Money and Such

House Appraisals: How They Get It Wrong

2009-11-24T09:00:00.000-08:00

When we were making our ill-fated attempt to buy a house a couple of months ago, as part of our mortgage application process we had our target house appraised. The appraisal came in about $40K higher than the sale purchase price on which my wife and I agreed with the seller. How strange is that?

Unlike the stock market, where all transaction prices are immediately made known to the public at large, real estate is one of those inefficient markets, where prices are not immediately apparent. To add complexity, prices are very much location based, such that identical houses can fetch wildly different prices only a few miles from each other. In addition, months can pass between similar transactions in a close enough location. With all this in mind, a real estate appraisal strikes me more as black magic or art, than science. Yet, the appraiser provides a POINT appraisal. He doesn't say "the house is worth between 0.9X and 1.1X", he says, "the house is worth x". An exact dollar figure... pseudo-scientific accuracy... delightful.

Clearly the bank needs an appraisal to make sure that buyer and seller aren't in cahoots (yeah, I said it) to defraud the bank. Buyer and seller could, for example, agree on a much higher purchase price than the true market price and then take the money and run, leaving the bank to hold a crappy asset.

With all of that in mind, it seems to me that the best way to determine the market value of a house is to look at... the price the buyer and the seller have actually agreed upon. Our appraiser gave the house a value that was $40K above the agreed upon price. If this appraisal was true, would the seller have been willing to sell the house to us for a lower price? Wouldn't other buyers have come in to give a better offer? Clearly the seller agreed to take that price because he couldn't get anyone to bite at a higher price.

It seems to me that appraisers should focus primarily on two things: (i) is the sale an arms-length transaction, i.e. are the buyer and seller each truly trying to get the best price that they can for the house (each from their own perspective) or are there some unique circumstances (fraud, family connection etc.); and (ii) is there something that makes the property uniquely valuable to the buyer to make him willing to pay more than others would for the same house (e.g. maybe the house belonged to his great-grandfather). Unless something fishy is going on, the sale price IS the market value for the house.

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The News Driven Economy

2009-11-23T09:00:00.000-08:00

In recent months the economic situation has gotten decidedly better. Volatility in the market - as measured by the VIX index for example - has decreased considerably, nevertheless the economic headlines are still screaming at full blast. It's as if the news outlets are run by vocal manic-depressives. One day the recovery winds are blowing strong, the next day hopes are dashed and everyone is supposedly heading for the hills.

The best examples of manic-depressive economic news reporting can be seen on days when the stock market starts low and ends high, or vice-versa. I typically check the CNNMoney website a couple of time throughout the day, and often find that the very same news is interpreted in opposite directions depending on which way the stock market is heading at that very moment. The lack of consistency as the headline is changed but the story itself includes only minor corrections is amusing.

These days I am reading The Black Swan, by Nassim Taleb. A thought provoking and interesting read, even if it's written in a somewhat self important and needlessly complex way. It looks like I am not the only one who is bothered by these inconsistencies in the economic reporting. Taleb has been tracking them for years. In his book he gives the following example from reporting by Bloomberg news, relating to the capture of Saddam Hussein in 2003:

"US Treasuries rise; Hussein capture may not curb terrorism"

Followed 30 minutes later by:

"U.S. Treasuries fall; Hussein capture boosts allure of risky assets"

The same fact interpreted in exactly the opposite way, depending on the movement of the markets (in this case treasury prices).

Taleb ascribes these inconsistencies to the fact that people demand an explanation or narrative to facts, and to the news outlets' wanting to deliver what their customers want, even if they don't actually have anything to deliver. That's probably true, but I think that no less of an explanation is the fact that drama and crisis increase viewership & circulation. How many people would tune in to hear that just another random day went by?

Be that as it may, this rampant inconsistency and tendency towards drama makes financial news a particularly poor source on which to base economic and investment decisions, and it's not limited only to electronic media, these tendencies pervade printed financial media as well. The media tends to report that things are really awesome when they are merely OK, and tends to report catastrophes and when reality calls for some mild showers. That also happens to be true for Weather Channel reporting, but that's a topic for another day...

This is yet another reason, if you needed it, to have your own well thought-out economic and financial plan, and to stick to it.

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Spending My Bonus: It's Tech Time!

2009-11-16T09:00:00.000-08:00

I have made my big bonus decision. A few weeks ago I wrote about how I got an unexpected bonus and was trying to make up my mind about what to do with the windfall. The decision has been made: an upgrade to our computer and home theater system.

As a first step, we bought a fully loaded new PC: quad-core Intel processor, 9 GB of memory, a 1.5 TB disk, 2.7 inch monitor and a bunch of software. $2200 from Costco, all in. Really, really expensive, yes, but given that our previous computer lasted for 8 years, and that we hope to get the same mileage from this machine, that's not a completely reckless decision. This computer will also play an important part in the next phase of the plan: connecting our TV to the Internet.

For months I have been plotting a wireless assault combining TV, media server, computer & Netflix. Netflix now has a massive collection of movies and shows that can be instantly streamed over the Internet. The only problem: connecting the TV to the Internet has been a challenge. It turns out that this can be done in several different ways: certain TiVo machines, Blue Ray players and XBox consoles can be wireless connected to the Internet, and be used to stream content to the TV. That's the sole missing component in my scheme to upgrade our home entertainment system. I'll probably pick the TiVo or XBox and my master plan shall be complete! Muahhh-ha-ha-ha-ha..... Wow, that's almost as good as taking over the world...

One other nice thing about our new fancy computer is that it has a built-in TV tuner and DVR which I intend to connect to Comcast cable. That way our 1.5TB hard disk will become a massive new DVR.

A final note on the new computer: this is a Windows 7 machine and so far I like this new operating system. Some problems with software that's not yet compatible with the new operating system, but generally speaking, Microsoft did a good job making sure that accessories and most software install and operate smoothly. Very nice. Ironically, the only problem we experienced with migrating to the new machine has been with Apple... migrating my iTunes, iPod and iPhone to the new computer has involved days and days of work. Because the old computer crashed and we had no access to the old copy of iTunes, I had to recover my music from our home back-up. This process resulted in the loss of all my playlists, song ratings and customizations. As I said, it took me DAYS of work to recover, and all this while my iPhone retained a PERFECT record of all my data that could have been easily recovered and migrated to the new computer if Apple cared at all about it's customers. I love Apple's products, but abhor the company and it's philosophy. What a pointless nightmare.

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The Best Job You Can Apply For

2009-11-10T09:00:00.000-08:00

The best job you can apply for is one that doesn't exist yet. Many people looking for a job make the bad mistake of basing their hunt on job postings. This is a great strategy if you want to minimize your chances for landing a job and to maximize the number of interviews you get without actually getting a job offer. Think about it: if you see a job posting, thousands of other candidates are seeing the very same posting. In these days of high unemployment, you know that each job posting garners dozens or even hundreds of applications, many of these by well qualified candidates. Your application, if it is seen at all, is considered among many others and should you be lucky enough to get invited to interview for the position, you will be one of several candidates, each striving to be the last one standing at the end of the process. Too many steps. Unattractive odds.

There is a better way. How about a job that is tailor-made just for you? Seems like too much to ask for in an economy where jobs are scarce? Well, I got news for you. This is a tried and true strategy that works a lot more often than you think. In fact, this strategy worked for me twice in my career - my current job and my last one. Unfortunately, getting such a job involves the "N word". That's right, networking. I know everyone says it's necessary, and pretty much everyone hates doing it, but this is a special kind of networking, it's networking at the top.

Here is how it goes:

Step I - pick an industry or market

Step II - make sure you understand it well (ideally, this is a market you already know)

Step III - network your way into meeting CEOs in this industry

Step IV - make your pitch

Of course, the trick is step III - CEOs are busy people and are not sitting around waiting for your call. In fact, the only viable way to meet a CEO is to be introduced to one through a mutual acquaintance. That's where the whole networking thing comes in. Don't even think about cold calling or spamming. That's not going to get you hired.

Why a CEO? The good thing about a CEO is that he has no boss (technically it's the board of directors, but they don't deal with such things). If he likes you, he may very well create a position for you where none existed previously. Presto, a position out of thin air. What's more, the position is yours. You don't need to interview against hoards of qualified applicants. Another possible outcome is that the CEO will refer you to a member of his staff to interview with them. That's what happened to me in my previous job. After meeting with the business unit CEO for a networking meeting, he liked me enough to recommend me to his VP of Marketing. A recommendation from the CEO is almost as good as an offer letter... almost...

By the way, before the angry comments start flying my way, I am not against applying for jobs you find on the Internet. Someone has to be getting all those jobs, right? All I am saying is that this is a very competitive and impersonal process and that many applicants (myself included) feel that it's difficult to shine or stand out from the crowd in an e-mail application. I have never gotten a job from an online post. Your results may vary.

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Efficiency and Effectiveness in Hunting for a Job

2009-11-05T09:00:00.000-08:00

Alpaca is still looking for a job - it's been a few months now, which is not surprising in these economically challenging times. On Tuesday I met for breakfast with an old friend who works for a venture capital firm. We were chatting about our families and I mentioned Alpaca's job hunt. My friend immediately asked what kind of job she was looking for, and after I explained he asked me to forward her resume to him by email. I did, and a few hours later he sent an e-mail introducing Alpaca to all the partners in his well respected VC firm. Later that day, one of the partners sent Alpaca an e-mail. Yesterday they spoke on the phone and a few hours later he introduced her by e-mail to the CEO of one of their portfolio companies that had recently raised funds and that was looking for help on the marketing side. I don't know if this will end in anything concrete, but it's definitely a step in the right direction, yes?

Saying that networking is the key to finding a job is an old cliche, but that doesn't make it any less true. Which belatedly brings me to the topic of this post: in business school I took a class in building distribution channels. The professor explained that making your sales targets is largely the function of two parameters: (i) the efficiency of your sales channel; and (ii) its effectiveness. Efficiency is the number of customer contacts you make - or how many sales calls you make. Your effectiveness is a measure of how successful you are in converting each customer contact. Calculating your success is a simple multiplication exercise: how many customer contacts you have, multiplied by your success rate with each contact.

Today it struck me that success in a job search is subject to the exact same performance metrics. Your success is a combination of the number of job interviews you land (or the number of random networking contacts you make), and of your ability to convert those interviews (or random networking contacts) into job offers.

The implication for this is simple: you just need to be out there and meet with as many people as possible. Even if you are a particularly poor batter, if you take enough swings sooner or later you will hit a home run. The important thing is to keep swinging no matter how many times you miss the ball.

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Imaginary Personal Finance Cages

2009-10-30T09:00:00.000-07:00

Once again I am on a business trip, this time I am visiting Texas. Yesterday I went out to dinner with a colleague in a local restaurant and we got into a conversation with our waitress - who happened to be on her first day on the job. The conversation lasted about 5 minutes, but we learned some very interesting thing about her which I wanted to share with all of you.

Our waitress, a nice woman in her late 20's, whose name I don't remember, is an Illinois native, but she lived in many places around the country, including South Carolina and now, Texas. She has a college degree in "culinary arts" and a passion for wine. Before moving to Texas, she was thinking of moving to California and to work in the wine industry but decided that this was too risky, and instead moved to Texas where she "has some family". Her dream is to go to Italy, travel the country and experience the culture and the people. I don't know this for a fact, but I got the impression that our waitress is not married, and I am pretty sure that she does not have kids.

My colleague and I were perplexed. I asked her why she's not chasing her dream? Why not go to Italy? Her reason: she doesn't have the money. My response to that was "why don't you go to Italy and work there?" After all, if she can be a waitress in Texas, she can be a waitress in Italy as well. She explained that she wants to go to Italy when she has enough money to experience the country and its culture without being worried about every dime she spends. In a different part of the conversation, she mentioned that the restaurant was paying her a salary of $2.25 / hour, not including tips.

I am not going to sit in judgement on a hard working waitress, but both my colleague and I were amused by her attitude. I am in my late thirties and my colleague in his early forties. Both of us traveled the world extensively, on tiny sums of money. Backpacking and hitch hiking our way across continents, when we were more or less the waitress' age. I didn't work during these extended trips, but I met many backpackers who did. And what better way to experience the land and its people than to live among them? We both recall those times as some of the happiest in our lives. For me these were times of adventure. Of freedom. Of peace of mind. Imagine waking up in the morning in a strange part of the world, for months at a time, with the only thing on your mind being the next big surprise that is waiting for you around the corner.

I compare those times to the life I lead today, tightly constrained by the daily necessities of raising a family and nurturing a career, and I marvel at the adventures I had. I am tempted to look at our waitress and wonder at the imaginary personal finance cage that she put herself in. Not pursuing your dream until you have the money!? "Break free", I want to shout at her. From my vantage point it looks like the barriers standing between her and her dream are all in her mind. But then I wonder whether someone with a different vantage point could say the exact same thing about me. Even though those cages exist only in our heads, the barriers we set-up for ourselves govern our lives.

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Home Insurance: The Big Picture

2009-10-29T09:00:00.000-07:00

As part of our ill fated house purchase late this summer, we did a lot of thinking about home insurance policies. A truly riveting topic, to be sure. Nevertheless, we discovered a few interesting things about the subject:

Most home insurance companies offer about the same rates for the same coverage. This is not terribly surprising when you think about it. These guys' jobs is to estimate risk and then to price their plans a bit higher than the expected pay-out, such that they generate a profit for their companies. Since this is an extremely competitive market, prices should gravitate to more or less the same level, and they more or less do.

The biggest impact on your home insurance premium seems to be your deductible... that stands to reason as well. The insurance companies are in the business of making money. If you can sue them for every little thing that goes wrong with the house two things happen: one, you are more likely to sue. Small things go wrong all the time. Second, when you sue, they not only incur the cost of paying you for your loss, they also have a considerable administrative cost. However, if you are willing to take a higher deductible, things look much brighter from the insurance company's perspective: you are less likely to sue and you are less likely to be able to manufacture false claims. In addition, the insurance company knows that you are motivated to reduce the likelihood of damage, since you bear a larger percentage of the cost.

The difference in insurance premiums is dramatic. We found that by increasing our deductible from $2,500 to $5,000 we could roughly double our liability coverage for the same premium.

My philosophy about insurance is a simple one: you insure only risks you cannot afford to bear yourself. The window is broken? No problem. Repair it yourself. You don't need insurance coverage for that, and you certainly don't need to pay for the insurance company's profits. However, most people (ourselves included) can't afford to replace a entire house lost to major disaster. That's what insurance is for.

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How I Almost Lost My Job

2009-10-27T09:00:00.000-07:00

About 18 months ago I got a new job. I left a large, established technology company, for a small start-up in the same field. There was a certain amount of trepidation involved in leaving a solid company for a tiny one with only a few months of cash in the bank. Last week my decision was vindicated, in the most nasty of ways. My former company eliminated my old position. In fact, they eliminated the entire team that I ran.

OK. I admit it. That wasn't even close to my losing my job. Still those cuts hit close to home. Some good friends of mine lost their jobs, in what is a very nasty job market.

I believe that I would have kept my job, had I stayed with the company. I had very good relationships with my management and I believe that they would have found a new role for me in some sort of a re-org scenario, but I can't help but feel that I made the right decision to take a risk and move to my current position.

There are a couple of lessons to be had here. First, no job is safe in today's corporate culture. Next time you have any feelings of loyalty or warmth towards your employer, remember that those feelings only go in one direction. If the need arises, your company will let you go in the blink of an eye. I am not saying this in a pejorative way. In fact, just a few weeks ago I had to let someone go in my company. However, what I am trying to say is that "every man for himself" is the reality in today's business climate, and I don't know that it was ever different.

Second, job security is a very ephemeral thing. Some of the financially strongest companies in the world are laying people off, left and right. Some small businesses and companies are retaining their employees and are even hiring. Big business is such an impersonal thing. You could be doing a phenomenal job, but if someone at the top decides to lop-off a business unit, you would lose your livelihood just as the slacker in the next cube would.

At the end of the day job security exists no-where in corporate america today. I believe that a new term is needed: Career Security. It's not about keeping your current job, it's about making sure that if you do lose your job your long term earning prospects are not diminished. Career security is about recovery and resiliency more than it is about maintaining a specific employer.

I think there's a book in there somewhere.

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Are You an Up Day Addict?

2009-10-22T09:00:00.000-07:00

I have noticed something interesting about myself: I am more likely to go into Quicken and check the state of our finances on days on which the stock market does well. I am an up day addict. It's not that I make investment decisions or change our financial strategy based on the vagaries of the market, but I am just loathe to look at the paper losses that accumulate on days in which the market goes down.

During the height of the financial meltdown, I kept myself away from Quicken for days at a time. I would check stock quotes online semi-obsessively, but I would not go into Quicken to tally up the damages. Since the market started heading back north in March, I have been turning to Quicken more often, taking pleasure from the fact that the losses were diminishing at a breath-taking pace.

You could look at this in two ways, one good, the other not so flattering. You could say that I am reducing my level of anxiety by not checking the Quicken tally on down days, and thereby lessening the risk of impulsive action that would hurt us in the long term. You could also say that I am too squeamish to face reality. I suppose you would be right in both cases. Nevertheless, at the end of the day, what counts are the real steps that I take (or not take) in response to the data which Quicken so graciously gathers for me, and on that front I am proud to say that squeamish or not, I was able to stick to my plan so far.

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Credit Buyers are Undisciplined Consumers

2009-10-21T09:00:00.000-07:00

Buying things on payment plans is an insane idea. I know, what I am saying is practically un-American, but nevertheless that's where I stand. A great example of that all prevalent insanity is car payments. A car is the classic depreciating asset - you buy it today and it's value can only go in one direction: down. However, tens of millions of Americans buy their shiny, cash draining machines on credit, burdening themselves with financing changes and negative cash flows. Some would say that they have to buy a car on credit because they can't afford to buy it straight out. If you can't afford to buy your car with cash, you can't afford to buy it on credit either. You can't afford to buy that Lexus? Spend $8K and buy a second hand compact car. Believe me, it will get you to work and back, just like that fancy car would. Yes, I know, you won't look as cool, but think of all that cash rattling in your piggy bank.

Are all payments bad? Of course not. Credit is a good thing if it is used for the right things, and there are primarily two types of things that are worth buying on credit: (i) appreciating assets (or at least ones that are not expected to lose value) - a house is a great example that falls into this category; and (ii) assets that generate a positive cash flow after the financing charges - for example, a profitable business.

Financing consumption through credit payments does not make your consumption more affordable, it simply robs your future self to pay for things you want today. Show me a payment buyer and I will show you an undisciplined consumer.

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Our House Purchase Fell Through

2009-10-19T09:00:00.000-07:00

Well, we have terminated our house purchase contract. This is very disappointing, but it was the right thing to do. How did we get to this point? It all boils down to one thing: the seller did not disclose to us that at the time we signed the contract he had a firm lease with a tenant. While at some point the tenants supposedly expressed a willingness to move out, there was never a firm commitment with a firm date.

The sellers and their agent are clearly the bad guys in this story. The tenants did nothing wrong - they were supposedly willing to cooperate, but understandably were not willing to give up the house before they found a different place to rent. Can you blame them? I can't. The idiot sellers actually threatened to initiate eviction procedures against the tenants - which they clearly had no cause to pursue. That's when I started having serious second thoughts about buying the house. If the sellers were unethical enough to try to evict an honest tenant without cause, could I trust their word on anything else? For example, could I trust them that they made repairs and improvements to the house which my inspectors could not see for themselves (e.g. roof repairs, pipe replacement etc.)

I believe that we may have been able to close the deal if we had chosen to aggressively pursue it. However, going for closing would have carried serious risk for us, as well as immediate costs. For one thing, I would have had to liquidate part of our investment portfolio, thereby immediately incurring a capital gains tax liability, whether or not the deal went through. In addition, we would have had to give notice to our own landlord and may have lost our own house. Finally, the tenants' supposed proposal to move out was conditional on their finding a different place. If they did not find a place, the deal would not go through and my mortgage financing would lapse. The risks in going to closing were just too high.

What next? We've decided not to try to sue the sellers. According to legal advice we got, our only way to sue them would be to demand closing, and to do so, we would have had to transfer all our cash to the escrow account. As I mentioned above, this would carry immediate costs, and would lock-up most of our net worth in an account we could not control, for a length of time that was not immediately clear. As much as it pains me, the ******* sellers and their lying agent will get out of this without the punishment they so clearly deserve.

Could we have avoided this result? I have been asking myself this question for the past week. My honest answer is that I can't think of anything we could have done differently. Occasionally in life you run across unethical characters. It's just the way things are. I just wish I could make sure that they received the punishment they deserve.

As a final note, we have had a major rain storm in California last week, and in one of the final e-mails sent to us by the sellers' agent, he wrote (god knows why) that the tenants complained that the roof was leaking. The sellers told us they replaced the roof. I guess they didn't do a very credible job on that either.

It's back to square one. We're in the market for a house. :-(

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Financial Incentives & the Weather

2009-10-15T11:00:00.000-07:00

In honor of Blog Action Day, whose topic this year is climate change, this post is dedicated to the impact of financial incentives on the weather. Yes, financial incentives can and do effect the weather. Granted this effect is subtle and is only noticeable over a period of decades, but it’s real and it’s happening.

Over the past 150 years or so the world has been rapidly industrializing. This industrialization has been an exceptionally good thing, vastly improving standards of living, dramatically lengthening average life spans and giving a huge number of us a comfortable way of life. Of course, while making this great progress we have been enjoying an unfair advantage. We have been using the atmosphere as our own personal dump. The reason for this is simple. It costs nothing to pollute and since industry is about maximizing profits, industry’s economic incentive was to ignore the cost to society that such pollution causes.

Because of its sheer size, our emissions have take over a century to make a noticeable impact on the atmosphere, but scientific consensus now tells us that our actions are changing the atmosphere in a way that could lead to catastrophic results. The good news is that the financial incentives that brought us to this point, can also take us in the opposite direction and help clean up the planet.

Congress is considering several ways to cut global warming causing emissions, cap and trade being one of those proposals. Under such a system, government would cap the amount of green-house gas emissions, give “pollution permits” to certain industries, and allow firms to buy and sell those permits according to their needs. The thinking is that the “cap” would be reduced over time. While this is a good fall-back plan, it is complex and somewhat circuitous. A simpler way: carbon tax.

A carbon tax would be very easy to administer. Set a price per pound of CO2, and tax every activity according to the amount of CO2 it generates. You buy gas? The cost of CO2 would be added to your bill. You buy a computer? Same deal. You buy transportation services? Pay for the CO2 you emit into the atmosphere. The cost would be very transparent and immediate to the buyer, and when strong financial incentives exist, behavior changes.

What would we do with the funds generated by a carbon tax? We could do several things. One possibility: return it to consumers in the form of lower income tax rates – this way the net impact on the economy will probably be close to zero. Another possibility: use the money to subsidize alternative energy and energy efficiency projects. Or, here’s a thought, how about we reduce the federal deficit so that each of us owes less money to the rest of the world?

Economics got us into this climate change mess, but the good thing is that it can also go a long way towards getting us out. Hooray for carbon tax!

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Do You Cheat Yourself? Apparently I Do...

2009-10-13T09:00:00.000-07:00

CNN-Money recently offered it's readers the opportunity to take a financial risk tolerance test. I am a sucker for personal evaluation tests, so I went ahead and clicked on the link. The test is comprised of 25 questions designed to ascertain how risk averse you are as an investor. Unlike most tests that give you two or three pretty transparent questions and then throw your answers back at you, this test is fairly sophisticated. As I was taking the test I was noticing something very strange about myself: I was cheating. Even though I was the only person who was ever going to know or care about the results, I was trying to game my answers to make sure that the test score came out the way I wanted it to come out.

To be fair, this wasn't a completely premeditated act of deceit. In a couple of places, after I chose one answer, I noticed that this wasn't really a truthful answer. I went back and changed the answers I had first given. In the end, the answers I submitted were sincere, but I am not sure why my initial reactions were not honest. I have been thinking about this for a couple of days and I think I have a good theory. I believe I know myself very well, especially in matters of personal finance. I also think that I understand my tolerance for risk and my behavior under pressure. Here I was, taking a test that was supposed to tell me something about myself that I did not already know. Damn arrogant test. It thinks it knows me better than I do? I'll show it. I'll give the answers that will generate the results as I know them to be.

Not very smart or mature, I admit.

Still, I did catch myself and fix the erroneous answers, so give me small credit please.

The bottom line is that I scored a 68 on that test, with the following description for my risk tolerance:

"Most commonly they think of "risk" as "opportunity". They have a great deal of confidence, if not complete confidence, in their ability to make good financial decisions and usually feel very, or at least somewhat, optimistic about their major financial decisions after they make them.

They are prepared to take a large degree of risk with their financial decisions and are usually, if not always, more concerned about the possible gains than the possible losses.

When faced with a major financial decision you are usually, more concerned about the possible losses."

Actually, that's pretty good. This is very close to the view I have of myself and my tolerance for financial risk. In the end, after trying to cheat the test, I have to admit that it did a pretty good job at what it was designed to do.

A final word on my risk tolerance and our asset allocation. The best measure of your correct asset allocation, in my opinion is this: if you went through the most recent crisis and held onto your asset allocation strategy, you have a good understanding of your tolerance for risk. If you bailed out when things got rough, you are probably taking on more risk than you can handle. Remember that next time the market turns up and you are tempted to jump back into stocks (as in, now, for example). If you want the ups, you have to be able to live with the downs.

So, dear readers, let me know what you think of this test and let me know what your test scores turn out to be. I am also curious to know if anyone else finds themselves cheating on personal assessment tests that only they will ever see the results to. Humans are strange beasts.

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Health Care Inflation & My Wallet

2009-10-12T09:00:00.000-07:00

Health care inflation is here again. Our open enrollment season for health care plans at work is upon us, and this week I received an e-mail from our benefits administrator informing me (and the rest of the team) that our premiums this year are up about 4.9%. My per paycheck deduction will now increase from $253.25 to $265.75, or a total of $325 per year. Nope we are not any sicker, and no our plan didn't get any better. It's the same old coverage for the same old plan.

So what's going on? Inflation. But this is the smart bomb equivalent of inflation - it's affecting only very specific sectors of the economy. In fact, if you take a look at government statistics, total inflation at the consumer level from August 2008 to August 2009 was - brace for it - negative 1.5%! So even while the rest of the economy was showing serious signs of deflation, the cost of our health care plan increased by about 5%. Does this make sense to anyone? How can anyone delude themselves into thinking that this is sustainable?

Before you bring up this issue, let me add that my employer is not sending more of its coverage costs to the employees. Our benefits administrator sent us all a detailed chart showing that the company's cost per employee is also increasing by about 5%.

The US health care system. The good news just keeps on piling up.

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A Few Links

2009-10-11T00:20:00.001-07:00

I am back in the blog carnival game, and this week I participated in two of them: Carnival of Money Hacks hosted by The Dough Roller and Festival of Frugality hosted by Improve the Quality. In fact, my article titled: Mortgage: Everything You Buy Costs Twice as Much was selected editor's choice. Sweet.

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Medical Insurance: Small Battles of Attrition

2009-10-09T09:00:00.000-07:00

Forget all about the big philosophical questions of reforming the health care system. Let me tell you a couple of small medical insurance stories that my family has gone through over the past two months.

Chapter I - the twin mix-up - we have twin boys. When one is sick, the other quickly follows suit. It's the whole contagion thing. Anyway, some weeks ago both twins came down with a nasty cough, that progressed to the point where the doctor prescribed them both antibiotics. The two prescriptions were delivered within a couple of days' difference from each other, and while we had no problem filling the first prescription, our health insurance refused to authorize the second prescription, assuming that this was for the first child. An hour on the phone with the insurance company while at the pharmacy was not enough to correct the problem, and eventually we paid for the prescription out of pocket and waited several days while the insurance idiocy was worked out and we got reimbursed for the fiasco.

Chapter II - my wife took the kids to the dentist the other day - regular check-up and cleaning. She paid the dentist and filed a claim with the insurance. The insurance company sent us an explanation of benefits, but didn't send us a check. Alpaca called them to figure out what was going on. Turns out they sent the check to the dentist. They will now cancel the checks they already issued and send new checks to us.

Two small incidents. Nothing earth shattering, just tedium and annoyance. But there's more to it than that. Think of all the money that our health care system just wasted in the process of providing routine service to a generally healthy family. Now multiply that waste by 100 million households and you get some staggering amounts of waste. What a burden on the system. What a burden on health care premium paying consumers.

Folks, there is no reason on earth why we should put up with this insanity. What is Congress waiting for? Where is meaningful reform?

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Where is the Economy Going?

2009-10-08T09:00:00.000-07:00

In recent weeks some folks have started voicing concerns about the nascent economic recovery. I am not one of them. I believe that the economy is bouncing back and that the recovery is going to be robust. Yes, unemployment is still on the rise, and indebted consumers are keeping their money in their wallets, but I see signs of economic recovery virtually everywhere I look.

At least here, in Silicon Valley, companies are beginning to hire again. When I talk to customers and vendors and ask how business is going, people tell me that they are seeing a nice up tick in sales. Our realtor says that the market for sub-million dollar houses is positively booming (this is the San Francisco Bay Area. In decent neighborhoods houses under $1M are cheap). Life is flowing back into the system.

Considering the economic near death experience we lived through in the past year, this is a miracle. It's also no surprise that there is still a lot of economic pain. However, the bottom line is that the economy is in better shape than we have any right to expect it to be.

Credit for the economic recovery belongs with the government. Yes. I said it. Ouch. Both the Bush administration and the Obama administration have done an outstanding job (so far) of staunching the bleeding and restoring confidence in the markets. There are many Monday morning quarterbacks out there criticizing each administration's policy decisions, but given the speed with which things collapsed, the tremendous uncertainty involved and the unprecedented magnitude of these events, I think that our policy makers deserve rare praise.

Let's hope things continue to improve.

Unfortunately, in the longer term, deficits, inflation and a decline in the value of the Dollar all threaten the US economy. Let's hope our leaders have the vision and fortitude to avert that future economic disaster in waiting. Sadly, I think that this will be tougher to accomplish.

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The Threat: Permenantly Reduced Income

2009-10-07T09:00:00.000-07:00

I am one of those people who always has a plan when it comes to my career. My career plan calls for a gradual, but constant, move to the top. It also calls for a my work income to continue to gradually and steadily increase over time. But while I would like to think that things will continue to go accordingly to plan, there is always the chance that my career will take a turn for the worse. If that ever happens, there is a possibility that I may have to accept a long term hit to my income.

Late last week I spoke to my company's former VP of Sales who was let go last May. He is still unemployed. No doubt the job market is tough for everyone, but I think it's even tougher for executives who are searching for a job. I think that once you make it into the executive ranks, it becomes dramatically harder to find a job if you involuntarily lose your job. For one thing, there aren't that many executive positions available in the first place. For another, it seems to me that there is a certain stigma that attaches to an executive who loses his job.

My former colleague seems discouraged and it doesn't look like he has too many immediate job leads.

Dealing with long term loss or reduction in income when it occurs is unpleasant, but it's pretty straight forward: reduce your spending, take the best job you can and try to rebuild. The question is, how do you plan for the possibility of a long term decline in income? For my wife and I a major part of our financial resiliency plan is to rely on two incomes. Having two incomes helps both in the case of job loss, and in the case of underemployment. First, losing a single job cannot eliminate our family income. Second, even if one of us has to accept a lower paying job for the long term, the percentage decline in our household income would be lower than if we relied on a single source of income.

Another part of our plans is frugality. We live below our means.

In recent years I came across a large number of people who lived through prosperous times in their careers, only to revert back to the mean a few years later. Some of these made smart financial decisions and did not inflate their lifestyles. Those continue to live a comfortable, prosperous life, even after the good times ended. On the other hand, those who relied on permanent sunny skies for their financial stability have been less fortunate. It appears that moderation is an important part of the plan even when talking about long term career and income planning. Never count on the good times to keep on rolling.

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Bonuses and Recognition

2009-10-06T09:00:00.000-07:00

My company's board of directors gave me a nice bonus when they met last week. The best thing: I wasn't expecting a bonus. Yes, I had a couple of very nice wins going into the board meeting: I recently signed two important deals for my company, after months of hard work. However, this is not bonus season and given that my annual bonus was not paid last year - no executive bonuses were paid due to the economic situation - this really came out of the blue. What a nice surprise.

The cash is definitely nice, but what's nicer is the recognition from the company's board. These are all very seasoned and prominent industry executives. The fact that they recognized my performance gives me confidence that my efforts are appreciated - and better yet - that since these key industry players appreciate my work, they may help me further my career plans in the future.

Now to the task at hand. Unexpected bonus plans. What's to be done?

Option A: assume the house deal goes forward, spend the money on house upgrades

Option B: again, assume the house deal is a go, use the money to pay down the mortgage

Option C: buy a nice toy (new home theater?) and bank the rest

Option D: Save for a rainy day

Option E: Blow is all on hats (for the uninitiated, that's a line from the immortal movie "Hotshots" - one of the worst movies ever made).

I am leaning toward option C, but then option A is also in the game. Option B is enticing - especially given my post about the cost of a mortgage last week, but then my bonus after taxes is only going to be approximately two months of mortgage. Still, that's pretty large. I think I got enough hats, so option E is out for now.

Live a little or save? Advice anyone?

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Trouble with Our House Purchase...

2009-10-05T09:00:00.000-07:00

Regular readers remember that we bought a house last month. Signed contract, mortgage, removal of contingencies and a bunch of inspections. The works. Well, turns out we're not done yet. Here's the problem. When we bought the house we knew there was a tenant in it. In fact, our contract required the sellers to give us a signed agreement for the tenant to vacate before we removed our contingency. They didn't. Instead, they asked if they could give us this written agreement before we removed our financing contingency. We agreed, but even though we removed the financing contingency, we still don't have that written agreement with the tenant.

Worse. The sellers (or rather their agent, who is also their relative) finally came clean. Apparently, the tenants have a six month firm lease for the house. The lease ends at the end of February. Our contractual closing date? October 23... Worse still, the sellers and their agent simply don't understand (or are pretending not to understand) what they have done wrong. I met with the agent on Friday, and he said "we'll just cancel the deal". I explained that we have a firm contract, and cancelling is simply not something he can do. His response: "sue me"...

It's not quite as bad as it sounds (well, it's bad enough): the tenants are willing to vacate in December, if the sellers agree to pay two months of their rent as well as their moving expenses, for a grand total of about $7,000. The seller? He's willing to pay $3,000. Period. This weekend he is supposedly negotiating with the tenants and we should have a clearer picture on Monday.

Of course, we could supposedly get this resolved by simply agreeing to pay the difference between the tenants' demands and the amount the sellers are willing to pay. However, the prospect of doing that gives me serious heartburn. We clearly have a very strong legal case against the sellers and could sue them for a lot of money. We could also file ethical complaints against the sellers' agent for misleading us. These guys knowingly entered into a binding agreement to sell us the house, while they had a conflicting contract with the tenants that would not allow them to close the deal. They did this without disclosure and without including a sellers' contingency in the contract.

On the flip side, this is a million dollar house (it's the San Francisco Bay Area, people). Is it really worth letting a million dollar deal collapse because of a $4,000? Yes, $4,000 is a lot of money and the sellers are trying to cheat us and increase our buying price by trying to make us pay for their dishonesty. The question is: should I let the deal fall through and go to court? Or should we just suck it up and get the house?

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How Investing into the Crash Worked for Us

2009-10-01T09:00:00.000-07:00

Throughout the stock market melt down we kept our stock positions and even invested more money in stocks. We did this across our portfolio, but the ultimate results of this strategy are most visible in my 401(k). I max out my 401(k), every year. This is not discretionary, it's something that I must do to ensure that my wife and I are economically secure when it's time to retire.

The nice thing about 401(k) contributions is that they happen every two weeks like clock-work, meaning that you invest regardless of whether the market moves up or down. Market timing is not a factor. As the market fell, my existing portfolio fell hard, but my new contributions were purchased at a huge discount. When the eventual rebound came, those discounted purchases more than off-set the original losses.

I only started contributing to my 401(k) plan in May 2008, and suffered through the worst of the bear market, but as of last Friday, my 401(k) was solidly in the black, as you can see in the chart below.

Of course, this is only the case because my regular contributions were large relative to the funds already invested, but still, I think this gets the point across: buying buying low pays off when the market turns around. If I shifted to a more conservative stance following the declines, my 401(k) portfolio would not have been above water today.

BTW, the pic may be a bit too small to make out the details, so here here's a quick guide: the blue position is an S&P 500 index fund; orange is an international stock fund; yellow is a REIT fund; and green is a bond fund. My allocation is 70% for S&P and 10% for each of the other funds. I re-balance quarterly. The regular jagged line shows the bi-weekly contributions and their cumulative value.

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Mortgage: Every Thing You Buy Costs Twice as Much!

2009-09-30T09:00:00.000-07:00

I have written numerous posts recently about the house we are buying. Last week I told a colleague about our mortgage: a 30 year fixed rate loan at 5%. My colleague's advice: "don't stop living". I asked him what he meant, and he explained that in the first few years of the loan, every dollar of principal you pay back, saves you about a dollar in interest payments over the life of the loan (depending on your interest rate and length of your loan). His advice: if you become hyper aware of this you will become overly conscious of your spending. Sure you would pay a dollar for a can of soda, but would you pay $2 for that same can? By buying that soda you are spending a dollar you could pay down on your mortgage and save an extra dollar in interest. You are in fact paying twice for that soda!

Yikes. I never thought of that.

There is a huge financial incentive to do the exact opposite of what my colleague advised. Do we really need those extra channels on cable if they are costing us twice as much? Do we really need to take that family vacation? How about that lunch out? But then, there is the issue of living life...

Interesting conundrum. Any advice or opinions?

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Even for 401(k) - Vigilance Pays

2009-09-29T09:00:00.000-07:00

This week we got proof again - as if we needed it - that you should always be vigilant where your finances are involved. I manage our finances using Quicken. It's my way of keeping an eye on all our accounts in one place and making sure that mistakes or even dishonesty don't whittle away at our resources.

Two examples from the past week:

Our dry cleaner charged us $40 to clean a single shirt. $4 was the agreed upon price, and somehow a zero got added to the mix.

A bigger mistake appeared in my 401(k) account. I noticed last week that my mid-month 401(k) contribution never showed up in my account. I waited a few days to make sure that no simple technical glitch was involved, and over the weekend I sent an e-mail to our HR person. Turns out that the company simply did not fund employees' 401(k) accounts since the HR person was on vacation. Hmmmm. Err, OK. That makes sense. Actually, it doesn't. They made the deduction from my salary but sat on the cash? That doesn't strike me as particularly fair.

Still, since this doesn't typically happen, I'll let it slide, I guess.

Our VP of Finance asked me how I found out that the account was never funded. He was pretty surprised to hear that I keep an eye on all my accounts through the magic of Quicken. I got my eye on you, dude. Stay away from my cash.

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Shopping to Save the World

2009-09-28T09:00:00.000-07:00

A couple of days ago as we were eating a family dinner, my dad pointed out a "save the rain forest" promotion on a box of Tropicana Orange Juice. According to Tropicana, they will protect 100 square feet of rain forest, every time you enter a code you find on a box of Orange juice. I am pretty ambivalent about such promotions. On the one hand, there's nothing wrong with raising awareness of environmental issues. On the other hand, I feel such promotions have a healthy dose of green washing in them. Marketers these days are trying to sell us on the notion that we can shop our way to a cleaner world and a healthy environment, when truth is the exact opposite. It's our consumerism and shopping that is driving the planet to the brink of environmental disaster.

All manners of car companies, from Toyota to Ford are now advertising their hybrid vehicles as environmentally friendly. Even energy companies - read "oil companies" - are now trying to sell us on the notion of their products being more environmentally friendly (see this campaign from Chevron for example). However, reality happens to be in the exact opposite direction: nothing you buy will improve the environment. Nothing you buy will slow down global warming. If the environment is on your mind, buy less, not more.

True, there are some products that are more environmentally friendly than others. Hybrid cars certainly require less gas than a "light truck" or SUV. So if you must have a car, definitely go for one that will have a smaller negative impact on the planet, but don't delude yourself into thinking that you are actually improving the environment. You are only doing less damage than you would otherwise. Still, there are some exceptions. If you buy a product that reduces your net impact (e.g. a compact fluorescent light bulb to replace a regular light bulb), you are, in fact, creating a net positive change. That's a good thing.

Drinking orange juice to save the planet? Drinking tap water would be better, and would also save you money. That's not to say that you shouldn't drink orange juice, only that you shouldn't tell yourself comforting lies about why you're doing so.

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Contingency on the House Lifted...

2009-09-22T09:00:00.000-07:00

Can't back out of the house purchase any more. Last night we lifted our contingency...

Looks like this thing is happening for real.

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