Money And Investing

Two Blogs

Tue, 11 Sep 2007 07:47:00 -0700

For those who have not noticed, I stopped posting Money and Investing stories on this weblog. The Money and Investing weblog is completely separate from this one.

On the Anes Weblog you will find stories about what I do on my spare time, what I am thinking, and my views on current topics.

On Money and Investing you will find information about finances, career, self-employment/entrepreneurship, independent consulting, stock trading, saving, investing, and retirement. About half the posts is about things that I have done (for what it may be worth), and the other half is sensible (but without guarantees) financial advice. I invite you to check that site.

The Employee and The Serf

Fri, 19 Jan 2007 17:51:00 -0700

In the old medieval times there where land-owning nobles and land-working serfs. Both had their responsibilities. The serf had to work the land and give the majority of its produce to the land-owning noble, keeping a minor portion of his produce for his family's sustenance and to barter it for goods in the local market. The noble in turn had to protect the serf from attacks from fellow warring nobles, and ensure that his serves lived in a safe community. The noble also had to provide tribute to higher nobles, and had to pay for the upkeep of fortifications, armies, and other government needs. In times of war the serf had to serve for up to 40 days in the noble's army. In times of famine the nobles often shared their stores of food, for fear of loosing the serfs (and loosing all of the hands that worked their lands). Serfs where not allowed to move from one noble's land to the other without prior permission of both nobles. People who didn't owed lands (nobles), nor worked the land (serfs) better had a trade (craftsmen: blacksmith, carpenter, cobbler, etc.) or found themselves out of society (literally).

Civil rights and liberties have changed the lives of the common man and of the owner. Modern society doesn't impose serfdoom on those who don't own land. Furthermore, owning land doesn't directly make someone special, as the mere quarter of an acre on which most suburban homes sit now would not feed too many people if it had to be put to farm use, nor the house structure would produce anything that could be bartered for food or goods.

What is still true is that the employee (serf) is expected to produce far more than what he/she will bring home in the way of money. The business owner(s) (nobles) make use of most of the production to cover the costs of running the business and paying taxes (tribute) to higher authorities. Increasingly, business owners are expected to provide for social needs of the employees (serfs) � like medical and life insurance, and even vacation and sick time. Business owners hope that through good management they will be allowed to keep a reasonable amount of the value produced by the employees.

Both models have a drawback for the employee/serf. This person is not really free to get out of the situation where he/she is. Both the employee and the serf need sustenance (food and shelter) and the modern employee has the perceived need of acquiring luxury goods. The only way these people acquire the things they need is by producing. However, neither has the means to produce � the serf doesn't own the land and the employee doesn't own the business. The serf needs to move from one noble to the other, and the employee from one employer to the other.

Fortunately modern society does provide for the ability to move from one segment of the population to the other. Better yet, the move can be gradual or at once � up to every individual. An employee (serf) can become a business owner (noble). For this he/she needs to invest into the starting of a business and if successful can have people work for him/her and may be able to enjoy the production of those employees. It is all possible because we have a very liquid currency that can be accumulated and invested until it is time to start a business. We also have credit institutions and even venture capitalists willing to help someone with the energy to move from being a serf into being a noble.

As you might expect, nobody said the path to become a business owner/noble would be easy. Business may fail, and then you are in a worse situation than you where before. Just think that the path to Knighthood used to be riskier: you could fall a casualty of war in an attempt to impress your noble enough to make you a landed Knight.

Modern society does allows for the same person to be the equivalent of a serf and a noble. A serf in the sense that person works for an employee � and can only keep a portion of his production to feed his/her family. However, that same person can invest a portion of his/her earnings into companies � essentially becoming one of the owners of a corporation. By becoming one of the owners of the corporation, now he/she enjoys the excess production from such endeavor. He/she also shares the risks of the corporation, just as the noble(s) shared the risk of defending their land (market).

There is another option in both societies. The craftsman, that expert in a trade who barters his services for food, shelter, and goods rather than his raw work in the land. In modern times this expert on his field is called the independent consultant. This is the electrician, the plumber, and the carpenter. This person is also the staffing consultant, the temporary worker, the IT consultant, and many other flavors of the same idea: someone who barters his/her services directly for a compensation. Fortunately you do not have to go through a 10 year apprenticeship / slavery to earn your trade now. You just have to get education and experience (potentially a lot more than 10 years). Traditionally life has been more comfortable for this kind of person � but this person is not protected by the business owner (noble) from any social maladies. This person is not entitled to keeping his sustenance as the serf does either. If a there is no war, fletcher may be out of work, and if there is no wine the cooper (barrel maker) may be out of luck.

If you had the choice, would you rather be:

A Serf / Employee.
A Noble / Business Owner.
A Craftsman / Independent Consultant.
A combination?

You have the choice. It is a modern and free world.

Real Estate: Increases in Price, Not in Social Status

Wed, 03 Jan 2007 20:17:00 -0700

Real Estate has the habit of increasing in value over time � I do believe in real estate as one of the greatest investments you can have. It has the ability of creating great amounts of wealth with very low initial investment when leveraged by a mortgage loan. In fact, for many people the primary residence is the biggest asset families have.

Real Estate, however, has the habit of staying fairly constant. Lot size, house size, number of rooms and dimensions, number of bathrooms tend to stay the same. As time goes on people from any particular Social Level expect more out of a house. Years ago people where happy with one or two bathrooms in their houses. Nowadays middle class people want two and a half. Rooms where 10 x 10 feet, while 12 x 12 feet is becoming the norm. Real Estate agents still list dishwasher and food disposal machines as features, while most people think is a necessity. In short, a middle class family from today may expect a lot more than what a middle class family expected out of their home 30 years ago.

To make things more complex, new neighborhoods are often the ones in more demand by those who can afford them, and some old neighborhoods start to become less desirable � not as pricey.

This issue becomes particularly evident when an old couple (or single person) has been living on a house for 20 or 30 years. The day they decide to move they face a hard reality: the sale proceeds from their home may not buy a home that reflects the particular social level that the person or couple identify themselves with. The old house will most probably fetch a lot more than they paid for it but, no matter how nicely cared for, it may not fetch enough money to buy the property that reflects the perceived social status.

I have seen this shock to happen to my grandmother, to my in-laws, and today to a relative of my in-laws. In these and many of the other cases I have seen, the individual have come up with extra cash to move to a property in the same city that is comparable in social level and comfort level to the one they bought 20 or 30 years ago. Other people choose to move to less costly places � places where there may not be enough jobs but that suits them very well because they no longer need one. Plain downsizing is another option � especially if the family size has dramatically decreased in the past few years.

I think this particular phenomenon affects people who hold the same property for 20 years or more, and a lot less for those people who hold the property for 10 years or less. I am not sure what the best way to address this is, assuming it should be addressed. But I would throw a few suggestions:

Upgrade residence once every 10 years � easier to say than to do. Will always require a lot of cash that may be needed for education, fun, or retirement.
Save a lot of money � again, easier said than done. It is better to be prepared than to face a reality check.
Buy in a very nice area of town, with very nice schools that produce very successful kids. Great school systems usually tend to attract people, regardless of house conditions. House value, and social level may probably be closely related in these communities � more so than in others.

Can you think of other ways to prevent this phenomenon from affecting us? Do you agree it is a phenomenon to be preoccupied with?

I Like Visibility

Thu, 09 Nov 2006 17:22:00 -0700

I like the work I do to be felt across every single employee in the company, and recognized too! I want every employee in the company to recognize that their paychecks depend on me.

Sounds ambitious? Not so. That is the feeling you have in a small company. The best employees - those who cause the most impact to sales � are recognized and remembered by anyone. You stopped being �Jose Anes�, and you become just �Jose�, even when there are other three Jose�s in the same office. You are the one and only. Every employee in the company greets you by name, even when you don't remember all of their names.

You do not need to be in sales to be felt. You just need to do something so important that the company would not survive without you: and in small companies this is something achievable. The engineer with the grand idea that changed the company. The operations guy who changed the office layout into a more productive and comfortable one. The marketing guy that launched the campaign that raised sales by 10%.

The problem: In large company you have to be in a very high level management position to create this impact. Small companies haven�t showed me the money lately. The large company of dubious reputation that I work for shows me more money. I haven�t received a very high offer from a small company.

The potential solution: I am willing to go to a small company for less salary, any good small company, as long as I get a significant ownership on that company. I want to have a piece of the company that I am helping build again.

The question is: How do we get to that solution? How do we get a company that offers a significant amount of ownership in exchange for success?? How do I get an opportunity to create massive ammounts of cash through ownership and direct involvement??

Always Tip Cash?

Thu, 09 Nov 2006 14:53:00 -0700

I have heard many people suggest that you should always leave your waitress tips in cash, as opposed to by credit card. I have heard several reasons, along with my thoughts on them:

Cash tips are not reported in the W-2 forms and save the waitress money in taxes -- Not necessarily true, sometimes, when the tips are not recorded, the restaurant owner has to estimate them. However, they usually estimate them on the low-side, saving some taxes to the waitress. I do not believe in willingly helping anybody commit tax fraud. I help people use lawful ways of reducing tax liability, but hiding earnings from Uncle Sam is fraud. Some people justify waitress tax fraud on the fact that they earn $2 an hour. Besides the fact that I do not justify fraud I have to point out that if they wait a single table of four for an hour and the table consumes $80 in food and beverage, they earn around $10 in tips. $12/hour is a better salary than a supermarket checkout person, who has to report all his/her earnings to Uncle Sam.
Credit Card Tips are Shared Among All Service Personnel - True in some restaurants, but usually not the case. But those restaurants also ask the cash tips to be placed in a common pot � if they pocket the tip cash, then they are breaking the agreement with their peers.
Credit Card Companies Charge Commissions on Tips - This one is probable true. Credit Card companies charge a commission on the charges you make on them. The restaurant owner may reduce the tip to cover the tip�s commission. I have read some articles that suggest that credit card users leave more tips than cash users, which may compensate.

I do pay as many expenses as I can with a charge card (debit card or credit card). I do it so that I can keep a perfect record of all of my expenses, and I can understand on which areas I have to adjust my spending. Tipping in cash would skew my spending analysis. It would also make it very complex to handle my business expenses accounting.

I believe people should just leave the tip on the same method that they use to pay the meal. Don�t make your life more complex than it has to be.

Third Party Content

The creditcard facility enables you to make purchases on credit while retaining cash in your wallet for an emergency. A popular credit card is the citicard which is the Citibank credit card. Spending on your credit card earns you reward points which you can redeem against other products and services. All secured credit cards in the market offer reward points on spending. The bank of america card offers rewards on your credit card. The rewards visa whereby consumers can redeem their reward points online is an added feature of credit cards. Whenever you plan to apply for a credit card, do keep the added features and benefits in mind. Go for low interest credit cards to keep within your budget. The hsbc credit card is an example of low interest credit card.

Do We Care About Our Personal Gain?

Wed, 08 Nov 2006 15:29:00 -0700

Adam Smith, on The Wealth of Nations, suggests that society will improve by means of an �invisible hand� that will steer it in the right direction. It will happen out of the desire of every person to maximize his gain, and not necessarily that of society.

...every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. -- Adam Smith, 1776, An Inquiry into the Nature and Causes of the Wealth of Nations

The question I have is: Could it be that 200 years later, the people of the U.S.A. have so much (money, benefits, comfort) that they do not see the need for gain and try to find emotional gain in trying to solve other people�s needs? And the cororally of this statement: Could it be that by loosing the personal gain desire, we have lost the �invisible hand� that moves society in the right direction?

Yes, we all certainly want more of what we have got. But gone are the days on which people feared cold, hunger, clothing, or even the lack of luxuries (or affordable luxuries). Once pressing needs go away, we may have enough time to think about what we call �social issues� � or other people�s problems. Getting more and more goes to the backseat, and so does the �invisible hand� theory. At that time we start having conversations about how to solve them, instead of working so hard that our effort makes the whole nation stronger.

Adam Smith and Karl Marx could have made mistakes in their philosophically opposed treaties. Karl Marx�s treaty proved a failure once, with the Soviet Union. Could it be that Adam Smith�s treaty was also a failure? Or could we trust the �invisible hand� will come back to save us from our current path?

Did You Voted Today?

Tue, 07 Nov 2006 14:06:00 -0700

Voting is not only about whom you like or who doesn�t. It is not about who talks pretty or can be admired. It is mostly about who will use your tax-dollars for the purposes that interest you the most.

The Office of Management and Budget is kind enough to publish very valuable information that all of us should be reading. For example, look at the following information:

Category	1962	2005	2006 (Projected)
Defense	46.9%	19.2%	18.9%
Health, Human, Housing	4.1%	25.3%	25.4%
Social Security	15.5%	22.7%	21.9%
Treasury (Payment on Debt)	0%	16.5%	16.7%
Education	0.8%	3.0%	3.1%

-- source: Historical Tables p.79

Most of us pay money to the Federal government in the way of taxes, fees, and social security taxes. Our employers also pay a social security tax on our behalf. Corporations pay taxes as well (cutting into the earnings you get through stocks on your 401k plan, for example). Out of all of that money the Federal government takes, 18.9% gets spent on Defense (military), 25.4% gets spent on social services (not counting social security), and only 3.1% on Education.

States also have their own budgets, collection methods, and spending habits. I do believe that localized spending is more efficient than Federal spending, but I have used Federal budget because it affects the widest amount of readers. I prefer higher state taxation/spending and lower federal taxation/spending.

Which areas do you value most? Which areas you want to see reduced? Do you want to see all of them reduced (less taxation)? Do you want to see all of them increased (more taxation)?

529 Plans and Life Insurance

Mon, 06 Nov 2006 14:08:00 -0700

I love financial institutions, I really do. They provide instruments so that we can build a safe and stable life. The problem is that financial salespeople often sell the instruments that make the less sense on a particular situation � most probably motivated by the gain margins on these products.

An example is life insurance for a young, childless, and wifeless guy. Unless his parents depend on him, there is little reason to have life insurance of any kind. Yet, financial salespeople tend to sell to them, mostly on fear: to lock in rates, to make sure he stays insurable, and all of that. Nice reasons, but rarely cost-effective. These young, dependent-less people take life insurance because they are afraid of dying � a lot more than they are afraid of becoming disabled (disability insurance), having their apartment robbed (renter�s insurance), or even having a hurricane flood their houses (flood insurance).

Same thing happens with 529 plans. 529 plans are mostly for high income earners or small business owners/employees. See, those working for small business may not have access to employee sponsored retirement accounts. And high earners may already maximized their 401k, Individual Retirement Accounts (IRA), and other qualified retirement plans.

You may ask yourself what does retirement has to do with education? Thanks to our convoluted taxation system, a lot! See, federal rules take into account the money on 529 plans to calculate what portion of the college expenses the family of a kid can pay. However, federal rules do not consider the money on qualified retirement plans into the equation (colleges may, but for the education funds they have privately acquired).

To make things more interesting, money in an IRA (or a 401k plan converted into an IRA) can be used for education expenses without paying penalties.

It makes perfect sense to contribute to 529 accounts, but only after you are contributing as much as you can to your qualified retirement accounts. This means contributing roughly $15,000 to a 401k and up to $4,000 to an IRA (lot of money considering that most families earn about $40,000 a year). As I mentioned, 529 accounts are for those families earning in excess of $100,000/ year or for those that do not have access to employer sponsored retirement plans like the 401k�s or SIMPLE-IRAs.

So then why do people flock into 529�s before maximizing their retirement accounts? People are frightened � almost as much as they are afraid of dying. The idea of an uneducated child scares people � at least some people. Plus, education is a �sure thing� � while some people even think they can work until they die. (Education is a time pressing need � the child will reach college age sooner than you are forced to enter retirement.)

Like many things in life, it is all about how you market them. An IRA and a 529 may be investing in the same underlying vehicle (mutual fund). However, if your financial sales guy things you will put more money into the 529 than in the IRA, he/she will most probably try to get you to get the 529 rather than the most efficient and flexible one: the IRA.

Dead People Can�t Pay Their Loans

Mon, 06 Nov 2006 12:21:00 -0700

Young people are often enticed to take a Life Insurance Policy on their Auto Loans, or even Credit Card Debt. The salesperson tells the young guy/gal that if they die, their estate will not have to pay for the debt. How nice of them!

The reality is that no-one had to pay for the loan � the estate does not inherits debts, whatever is not covered by the individual�s assets at the time of death is written off by the bank! (However, it is true that if the bank can�t recover their money, they will take the assets that where backing it away � it is not as if you can get to drive your car after you die.)

Of course, the bank is very happy to make sure that you have no excuses to pay off your debt, even if you die. But it doesn�t benefit you at all.

What is worse: the cost of debt related life insurance is usually higher than Term-Life Insurance for comparable amounts. Even if you have a wife and ten kids and want to be sure they can pay off the house, the Hummer, the Volvo, and the Mini-Van, you are better off getting term insurance rather than four individual debt insurance policies.

My advice: just save those few bucks that you would pay in debt insurance and put them into your IRA. By the time you are about to die you would have paid the car, the house, and will have a nice nest egg.

There is no Upper Middle Class

Thu, 17 Aug 2006 17:14:00 -0700

I almost laugh every time someone says that they or someone they know are �Upper Middle Class�. I wonder what they really mean with that.

I consider there are only three classes:

Poor or Lower Class � Those who can�t cover their heads with a roof, clothe themselves, or get three square meals � even if they tried hard. They also die or suffer of easily preventable diseases. These people are in �survival� mode.
Middle Class � Most of us fall in this category. Working or not, we are trying to find a way of covering our needs and have some amount of luxury in our lives. Although we feel a natural pressure when we can�t have everything we want, we know we can get a roof, food, and clothing with the income (earned or unearned) we receive. We worry about getting a medical insurance that covers most diseases and most treatments. We are in a situation where we want to acquire more money to live a better life now. We are in a constant struggle to make our equation ends meet: make our income meet our wants.
Rich or Upper Class � These people can cover their expenses indefinitively, without working a single day of their lives. They can cover their basic needs and have some amount of luxury � maybe even a lot of luxury. If they decide to work it is simply because they are bored, or because they want to amass even more. These people worry about extending their money over generations, since they know that they are covered now.

Now lets take a closer look at the �Middle Class� in the USA. Inside this class we can probably put most of the population; I am willing to bet it is 90% or more. I have noticed that most people in this society, regardless of primary source of income (salary, pension, social security, or government subsidies) has access to luxury items. Some people have access to a TV, others to Nike footwear clothes, and an increasing number of people nowadays have access to what could have been considered frivolous 10 years ago, like any of the available flavors of an iPod. Look around you: almost everyone in your office, from the janitor to the Vice President has some luxury items he/she is happy with. Now get to the street, get into the subway and you will see the same. Go to an expensive restaurant or go to a public housing site and you will see almost everyone has luxury items � and they do not differ too much from one place to the other. You will find Nike shoes, iPods, and modern electronics in a very broad variety of residences in the USA.

Can we risk separating the �Middle Class� further into �Upper-Middle�, �Middle-Middle�, and �Lower-Middle�? How would we do so?

I believe most people classify the �Middle Class� divisions on what could be perceived. I think quantity of luxury items makes people believe someone is above or below the average within the class. It could also be the market value of the primary residence of the family in question, regardless of ownership status or value of other assets that the person may have. Some people also throw into the equation the market value of the car driven: again, regardless of ownership status. Social circle participation also tends to be a way to classify people.

Upon some reflection I tend to start thinking that �Upper Middle Class� refer to the Joneses! We all want to be better than the rest, but climbing all the way to the �Upper Class� is too much of an effort � so it is easier to try to climb and sustain a concept of �Upper Middle Class�. �Reach the Joneses Level! Be the Joneses! Live Richly!� Aren�t those the messages that we get from the advertising media? There are plenty of massively produced designer labels to create the �Upper Middle Class� idea.

I prefer to keep the labels to real needs. Either you can survive or you are in peril (Middle vs. Poor). Either you worry about how to live today or you are at a stage in which you worry about how your descendants will enjoy life in the future (Middle vs Rich).