Rather, there are a few other explanations.

First up is arrogance, an unfortunate trait too common among those in positions of power. Of course, arrogance is delusional in the sense that, however large your bank balance or expansive your influence, this doesn’t make you privy to writing history before events unfold.

Second, we the people, habitually grasping for certainty in all aspects of life, tend to respond positively to strongly worded opinions. Attracted to the ‘with us or against us, take it or leave it, black and white opinions’, we don’t care much for wafflers.

Because wafflers are colored gray, they’re messy, they confuse issues by offering more than one explanation or possible outcome, and never seem to just get to the point and tell us what we should do.

The sad thing is, this sort of thinking, this wanting to have a clear cut answer, is harmful for many reasons. Not the least of which is because, surprise, surprise, those who give off the appearance of certainty are no more likely to KNOW what tomorrow will bring than the perceived wafflers.

Personally, my bias is toward wafflers. Because they have considered more than one side of the issue (there are always at least three sides, you see) and understand that REALITY IS MESSY AND IT’S ALWAYS CHANGING.

As an investor, you don’t want to be spoon fed information, you don’t want to be told what to do. Rather, you want to (uh oh, seems I’m telling you what to do … read on, you’ll see I’m one of the good guys) think, ask questions, empower yourself by accepting the information, rolling it around, chewing on it, digesting it, spitting it up, letting it sit, looking at all angles, comparing it to contrary information sources, then using your best judgment to render a decision about its worth.

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Case In Point

Back to Barrons. I recently landed on an article written by Byron Wien, vice-chairman of Blackstone Advisory Partners, a subsidiary of The Blackstone Group, an investment firm managing more than $300 Billion.

The subheading for the article is, ‘Wall Street’s Best Minds’. And the article itself is titled, ‘Smart Money Analyzes The Market.’

Hmmm, best minds you say? Okay, fine, this is marketing hype but still, given his background, I took a leap of faith here and accepted that Byron is a guy who knows a fair bit about the workings of financial markets. That said, regardless of Byron’s position or net worth, I read his words closely.

Wein. “Howard Marks of Oaktree, one of the most insightful thinkers in the money management business, has written a 22-page paper on the risks facing investors, and he concludes that this is a time for caution because of the condition of asymmetry: the potential rewards are not sufficient to justify the uncertainties and stretched valuation of equities.”

BuddhaMoney. Okay, Howard is a smart guy. Knows his stuff. But should I FOLLOW his conclusions? Does it matter that his analysis runs 2, 12 or 22 pages? Should I be cautious about investing at this time? Maybe. But even if I agree with Howard, I’m well aware that Howard’s crystal ball reading is just as accurate as any other. Translation: his ball is on the fritz.

Wein. “One investor recalled the “Rule of 20” from what now seems like ancient times: the combination of inflation and price earnings ratios should be no more than 20. On that basis, the market is a little more than fully priced but not egregiously overvalued.”

BuddhaMoney. Really? The Rule of 20? It’s ridiculous how many myths are out there trying to explain future stock market movements. And this Rule of 20, like other silly and simple ‘rules’ is meant to make clear sense of current financial conditions. And it fails. Like every other rule. Because financials conditions are too complex, there are too many moving parts that don’t allow for simplistic answers packaged in a neatly titled Rule.

Wein. “Looking at historical price earnings ratios, the market certainly appears to be fully valued, even assuming earnings continue to come in better than expected.”

BuddhaMoney. Ya well, we can and should learn from history. But history is not a dead on predictor of what will happen tomorrow. And note here that Wein himself is hedging …’the market certainly appears to be fully valued’. How is this statement helpful? Is it fully valued or not? The thing is, this phrase is purposeful since Wein knows what he doesn’t know … and he doesn’t know with any certainty whether or not the market is in fact fully valued.

Wein. “… other potential impediments to equity appreciation are not currently negative: investors are optimistic but not euphoric, inventories are not excessive, unemployment is declining rather than rising, leading indicators are making new highs and inflation is modest. Accordingly, we could be several years away from the next recession or bear market.”

BuddhaMoney. What Wein is saying is that, um, who knows! Who knows where the market is headed!

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Passive Index Funds Don’t Require Tea Leaves

So what’s the take away? I’m not here to disparage Wein. The article’s title says that it’s intended as an analysis. And Wein delivers with a wealth of facts and insights, risks and other expert opinions leading to a conclusion that some of the best minds on Wall Street believe the market will go up, others believe it will go down.

And really, that’s the best that may be offered. Because no one knows with any certainty what will happen tomorrow, all we may do is inform ourselves and use our best judgment to make decisions.

That said, wise investors know enough to pay little attention to media generated noise, to not get caught up in the guessing game of when is the next market meltdown or economic recession.  Because when you have a long term game plan, short term hiccups don’t matter much.

Thus the relatively recent volcanic flow of money into passive index funds, where the only bet you’re making is that, over time, markets will go up. Is it a lock that, with an adequate investing horizon, markets rise? Nope. But a passive index fund is a safer bet than any individual security. And thats about the best we may do in the investing game.

 

 

 

 

Teenager, His Phone, The Canary

When my first born son turned 12 or 13 (I really don’t recall his exact age – frazzled parent brain the likely cause), I caved to his relentless requests for a cell phone. Invoking the enormous power of rationalization, I convinced myself that although a phone at his tweeny age is far from necessary, as a matter of convenience and safety it’s not a bad idea.

As telecom companies continue to dismantle and remove public pay phones owing to lack of use (and the disappearance of superheroes needing a place to change into costume), I wanted to provide Teenage Son with a way to communicate with me should the thought ever occur to him.

Adding him to my phone plan cost about $40/month, including tax, for a talk and text plan. At close to $500/year, this was not an inexpensive solution and definitely pricier than dropping the occasional 50 cents into a public pay phone.

Still, rationalization again came to the rescue; this was a safety issue, I insisted to myself. (Upon reflection, the matter of convenience was not weighty enough to justify payment so I went with safety, an issue no parent charged with caring for a baffling, still-under-construction teenage brain could ignore).

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Must Have Data Plan, Must Have Data Plan

Then came more demands. Teenage Son said that his friends surf the web on their phone and he wanted to do the same, and that a talk and text plan is soooo yesterday.

“How much will it cost,” I ask? (my usual first question).

“I dunno.”

“How about you do the research and let me know what you come up with?”

“Dad, can’t you just get me a phone with a data plan.”

“It costs money.”

“So?” (translation: teenage brain believes Bank of Dad grows money on trees).

“Is it necessary to have data? Why isn’t the talk and text plan enough?”

“Because it isn’t.”

“Convince me why I should pay more money just so you can play on the Internet with your phone? Why isn’t it enough to use your computer for surfing the web?” (Granted, Teenage Son is presently at something of a disadvantage going up against Former Lawyer, me, who relishes constructive discussion based on sound reasoning, often interpreted by my children, as unfair argument. That said, my ultimate purpose was to have him think about his choices, to thoughtfully consider his own rationale for buying ‘stuff’ that he wants, and the price to be paid, whether financial, emotional and/or spiritual).

“All my friends have data on their phone.”

“You know the old, ‘everyone else has it so I should have it argument’, is nonsense, doesn’t work with me.”

“Why are you being so mean?!”

And he stormed out. Once I dusted myself off from the teenage accusation of meanness (translation: if you do not give me what I want, what I demand at this very moment, then you are at fault and you are mean), and once he calmed enough to remove his headphones so we could talk while he wasn’t listening to music, I offered to change his phone plan to include data on the condition that he pay for the increased cost.

As his eyes began the familiar bug out that precedes walking to his bedroom because it has the closest door that may be slammed (sound effects are hugely satisfying for teenagers), I gently explained why I dared to suggest he take financial responsibility. Though his facial expression and body language hinted of tuning out, he voluntarily chose to stay with me, physically anyway, so I continued talking about the importance of learning financial responsibility.

 

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Planting Seeds

When Teenage Son was six, I took him with me to a local bank branch and opened an account in his name. While the account was connected to mine so I could monitor future transactions, I wanted to give him a sense of empowerment through having an account in his own name, knowing he would eventually manage his own money.

When the ABM card with his name on it arrived in the mail, we went to the bank the next day. Having quickly learned how to deposit funds through the ABM, he deposited $20, starter money from Dad. At this stage of the game, the point was not the money. The point was to teach him about money … it’s value, what it’s used for, how it’s managed responsibly, how to retain control over money so it is not a source of stress, or worse.

I figured that if we kept an open dialogue about money matters through childhood and teenage years, about what ‘stuff’ costs, about the fallacy of money trees (no, the Bank of Dad does not enjoy unlimited funds and, even if he did, strict withdrawal limits would be implemented), about choices we make in spending and saving, and the consequences of both, then little by little he would learn well the lessons of money management. And, in the process, he would retain a sense of freedom throughout his life when it comes to money matters, thereby avoiding the fate of becoming a Noble Consumer and Holder of Too Much Debt.

Then the cell phone fiasco hit. And I feared that Teenage Son would be turned into a consumer pod, the attachment to his cell phone being like the proverbial canary in the coal mine, portending a life where he was programmed to wanting the latest and greatest toy.

Still, difficult as it was, I kept the faith, choosing to believe that seeds planted way back when would sprout in time. Because the best I can do as a parent is to be patient, generous, and loving, and this includes setting boundaries.

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Buds Flowering

Teenage Son is now seventeen and attached as ever to his phone. They go everywhere together: to school, out with friends, on bus rides, to the movies, and to bed (the mobile phone having replaced the blanket as a source of security). That said, I insist that he power off before falling asleep so as not to expose his still growing brain to a constant stream of radiofrequency energy.


Chewy Bit

Children may be more susceptible to cancer causing agents owing to a growing nervous system. As well, owing to their smaller heads compared to adults, children are subject to greater proportional exposure to radiofrequency radiation.

Though data from studies done to date do not clearly support higher cancer risk, when it comes to my kid’s brain, I prefer to minimize risk and err on the side of caution, especially knowing that at least some of these studies are funded by telecom companies who, shocking as this may be, could have been tempted to juice results in their favor.

For an exhaustive, hugely informative, eye-popping discussion of this issue, sit down for a lengthy read of Disconnect: The Truth About Cell Phone Radiation, What the Industry Has Done to Hide It, and How to Protect Your Family, by Devra Davis – http://www.amazon.com/Disconnect-Radiation-Industry-Protect-Family/dp/0525951946.


And yes, Teenage Son has a data plan. The bonus for both of us is that he pays for it himself from wages earned working part-time at a grocery store during the school year and working full time during the summer.

Not only that but he has learned to live within a budget, knowing that I won’t bail him out. If he blows his paycheck on a cool leather jacket, and has drained his savings, then he has to wait until he receives his next paycheck before bouncing into a local café and ordering a giant, humungous caffeine and sugar laden concoction tailor made to mess with teenage mood swings.

Sure, I encourage him to set aside 25% of every paycheck into a savings account but he doesn’t always do so. That’s his call. And he has regretted his lack of savings each time his account dwindles close to zero. And that’s just fine; he’s still learning and he’s still a kid so no major harm done.

Eventually, he’ll get into the habit of saving. Eventually he’ll understand that just because he has money doesn’t mean he has to spend it. He’ll get that saving and investing money feels good and helps us take care of the practical necessities of life.

Though his lack of impulse control (read: under developed teenage brain Executive Functioning) may frustrate him at times, Teenage Son has been stepping up and trying to take responsibility. He’s learning that work has its rewards beyond the financial (not only getting out from under Dad’s thumb, but also the sense of controlling his world, the freedom to make independent decisions), that it takes effort to earn money so it’s best to value that effort and give good thought to how you spend, save and invest money. I’m proud of Teenage Son and ever more confident that those seeds planted years ago are taking root.

 


 

Fear Not The Bag Lady

I know a woman named Lily. She lays awake nights worrying that her bed will soon be a makeshift cardboard box on the street. This despite financial wealth that would have the 99% salivating.

Lily owns her own home, a comfortably sized condo in a luxury building. She has an investment portfolio worth north of $5 million bucks. Annual revenue generated from investments? A tidy $200,000 before taxes. Oh yeah, as if that weren’t enough, government coffers kick in a yearly $16,000. Part of this bonus dough comes from simply reaching a certain age, and the other part is drawn from society’s pension fund to which we all contribute during our working years.

What does Lily do with all this money? Well, not one to feel that money is burning a hole in her yoga pants pocket, for the most part she’s a prudent consumer. That said, she indulges from time to time in travels around the globe. Sure, travel is pricey, but Lily loves meeting new people, experiencing different cultures, and she can afford it. And because she doesn’t come close to spending what’s remaining after taxes from her $216,000 gross income, she donates a fair bit to her favorite charities.

All in all, Lily has no financial concerns. But this doesn’t stop her suffering from a malady commonly referred to as, ‘What’s The Point Of Having Money If You Worry So Much About Money That Anxiety Stresses You Out, Meddles With Your Peace of Mind, And Jumbles Inner Equilibrium.’

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Let Go My Nose

I don’t mean to be glib. Money, and the chance of losing all of her money, is a real concern for Lily.

Frightened of losing her wealth, Lily fixates on the ‘what ifs’. What if my investment portfolio drops in value? And if that happens, what if I can no longer afford condo property taxes and monthly payments? If I have to sell the condo, and I place the proceeds in my bank account, what if someone then steals my identity, gains access to my account and all my money is taken? If I have no money, what will I do? Live on the street? Eat at a soup kitchen? Or if I get sick? What happens if I don’t have enough money to pay for health care? Or, or, or …

Are these real concerns? Sure. Conceivably, any of those scenarios could play out. But let’s step back for a moment, put a lid on fear, and give reason some room to breathe.

Lily is 75 years old. Her health is excellent. She has first rate insurance coverage that would take care of most, if not all, medical related costs. Her portfolio is mostly in high rated bonds and cash. Meaning? The portfolio is minimally exposed to stock market volatility, and risk of loss is highly unlikely. Her financial institution fully insures all customer accounts against losses arising from identity theft. And, if needed or desired, Lily could well afford private nursing care without dipping into her principal.

Still, try telling this to Lily and you hit a wall of fear that blocks reason from taking hold.

That’s the thing with money, our connection to it is intensely emotional, not rational. So, Lily, like too many others, lets money concerns lead her around by the nose.


ENTER BUDDHA

bmAttachment brings misery. Those who know the joy of peace of mind, whether wealthy or poor, have learned to let go the delight of having money and possessions.


Magic Numbers Are Delusions

The Boston College Center on Wealth and Philanthropy undertook a study titled, The Joys and Dilemmas of Wealth. The joys being obvious, the study focused on dilemmas.

For our purposes, here’s what stood out from the results: despite their enormous financial wealth (study participants had a net worth of $25 million plus), the majority of participants did not see themselves as financially secure. Go on, read that bit again. Now roll your eyes and shake your head because that’s the natural response.

You want nuttier? Here we go: participants stated that, to feel financially secure, they would need about another 25% of their current assets. 25% huh? So, with a net worth of $25m, we’re talking $6m and change. Whoa!

Just for fun, let’s break this down. Say participant ‘A’ has $25m. Presumably, peace of mind comes from being bumped up past $31m. As for participant ‘B’, she has $50m. Well, she needs to hurdle over $62m to bask in the warm and fuzzies.

What’s going on here?! The unfortunate part is that these folks will never feel peace of mind, regardless of how much money they have, because they are tying peace of mind to a dollar figure. The thing is, peace of mind does not suddenly arrive when you hit a magic number.

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Bag Lady Syndrome

According to results of a study by Allianz (Allianz SE – OTCMKTS:AZSEY), a giant German based life insurance company, nearly 30% of women between ages 25-75 who earn more than $200,000 annually fear the proverbial dropping of the other shoe that will result in them living on the street, alone and penniless.

And almost 50% of the women, regardless of their age, income, or marital status, fear becoming ‘bag ladies’. And these are women who run the family household and have a solid career, some of whom earn more than their spouse.

Why didn’t Allianz include men in the study? Well, it seems that while women tend to be grounded, willing to acknowledge limitations, and question themselves and others with a view to learning, men are, um, uh, um … different.

How so? Generally speaking, men make for terrible study subjects on this issue because they are prone to self-delusional thinking. Specifically, men the world over are known to inhabit two primary delusions:

  • Men know where they are going, thus never ask for directions.
  • Financial know-how is genetically programmed into their wiring.

My guess is that if someone ventured to study men on this subject, and were able to somehow, magically, tease out the male animal’s delusionary thought processes, there may come into being a condition known as Bag Man Syndrome, in which men exhibit the same money fears as women. Until that day arrives, we’re focused on women.


CHEWY BIT

For those readers who disagree about the nature of men, please write a letter to the editor (that would be me) explaining the basis of your disagreement, providing proof that you are not delusional, and I will be sure not to respond because, you see, a writer needs latitude and I humbly request that you smile and grant me this latitude.


Deconstructing the Mythical Bag Lady

I don’t claim to know precisely why this sense of impending financial doom is prevalent among women. But I’ll do my best to shed some light on the issue. In this regard, consider the following:

  • Travel through history and you’ll see that women were blocked from acquiring wealth, power and freedom. Today, this oppression continues outright in most countries though in subtler forms in Western countries.
  • Sure, women are now empowered like never before but there is still a ways to go. Economic imbalances persist in North America and Europe with women typically paid less than men for the same work.
  • As a result of taking time out from the work force to populate our planet and care for little ones, women earn less thus save less for retirement.

There are many excellent books on this topic, with the most recent one to make a splash written by Sheryl Sandberg, Facebook Chief Operating Officer, and woman extraordinaire, Lean In: Women, Work, and the Will to Lead – https://www.amazon.com/Lean-Women-Work-Will-Lead/dp/0385349947.

  • We humans become acclimated to our environment. If generation after generation of women are taught that money matters are not their concern, and are not afforded the opportunity to assume authority over financial matters, then over the decades and centuries, this kind of thinking burrows into the subconscious, leading women to internalize a belief that they are limited in their financial ability.

Okay, so if we know how the bag lady myth came about then the question becomes, how is the subconscious rehabilitated and destructive thoughts banished?


ENTER BUDDHA

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Do not allow the words or actions of others to define who you are, especially when those words or actions lead to self-limiting beliefs. Honestly acknowledge these beliefs, then challenge them. If false, discard them and replace with positive self-perception. Changing your thoughts, replacing the negative with positive, leads to confidence and ability.


Reconstructing Your Relation With Money

So if you’ve been plagued by this negative line of thinking, it’s time to stop and investigate why. It’s time to change your relationship with money, open up this particular space, and plant new ideas supportive of financial success and peace of mind such as:

  • There is no mysterious formula to successfully managing money. Read lots, study lots, and go to it, just like any other venture (oh, and staying part of the BuddhaMoney community will seriously increase your odds of success!)
  • Empowering yourself is good for you.
  • Banish fear through planning and saving.
  • If you’re feeling stressed, hire a qualified financial professional to help out.
  • The whole ‘bag lady’ myth and the shoe dropping superstition, let that silly thinking go so you can get on with life and not be dragged down by yourself.

Just so you know, I’m not giving up on Lily. I’m working with her. I’m planting seeds. I’m watering the seeds. I’m hopeful that she’ll one day be able to minimize the irrational money fears that grip her way too tight. And when that day arrives, when Lily rejoices in all that she is and all that she has, she’ll know true freedom.


ps. Dear BuddhaMoney members, this article was published back in January, 2017. It’s posting for the second time results from me encountering this issue over and over, and wanting to do what I’m able to empower people to face this issue, do what they can to lessen the grip of negative emotions, and feel that much lighter in the way they relate to money. 

 

 

Risk is NOT a 4-Letter Word

My father-in-law retired from the practice of medicine a few years ago. During his fifty-year career, not only did he establish himself as a highly skilled and dedicated physician, he also displayed a head for numbers as they relate to investments. And because he was smart enough to enlist the aid of a savvy financial advisor, to plan for the future and nurture his investment portfolio, him and his wife are now enjoying a financially stress free retirement, living a comfortable existence courtesy of dividends and interest generated mostly from stocks and a sprinkling of bonds.

That said, not everyone shares his tolerance for investment risk taking. In this regard, one of his colleagues (let’s call him Dr. Aversion), was more inclined to place his discretionary cash in a bank savings account, earning a sometimes decent, sometimes woeful rate of return. Regardless the amount of interest earned, Dr. Aversion gained comfort from watching his bank balance grow, and he slept well at night knowing his money was not subject to stock market whims and fancies.

Now, keep in mind here that, save for a brief stint in California early in his career, my father-in-law lived and worked in Canada. And in this northern nation, the vast majority of medical docs are civil servants owing to the publicly funded health care system. While they are certainly paid well enough to afford a comfortable lifestyle, the pay is nowhere near the lavish sums heaped upon some State side physicians.

Dr. Aversion too was a Canuck based doc. One who didn’t understand the role that investments would play during his retirement. Who didn’t get that a pile of cash sitting in a savings account generating relatively meagre interest would dwindle once he retired, once his primary revenue stream (i.e., salary) came to an end.

Today, predictably, Dr. Aversion is paying the price for his unwillingness to become educated about investments and the role of risk, for clinging to the illusion of safety represented by cash. A few years after retiring in his early seventies, reality gave the good doctor a cold, bare handed slap. And he sold his luxury home and downsized to more modest accommodations because he needed to raise cash for living expenses.

Now near the age of 80, Dr. Aversion is doing his best to hold steady on the financial front, having finally enlisted the guidance of a financial expert. And though he is not likely to slip into poverty, he certainly will not return to his once financially stress free lifestyle. Though he was a fine physician, Dr. Aversion was an inept steward of his family’s money.

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You Want Success? Embrace Risk

In the investment world, ‘risk’ refers to the probability of losing part or all of your investment. Risk is not, as way too many people view it, the same as volatility. And it’s volatility that turns investors into scaredy-cats. And scaredy-cats make terrible, horrible, no-good investment decisions that most often turn into losses.

You see, volatility is part and parcel of the stock market. It’s simply the stock markets nature, ingrained in its DNA. If you understand this, then you accept the ups and downs and wild rides. Because you are confident that, based on more than 100 years of stock market performance, if you hang on for long enough, the stock market will smile upon you.

Check out the chart below published by Investors Friend:

total-real-26-2016Unlike other assets, stocks go through severe ups and downs from time to time. And investors with a long term horizon know this. They know that media noise heralding the end of the financial world as we know it (think 2007-2009 meltdown), is just that: noise, distraction, media publishing their usual ‘the sky is falling’ nonsense because it makes for good copy, believing readers want to be fed fear.

But if investors can muster the will to stomach the occasional precipitous fall in their portfolio value, they will be rewarded. When? No one can say for certain. Still, I’ll venture out on a limb here and say … it’s only a matter of time.

Let’s use the 2007-2009 meltdown as an example. Global markets dropped what, 40% or so? And for those who ingested a daily dose of Gravol to help calm nerves and restrain the fear impulse from hitting the sell button? Well, these folks reaped juicy rewards.

Check out the chart below (which is current only to 2015; sorry folks, a bit outdated. Given the continued market climb from 2015 through 2017, you can safely add on an even higher return than that shown by the chart):

150825113628-market-good-bad-since-recession-780x439

So, we’re talking more than a doubling or tripling of your money if you invested in 2009. And the way to have made this happen if you’re not the type to buy individual stocks but still wanted exposure to stock markets? Buy passive index Exchange Traded Funds (ETF).

How do you get a piece of the 30 blue chip companies comprising the Dow Jones? Buy an ETF such as the SPDR Dow Jones Industrial Average ETF (NYSEMKT:DIA).

Prefer to focus in on the technology sector? Buy Fidelity Nasdaq Composite Index ETF (ONEQ).

More comfortable investing in the broader market? Consider the Vanguard S&P 500 Index ETF (VFV). With each of these ETFs, your fortune is tied not to one individual company stock, but to all of the companies that make up the stock markets.

With each of these ETFs, your fortune is tied not to one individual company stock, but to all of the companies that make up the stock markets. (chewy bit: I do not own any of these ETFs, and am not recommending them one way or another. However, I do recommend you use these ETFs as a starting point for your research).

 

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Time Is On Your Side … Until It’s Not

On the issue of investing, Dr. Aversion was paralyzed by fear. And while fear led him to grow his cash stash, it wasn’t enough to last him for 20 or 30+ years of living post-retirement. Because today, you’re actually losing money by holding funds in a savings account, i.e., the rate of inflation is higher than interest paid so, in effect, these funds are worth less at the end of each year.

What would have happened if Dr. Aversion had a better understanding of stock markets, was willing to embrace at least some risk during the past 50 years? Most likely, he would not have downsized his home, nor would he be worried about outliving his money.

The huge, colossal, gargantuan, mistake that folks make is paying attention to stock market daily gyrations underpinned by self-serving political and media generated fear.

If we can block this out, if we can educate our self about the true nature of the stock market leading to a clear understanding of what it is we’re doing when investing, if we accept that volatility does not equal risk, and that we should have at least a three, five, ten, twenty or more year investing horizon, then we’ll be just fine.

And with patience as our ally, we’ll get to that place where our money is working for us, a place that affords us a financially stress free retirement not unlike that currently enjoyed by my father-in-law.

 

 

Parents: Discuss Money With Your Kids

I was fortunate to grow up in a middle class home with parents who cared for my needs and occasionally indulged my wants. The cost of stuff, what we could afford, the value of a budget, however, was rarely a topic of discussion.

Was their approach right, in the sense of being helpful, in preparing me to responsibly manage my own finances, and maybe pass along a nugget or two to my kids? Before answering this, let me express my unequivocal gratitude for the foundation of love, comfort, and security provided by my parents.

That said, ahem, parents of all stripes would be wise to reconsider the benefits, or lack thereof, of this non-constructive approach, otherwise known as ‘our-parents-didn’t-discuss-money-with-us-so-we-don’t-discuss-money-with-our-kids-although-we-don’t-really-know-why-it’s-just-the-way-it is.’

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Behavior Modeling

As kids, our primary behavior models are our parents. Like ducklings, we imprint upon them, copying their behavior simply because this is what we’re wired to do.

Whether we know it or not (usually not), we learn their values, internalize their ideas, even subconsciously choose a mate resembling, in appearance and/or character, one or another parent (possibly scary, but often accurate). So why shouldn’t we also copy their relationship toward money and the silly silence and secrecy surrounding money issues?

The thing is, we do. Other than telling the teenage me that I spend too much, and that money doesn’t grow on trees (an oldie but a goodie), my family didn’t have money conversations.

Even as an adult, well into my forties and my parents in their seventies, a time when estate planning issues should be front and center, lips remained sealed. Their net worth, who would assume responsibility for their investments should one or both of them become impaired, plans for distributing assets post departure for the purely spiritual world, none of this was shared.

Thankfully for me and my kids, I don’t accept that imprinting is permanent. If you want to change your ways, with persistence and effort, you can escape generational hand me downs.

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Break The Mold, Bear The Fruit

Here’s the question to ask your self: in staying silent about money issues, who benefits? And the answer is … no one.

As for kids and teens, they are wayyyyy savvier than you may credit them. It’s not difficult to connect the dots, piece together how much dough the parents have. I mean, if they’re so inclined, kids can go online to check your assessed home value, determine the cost of family car(s), piece together how much you’re dropping on family vacations, furnishings, clothes, etc.

And the middle-aged adults with aging parents? If it’s easy peasy lemon squeezy for kids to roughly calculate family wealth, then the +30, +40, +50 folks can do it that much easier. The point being, your wealth isn’t really much of a secret. And if you insist on staying the course, buttoning up money issues because you get all twitchy and squirmy and sweaty when even thinking about having THE TALK with your kids, oh boy, you’re missing an excellent opportunity not only to help them break the money taboo cycle, but to teach your kids about money.

Of course, talks should be tailored to a kids age. For example, more than once my 11 year-old son has asked how much money I have. In kidspeak, this means, ‘hey Dad, tell me how much you’re worth and I’m hoping you toss over a big fat round number because that would be so cool’.

So I tell him, $1,000. But he doesn’t buy it. Eventually, because I see no harm in playing the game, I go up to $50,000. He still doesn’t buy it but this is a huge number to him, one he can’t really place in any sort of perspective, and he’s thinking I may be getting close to the truth. Regardless, this isn’t information I share with my kids because in no way would it benefit them at this point in their life.

In addition to the cost of groceries, clothes, and restaurant meals, I do share the cost of a family vacation. And I share all of these expenses because I want them to know that life costs money, that I work hard for money, and that I do my best to make responsible spending choices, ones that enhance the value of our lives.

Ultimately though, it’s not about me. I want the kids to know that independence, grounding and self-esteem come from personal accomplishments, from work, not from being on the receiving end of gifts.

And when we work and earn money, our job is to then consider choices that life has to offer. To make good choices. To factor cost into our choices. And to know that we don’t get everything we want, that we don’t necessarily benefit from ‘having it all’, and that we’re successful when we learn to compromise and maintain healthy perspective on money issues.

Besides, one day, the Bank of Dad will close, or at least significantly reduce its operating hours, and the kids will be adults earning their own way and responsible for making their own money related decisions. And if I can help them along the way, encourage them to weigh the pros and cons of an intended purchase, and reflect upon how each purchase ties into their personal values, then I’ve done my job well. images


Down The Line

I have two theories as to why older adults, those +70, avoid money talks with their kids. First up is the money taboo, ingrained, not changing. Second is the fear of mortality. The thinking goes something like this: ‘if I talk about my will then I’m talking about my own death and that’s just too much for me to handle because I don’t want to believe I’ll die’.

From a nuts and bolts viewpoint, if you want to minimize stress and headache for your kids, then find a way to look mortality in the face. Because, like the song goes, ‘we’re here for a good time, not a long time.’ And when we get our house in order in preparation for our unavoidable departure, we’re doing our kids a huge favor.

Once kids know approximately how much (if any) money they will receive as beneficiaries, they can plan how to make use of these funds. That said, there’s the common concern that some kids will place their lives on hold, waiting for an inheritance. Or that an unequal distribution among the kids will cause resentment and family discord. These are real concerns, no doubt. And that’s where open discussion comes into play.

It may be tough having talks like this, for parents and children alike. But hey, that doesn’t mean they shouldn’t happen. The talks serve to remove the destabilizing element of surprise, give voice to all concerned, clarify issues, and support realistic expectations all of which make for a smoother transition of wealth from one generation to the next.

So all you parents out there, me included, know that the responsibility to talk with your kids about money remains until the sun sets because the job of being a parent isn’t over til’ it’s over.

 

 

 

Ozark and The Meaning of Money

It’s rare for a pop culture show to get to the heart of a financial issue better than the vast majority of so-called financial experts. And at the beginning of the first episode of the Netflix show, Ozark, which revolves around a financial planner caught up in a money-laundering scheme gone bad, that’s exactly what happened.

Now, I’m not here to tout the show (full disclosure: I’ve watched only one episode and I’m hooked) but you may want to watch at least the first three minutes of the opening episode. This is when the lead character, Marty, played by Jason Bateman, launches into a narrative that goes something like this:

“50% of all American adults have more credit card debt than savings.

25% have no savings at all.

15% are on track to fund only one year of retirement.

Is the American Dream dead?”

If these statistics are not entirely accurate, I’d say they’re definitely in the ballpark. For most Americans (and increasingly, Canadians), I’d say the dream of material wealth, of being comfortably middle class, is on life support, if not dead.

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Marty’s Take On The Meaning Of Money

Marty goes on to say that most people have a fundamentally flawed view of money. Contrary to conventional wisdom, Marty says that money does not represent security, happiness or peace of mind. Nor is it a unit of exchange whereby we exchange money for a good or service.

I listen to this and I’m thinking, where is this going? What is money if not a unit of exchange or source of security? Marty continues:

“At its essence, money is the measure of your choices.

Meaning, how much we accumulate, whether in debt or savings, is a direct function of our work ethic. And work ethic refers to our willingness to invest in our future, our family’s future, by employing patience, frugality and sacrifice.”

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Responsible Choices Leads To Freedom

Whether Marty’s discourse rings true for you or not, I’m completely on board with the idea that we may be measured by our choices. And in the money management universe, if our course of action is irresponsible, if we let impulse, emotion, envy and greed steer decision-making, then we pay a price.

Maybe that price is a life of financial struggle and attendant stress. Maybe the price involves never feeling fully independent owing to debt. Maybe the price is delaying retirement indefinitely because our savings are inadequate or non-existent, and we just won’t be able to get by if we stop working. Maybe the price is not being able to give our kids as much help as we would like when it comes to higher education. Whatever the price may be, it’s a cost to our self and/or our loved ones.

I’m not trying to go all doom and gloom here. Rather, I’m pointing out what you could say is the in-your-face-obvious: our choices matter. And too many people choose to charge it, to run up credit card bills because ‘hey, this is a free country, I’m entitled to buy what I want, I’m entitled to have the same stuff as my neighbor’.

Well sure, you can make that choice, you can load up as many credit cards as financial institutions are willing to offer. And if you do so, know the consequences of spending beyond your means: financial holes resulting in stress, relationship damage, impaired self-esteem, to name a few. These are the result of irresponsible choices. Choices that do not lead to any sort of freedom.

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Cut The Card

I was in my early twenties when I was approved for my first credit card. And wow, was I excited. I had achieved another adult marker. Pay for stuff with a plastic card. How cool is that?! Oh, and a few years later, when I got myself a Gold card, well, look at me and my newfound status! Oh, oh, oh, right … and when I received a statement showing the interest I was obligated to pay because I had not paid off the balance in full … um, uh, that’s what it took to get me to stop and think that I’d been hoodwinked, or maybe I just didn’t bother to fully inform myself about the pros and cons of the uses of plastic.

Look, a credit card is a convenient way to pay for stuff. Nothing more. Forget about the airline miles, the cash back, and any other perk peddled by financial institutions. Ignore the gold, silver and platinum marketing pitches appealing to status, ego, and an illusory sense of belonging.

Most people can’t handle the temptation to spend more than they have. And financial institutions know this. They know that plastic doesn’t really feel like money so you’re more apt to use a card than to spend the $20 in cash in your pocket. And they really don’t care. They make money from you; that’s their sole purpose. Your debt is your problem.

So here’s what you do: you choose to change your spending habits. You choose to pay via debit card, cash or PayPal (online) whenever possible. This will minimize, with the goal being to eliminate, all credit card interest. Know how else you’ll benefit? Impulse buys will go way down, you’ll spend less and save more.

To give your self a hand, cut all your cards but one. That’s right, hold only one card, a Visa or Mastercard. You don’t need anything more. And get one of the cards that doesn’t charge an annual fee. Sure, no fee cards don’t offer rewards but so what? Rewards exist to charm you into unnecessary spending. Life will go on just fine without counting any kind of credit card rewards.

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What’s The Problem?

To effectively tackle the credit card problem, to permanently relegate overspending and interest payments to the proverbial dust bin, take a look in the mirror. Review your total spending during the past six months and review credit card charges. In other words, look at where your money is being spent.

What can you cut? What was frivolous? Did you spend too much on one or more items and, if so, why? Was the purchase worth it? If so, why? What’s the cost other than financial? How does your spending impact short term paying the bills each month and long term planning for a life of financial freedom? What charges could you pay with via cash or debit card?

Look at these issues. Wrestle with them. Find answers. Don’t ignore, don’t minimize the importance, don’t stick your head in the sand and complain. This is simply not the BuddhaMoney way. Instead, recognize overspending, recognize mistakes, take responsibility, and make it different going forward. Make the choice to manage your money more effectively, in a way that bolsters your current assets and your long term plan to have your money work for you one day (through investments) rather than you working for the money.

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Make The Right Choice

The right choice means using credit cards only when absolutely necessary. And it means paying off credit card debt. It means figuring out a realistic plan for eliminating debt, whether you owe $500 or $5,000 or more.

Usually, the most effective, most realistic way to pay off debt is little by little, step by step. Of course, in doing so, debt won’t disappear overnight. And that’s just fine. That’s reflective of this little thing called patience. Together with frugality and sacrifice, this is what it takes to forge a winning path forward, one that does NOT include you among the 50% who have more credit card debt than savings; one that does NOT include you among the 25% who have no savings at all.

Instead, it’s a responsible plan, one that takes into account todays needs, and sacrifices some of todays wants, all so you can live with a little more freedom today (i.e., less spending = less debt = less stress), and a lot more freedom for the future you.

 

 

Drive a Bargain, Save Money

Looking to buy an 8 x 10 rug for our family room, I visited a local rug seller. Before doing so, I knew full well that the rug selling business has a bizarre business model: first, rugs are marked up by a ridiculous amount; then the merchant touts a ‘50% off sale’, ‘going out of business sale’, ‘liquidation sale’, ‘time sensitive once in a lifetime sale’ – any promotional tactic the purpose of which is to drum up foot traffic. It’s amusing really; this particular rug store has been ‘going out of business’ for the past four years running.

After finding a rug I liked, taking note of the wink, wink, nudge, nudge list price and ‘sale price’, I asked the owner if he was willing to accept a price 25% lower than the ‘sale price’. Knowing what I do about the rug business, that there are fat profit margins resulting from buying rugs cheap in places like Afghanistan and India (I won’t get into the child labor issues here), and selling to naïve North Americans at hugely inflated prices, I was confident that a lower price could be negotiated.

But I turned out to be wrong. The owner looked at me as if I were from another planet. A hostile planet at that. Who did I think I was?! Daring to ask to pay a price less than what is written on the price tag! By the way he reacted, you’d think asking a question is an unforgivable crime.

Still, I figured he was posturing: this was the owner’s opening volley in negotiations. But after he walked away from me, effectively communicating that our short-lived interaction had ended, I realized I misread the situation.

Here was a guy steeped in North American retail culture. A culture that has effectively trained consumers to pay list price. Likewise, retailers have been trained to expect list price to be paid. And if the consumer doesn’t like the price, then there’s only one option: leave the store and go look for a lower price elsewhere.

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Florida Flea Market

I was 17 years old the first time I struck a deal with a merchant. In Florida with my parents, we visited a flea market. One of the stalls was selling brand name knock off watches with minor defects (i.e., the tiny Gucci name was changed to Cucci – who would know the difference?).

I saw a watch I liked and asked how much. Ten bucks I was told. Before I could reach into my pocket for the money, my father pulled me aside.

“Offer him $6,” he said.

“What do you mean? The guy said the price is $10,” I naively responded.

“Listen, he expects you to negotiate. Offer him $6. Haggle with him. See what you can do.”

This was all unfamiliar territory to me. But with my father’s encouragement (and a smile on his face, telling me to relax and have fun), I started the process. After a few minutes of back and forth haggling, the merchant offered the watch for $8. Thinking I was doing well, and that eight bucks was a good deal, I returned to my Dad for guidance. He told me to take $7 out of my pocket and place the money in the merchant’s hand.

“Why?” I asked.

“Because $7 is a fair price, and because when someone is putting money in front of you, in your hand, it’s difficult to resist.”

He was right. The watch was mine for $7. And once the negotiating process was over, I felt both a sense of relief and satisfaction. I mean, after I got over my initial trepidation, I saw bargaining as a game to play. As for the merchant, he still turned a healthy profit as his cost for the watches was a whole lot less than what I paid, so I learned afterward.

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Bargaining: The Third Option

Negotiating on price is not limited to Florida flea markets or Middle Eastern bazaars. The option to negotiate presents itself in many situations but we don’t know this unless we ask. And when we ask, and find a willing merchant, well then, say hello to a lower purchase price that translates to savings and more dough in our pocket.

So who can you bargain with? I’ve bartered with big telecom companies (i.e., cell phone), department stores when buying large appliances and mattresses, even the Gap when buying clothes for my kids (they threw in extra discounts and coupons for future purchases). Whatever the store, if I see an opening, I try to drive through.

As for retailers who look at you as if asking for a lower price is somehow not playing fair, or as if you’re speaking a language known only to Klingons … that’s their issue. If they’re willing to lose a sale, lose a customer because their ego is bruised, so be it. It’s a competitive landscape out there and you, the consumer, may always take your business to the competitor most willing to meet your terms.

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Big Ticket Item No. 1: Automobile

You absolutely need to know that bargaining is expected when shopping for an automobile.

Car dealers typically shoot for a 10% profit. Meaning, there is 10% wiggle room, with most dealers willing to accept a 3-4% profit. But they’re not going to just give it to you! The dealer’s starting position is that you pay list price (Manufacturer’s Suggested Retail Price – MSRP). And if you don’t ask for less, if you don’t even try to bargain, then that’s what you’ll pay.

If you’re willing to give bargaining a go (highly recommended) when purchasing a vehicle, start by grinding down price, with your opening offer being 10% lower than MSRP. The dealer won’t accept such a low offer because they wouldn’t make any profit. But setting your opening bid low gives you room to move up in price and the dealer room to move down to meet you somewhere around 5% less than MSRP.

If you’re not getting as much of a price reduction as you want, lean on the dealer to throw in cash rebates or other incentives. When I bought my last car, and I wasn’t entirely satisfied with the price being offered, I caved to the dealer’s price in exchange for a few goodies, including car mats, trailer hitch, roof rack cross bars and a car box.

And keep this in mind: you always have the option to walk away. Don’t underestimate this option. It’s powerful. It’s a tough business, car sales. Salespeople want your business, and they’ll usually do whatever is reasonable to close a sale.

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Big Ticket Item No. 2: Home

After my recent post about buying a home, I received a comment from a reader saying that people need to know, in a buyers market or balanced market, how much under the list price do you initially offer.

Unfortunately, unlike autos, there’s no one size fits all answer. That said, here’s a few pointers:

  • Upper Limit. Know what you can afford to pay and do not exceed that number, no matter how excited you are about fulfilling your home buying dream (because if you exceed your limit, you’ll dig your self into too much debt, and the dream morphs into a nightmare, or at least undue stress).
  • Do Your Homework. With the upper limit number in mind, as well as the list price, have your real estate agent give you the stats, i.e., sale price of similar homes in same neighbourhood during the past few months, and all other available research relevant to home price and current market activity. And do your best possible sleuthing to try to find out the seller’s situation.

For example, if the seller has already bought another home, and that transaction closes in two months, then you know seller is feeling the heat because they need money from this home to fund their future home. Otherwise they’ll be carrying all the expenses of two homes. Under a time crunch, seller may be more willing to accept a lower offer.

  • Don’t Be Reasonable. Right. Not something you hear everyday. But in negotiating, your job is not to look out for the other person. Your job is not to be liked, not to be thought of as a good guy/gal by the seller or their agent. Nope. Your job is to get the lowest price possible. It’s up to the seller and their agent to look out for themselves.

So start with a low ball offer. And don’t fret that an unreasonable offer equates to showing disrespect. It’s not. You can show kindness and consideration to the seller AND make a low offer. One does not cancel out the other.

Then wait for the seller’s reaction. If they ignore the offer, then you increase the bid by a small amount if you’re serious about purchasing. If they counter-offer, then you know you have a seller who wants to get a deal done, even though the lowball bid won’t fly.

Here’s a concrete example. A friend of mine (HomeBuyer) was looking to purchase a home for him self and his family. They found what appeared to be the perfect fit. The home was listed for $595,000. After four months on the market, the seller dropped the price to $505,000. Clearly, a sign that they wanted to sell.

Armed with detailed market research, knowing there were no other offers and the seller was ‘motivated’ (as they say in the trade) HomeBuyer offered $460,000. Seller balked, saying that Homebuyer’s bid was a slap in the face.

Homebuyer tried again, increasing his offer to $480,000. Though Seller wasn’t thrilled with the revised offer, they saw that HomeBuyer was for real and countered at $495,000. Homebuyer, asking to split the difference, made a third offer of $487,500. Seller refused, saying they were already taking a bath if they sold at this price. Still, they gave a little more, reducing the ask price to $492,500. HomeBuyer, believing it wasn’t wise to push any further, accepted and moved into his new home a few months later.

Now remember, Seller could have exited negotiations at any time. But they didn’t. Likely because they were able to alter their perspective, i.e., the home’s value may have been $595,000 to them but in 4+ months, no buyer had agreed with that valuation. So they had a choice: wait for a higher offer or take what was on the table.

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When You Try, Sometimes You Get The Price You Want

You won’t ‘win’ every time you step up to negotiate. That said, you’ll never get a price reduction if you don’t even try. So try. See what happens. Experience the thrill (is it just me?), the fun, of bargaining, and odds are you’ll be saving yourself money.