Wise Money Decisions

The latest Jeremy Siegel column defends his earlier column “Why Stocks are Dirt Cheap” in which he argued that the S&P500 was “extraordinarily cheap.”   Both columns are worth the read.

In the earlier column he stated:

No one can guarantee the future of the stock market. But I believe that stock prices are now so extraordinarily cheap that I would be very surprised that if an investor who bought a diversified portfolio today did not make at least 20% or more on his investment in the next twelve months.  

It’s not exactly a prediction, but even so it belongs in the Prediction Tracker. 

In the later column he responds to critics and concludes:

The low level of stocks today is not a result of investors expecting current depressed levels of earnings will persist, but rather a result of record risk premiums in the debt and equity markets. When these extraordinary risk levels return to normal, we can expect much higher stock prices. 

My portfolio hopes he’s right.

There is an interesting clip from “reason.tv” on the frontpage of the Utah Taxpayers website.  Drew Carey proposes a private market solution to the public problem of heavy traffic in Los Angeles. 

Mr. Carey would like to see private companies build roads that would, in essence, compete with public roads.  Drivers could choose whether to take the public road for free and run the risk of heavy traffic, or take the private road without heavy traffic.  The private roads would make money through tolls.  No taxpayer dollars would be used. 

Here are my thoughts after watching the video.

On the one hand free roads are nice because they’re, well, free. On the other hand there are long wait times because everybody else wants to use them too.

Roads are no different than any other service. When there is no marginal cost imposed on the user, they get used beyond capacity.  The result is long wait times. With roads, we call it “traffic.”  With healthcare, we call it “Dr. Johnson has no appointments available until next June.”  It also happens with internet bandwidth.

It makes me wonder what it would be like if roads were privately owned and operated. What would we think?  We would complain at the nickel and diming as we drive down the freeway each day. It would be easy to think, “If only we had government-run roads, we wouldn’t have to pay all these tolls. Driving would be free. What a great world it would be.”

Well, we have that world, and it’s filled with gridlock and long commutes.

It’s also interesting to see the technological solution on the private road on highway 91 in Orange County.  There’s a scanner that tracks the vehicles that drive through the private road.  Depending on the time of day and the amount of traffic, the amount of the toll goes up and down, ranging anywhere from $1.50 to nearly $10.  The average toll is about $2.75 according to the video. 

What kind of people choose to pay the toll?   People that believe the time they save is worth more than the toll.  Each person makes the choice for himself/herself.

Are there lessons to be learned from the way we do roads that apply to other services? 

Take healthcare.   There is no shortage of people who think their lives would be better if we move to a government-run healthcare system.  Some of them are right.  Some people would benefit.  It would be free or very lost cost.  Everyone could go to the hospital anytime they need, for any reason.  What’s not to like?

Just make sure you book your flu vaccination appointment in April.  It may take 6 months to get in.

Today I introduce a new feature called “PFAIRQWOBRAR.”  

As you might have guessed, PFAIRQWOBRAR stands for “personal-finance and investing related quotes worthy of being repeated and remembered.” 

Some are funny.  Some are insightful.  A few are both.

PFAIRQWOBRAR Quote #1:

“Credit cards are like buzz saws. They are useful tools but dangerous if in the hands of someone who doesn’t use them properly.”

– courtesy of Consumerism Commentary

Jail is my worst enemy at times, and at times my best friend.  It depends on how many hotels there are.

I came across this statistical analysis of Monopoly by Truman Collins, who as far as I can tell is an electrical engineer in Oregon. 

It has the distinction of being the most complete statistical analysis of Monopoly I’ve ever seen, and the only statistical analysis of Monopoly I’ve ever seen.

I have neither the time nor inclination to check Truman’s model.   But assuming it’s right, it claims to determine the most likely square to end your turn on (slightly different than the most likely square to land on).  I believe there are 40 squares on a Monopoly board, so the average likelihood for each square should be 2.5%.

It may not come as a surprise that Jail is the most likely square to end a turn.  You can end a turn in Jail by landing on Go To Jail, rolling three doubles, getting a Chance or Community Chest, or by starting the turn in Jail and not getting out. 

After Jail, what is the next most likely square to end your turn on?  I would not have guessed:  Illinois Avenue.

And the least likely square?  It’s a trick question.  Since it’s least likely to end on, rather than land on, Go To Jail is the least likely since it’s impossible to end a turn there. 

The three next least likely squares are Chance, followed by the first Community Chest (between Mediterranean and Baltic).   Why?  Because many Chance and Community Chest cards send you to another square.  Interestingly, the other Community Chests are substantially more likely than the first one.   Not sure why that would be.

After Go To Jail and the card squares, the least likely square is ….. (drum roll) ….. Mediterranean Avenue.

There you go, more statistics than you ever wanted to know about Monopoly.   Unless you’re a statistics geek like me, in which case I predict you will check out the analysis yourself.

P.S.  My deepest apologies for ending a few sentences with a preposition.  I don’t prefer it, but it’s the vernacular.

The mainstream press provides more bad financial advice than good, so it’s important to highlight the good advice when it appears.  

From Ron Lieber at the New York Times:

“It’s a question we’ve all asked in our darker moments of late: Why not just put all of our investments in cash, 100 percent, just for a little while, until things calm down?…

“By fleeing for the comfort of safe and insured, however, investors with a time horizon beyond a few years may be doing real damage to their long-term finances. If you’re tempted to make a big move to cash right now, you’re doing something called market timing. It’s an implied statement that you’ve figured out the right moment to get out of stocks - and will also know the right time to get back in.

“So let’s dispense with the first part straightaway. The right time to move out of stocks was a year or so ago, before various stock indexes the world over fell by one-third or more.

“If you missed that opportunity, you’re hardly alone.

“But if you sell now, you’ll be locking in your losses. And once you’re in cash, there isn’t much upside. In fact, with interest rates low, you’re likely to lose money in cash, because inflation will probably eat up the after-tax returns you earn from a savings or money-market account.”

One of the credit reporting agencies, Trans Union, recently settled a class action lawsuit.  They are accused of misusing consumer information for marketing purposes. 

Included in the class is anyone that “had a credit card, loan or credit account” anytime in the last 21 years.   So, everybody.

Here’s where it gets to be like a game show, as Wallet Pop points out.  You can choose one of four remedies:

• Six months of their credit monitoring service and possible cash payment;
• Nine months of their credit monitoring service (no cash payment);
• Possible cash payment;
• Do nothing and preserve your right to sue individually.

You guessed it, no one knows what the cash payment will be.  Don’t you love these things?

I’m signing up for the 9 months.  The credit monitoring service includes your credit score, not just your credit report.  From what I understand, you can check your credit score every day if you want. 

I want to see how my credit score fluctuates from day to day and month to month as I incur debt, pay bills, sign up for new credit, etc.   Having a first hand look at how the credit score works is worth way more than the 35 cents I may or may not get from the cash payment option.

You must sign up here or by phone (1-866-416-3470) by September 24, 2008 if you want to be included in the class.

Some interesting California statistics:

Domestic migration outflow: 49th highest out of 50 states. 

According to ”Rich States, Poor States” by economists Arthur Laffer and Stephen Moore, the Californians leaving for elsewhere are our ”highest achievers and those with the most wealth, capital and entrepreneurial drive.” 

Highest maximum tax rate: 2nd highest out of 50.

Highest corporate tax rate: 15th highest out of 50.

Highest taxed population: 12th out of 50.

Best business climate as ranked by the Tax Foundation: 47th out of 50. 

Most expensive state to do business according to CNBC: 3rd out of 50.

Best state to do business according to Forbes magazine: 40th out of 50.

State requiring special credentials or licensing of most occupations: 1st out of 50.

California has credential or licensing requirements for 177 occupations.  Including mine.

Highest workers’ comp costs: 2nd out of 50. 

Highest gas taxes: 1st out of 50.

Highest unemployment rate: 3rd out of 50.

Highest foreclosure rate: 1st out of 50.

Housing affordability: 50th out of 50. 

Highest average public school teacher salaries: 1st out of 50.

Highest average compensation for state employees: 1st out of 50.

Highest welfare grant level: 2nd out of 50.

Highest state and local government spending per capita: 4th out of 50. 

Highest eighth grade math scores: 42nd out of 50.

Highest eighth grade reading scores: 45th out of 50.

Highest fourth grade math scores: 46th out of 50.

Highest fourth grade reading scores: 48th out of 50.

Highest level of violent crime: 10th out of 50.

Worst traffic: 1st out of 50.

Highest cost to repair and expand transportation infrastructure: 1st out of 50. 

Depending on your political leanings, you may find a few of the numbers encouraging.  But most of them are discouraging no matter which side of the aisle you’re on.

The statistics come from an article by Dave Cogdill, the Minority leader in the California Senate.

This AP article by Mitch Weiss points the proverbial finger at unscrupulous appraisers, lenders, brokers and others:

To be sure, there are many causes of the housing crisis - lenders who allowed people with spotty credit to buy homes with little or no money down, mortgage brokers who focused on selling loans without regard to the borrowers’ ability to repay, investment bankers who bought and sold risky mortgage-backed securities.

But wait a sec….. isn’t someone missing from the list?

How about the borrowers that didn’t exercise enough common sense to avoid biting off more than they could chew!

I don’t think that bad appraisers, lenders, or bankers should escape scrutiny.  But why give bad borrowers a free pass?  They’re just at fault.  If there were no bad borrowers, there would be no bad appraisers or lenders either. 

It seems everybody wants to know what the highest paying majors are.  Could it be that the school year is about to start? 

Here’s yet another one.  It lists the top five in demand majors according to the National Association of Colleges and Employers (NACE) Spring 2008 Salary Survey.

And this time Mechanical Engineering is #1 — woo hoo!

Following up on the post about Most Lucrative College Majors and this follow up post, see this from Yahoo News:

Graduates with technical skills do well in the short term. But in the long run, it’s the folks who move into management positions that take home the biggest paychecks. Top earners who majored in economics or finance have higher salaries than any other major, followed by chemical engineering, math, and physics, according to PayScale.com.

“If you can take technical skills and turn them into something entrepreneurial,” you have the chance to make a top salary, says Russell Miller, managing director at Executive Compensation Advisors in New York. “Lots of people who graduate from MIT start up their own technology firms.”

Regarding engineering schools:

Interestingly, median starting salaries for alumni of MIT, California Institute of Technology, and Harvey Mudd College, which have strong engineering programs, are the highest in the country ($75,500, $72,200, and $71,800).  But the salaries do not get as high for midcareer professionals from those schools as they do for graduates of the elite liberal arts schools.