All Things Considered–Long Weekend Edition

• How to teach personal finance.

• The power of the pen. The bin Laden papers were going to be released independent of Hersh’s London Review story of ObL’s death. And Hilary Clinton really wants all her emails made public. And Tom Brady’s never done anything wrong. The Obama administration says Hersh’s story is “filled with inaccuracies”. Which is a lot different than saying it’s untrue.

• Best sports presser of the week.

• Warren Buffet, minimalist. “Money has no utility to me anymore as I am very happy with what I have but it has enormous utility to others in the world. More possessions to me would actually be a liability more than an asset.”

The data was faked.

Seven uncomfortable truths about living in Norway.

• Minimum wages compliments of fivethirtyeight.com. Look out Columbus, Seattle is closing fast.

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Sentence That Restores My Faith In “The Public”

From today’s Wall Street Journal.

Investors pulled $12.7 billion from actively managed U.S. stock funds in 2014 through November, and put $244 billion into passive index funds from Vanguard and others, according to Morningstar.

Related factoid:

Vanguard is undercutting many rivals on fees. Investors pay 18 cents for every hundred dollars they invest with Vanguard, compared with $1.24 for the average actively managed mutual fund, Morningstar said. The company also is beating its passive rivals, which charge an average of 77 cents for every hundred dollars.

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The 5 Most Important Things You’ll Read All Week

1) Have you noticed? Increasingly, bloggers are inserting numbers into post titles to increase readership and improve search engine rankings. “5” has replaced “3” for most popular number. “17” is trendy too. I don’t know why numbers increase readership and improve search engine rankings. I find it disingenuous at best and insulting at worst. As if all anyone can process anymore is a list. My one-time use of it here is sarcasm. I should start a movement. . . force a number into your title and we’ll refuse to read what follows. Who is in?

2) Imagine a world in which everyone reads and discusses books with people different than them. My favorite story from last week.

3) The Seattle Mariners are the best team in baseball when it comes to this.

4) Is this a trend. . . dad’s helping grown daughters who aren’t necessarily interested in their help? I’ve never offered unsolicited advice to my daughters. . . that’s an additional serving of sarcasm. One of my daughters’ friends laughed at her dad for sending her an article on “How to save and invest money”. Another “couldn’t believe” her dad mailed her bicycle to her at college, then assembled it during a visit. The “extremely large” bike box was difficult and embarrassing to pick up at the mail room. The two wheeler was used one or two times during the school year. This isn’t limited to dad’s and daughters. Parents often presume their young adult children want to save money, invest wisely, prepare healthy meals, bicycle, etc., etc. Maybe I should start a movement where parents let their young adult children know they’re interested in sharing different “lessons learned” if and when they’re interested. And then we’ll sit back and wait for our young adult children to ask us for help.

5) I’m filing this under “Sometimes I Amaze Myself”. I’ve done it again, I’ve come up with a brilliant idea. This one will enable me to extend my triathlon career for many more years. Based upon my swimming, cycling, and running training log, I have a very good feel for how fast I can swim 1500 or 1900 meters, how fast I can ride 40k or 56 miles, and how fast I can run 10k or 13.1 miles. That means all I have to do is guess how bad my transitions would likely be, and presto, I can spend a few minutes on-line on Mondays to see what place I would’ve finished had I actually shown up at that weekend’s races. This way I save tons of coin and race every weekend without swimming through seaweed or increasing my exposure to the sun. I “won” my age group at a few recent races.

 

Frugality’s Point of Diminishing Returns

Frugal people like me sometimes take bargain hunting too far. We need to be smarter about frugality’s point of diminishing returns.

Writing in the New York Times, Henry Petroski states the obvious—U.S. airports, harbors and highway systems are often poorly designed, built, maintained, and funded.

He adds:

. . . infrastructure can also refer to things on a much smaller scale, like private homes . . . . Thinking about the construction, aging and care of this domestic infrastructure can provide insight into how we as a nation might better respond to our mounting public works problems.

Our 60-year-old home is an example of how infrastructure can be built to stand strong, age gracefully and be almost maintenance-free. The foundation sits firmly on solid granite. From the full basement you can see how the exposed beams, joists and underside of the flooring were made of good wood, built to last.

When I see a commercial building under construction today, I see nothing like this in the materials and workmanship, perhaps because it is simply a function of finance, expected to survive only until it is fully amortized in a company’s budget.

I can see the same decline in quality when I try to do work on our house. When it was built, two-by-fours were actually only an eighth of an inch short of those nominal dimensions. Today, a two-by-four is a full half-inch shy. This sort of thing frustrates carpenters and do-it-yourselfers alike, making old construction more difficult to fix and encouraging tearing down and starting over with inferior newer materials and less skilled labor. What a waste of time, effort and money — and, more important, superior infrastructure.

Why the marked decline in the quality of home building? Petroski argues it’s because “expert craftsmen—carpenters, roofers, painters—who work with precision and pride, are increasingly being pushed out by cheaper labor with inferior skills.”

And then adds:

This is not the fault of homeowners, but of the industries whose practices favor the use of inferior products and labor that drive modern construction: the developers, lenders, builders and realtors who, to make quick money, have created a stock of domestic and commercial infrastructure that is a waste of resources and will not last.

One commenter vehemently disagreed:

“‘This is not the fault of homeowners’. Wrong wrong wrong! I work for homeowners remodeling their homes in San Francisco and environs, and their relentless pursuit of the lowest cost is costing them dearly in the long run. Many do not want to hear that I am licensed, insured & bonded; that I have only full-time long-term employees on whom I pay all required taxes and insurances, and who are respected with medical & retirement benefits; that I pay to have my hazardous waste disposed of legally (rather than pouring it down the toilet); that their toddlers will be in college before they will need my services again; in fact that their toddlers will not be intellectually impaired by improper disturbance of lead-based paint. No, many prefer the fantasy that Yelp is wise, that the China price is obtainable, that my price is merely my opening bid. We here have just built a multi-billion dollar bridge that took a quarter-century, went to the lowest bidder who subbed out major components to China, which is already showing alarming signs of premature senility, and which may not even meet it most elementary function of surviving the next Big One. Some bargain! No, we homeowners, we taxpayers, you & I, us cheapskates, we are at fault.”

In this blame game debate I side with San Francisco. My relentless pursuit of the lowest costs helps create the razor thin profit margins that give rise to all kinds of corner cutting. Us cheapskates are at fault.

This is true with respect to home building and our national infrastructure. Petroski returns to our faltering infrastructure:

We have seen short-term fixes and shoddy workmanship at home, and we see our bridges and roads the same way.

. . . we do not have to be homeowners or highway engineers to know that good materials are better than poor and a job done well from the outset will outlast one done shabbily.

As we debate how to pay for infrastructure, we should also have a discussion about raising expectations for what we’re buying. Homeowners, project managers and legislatures alike must call to account suppliers and contractors who do not produce the quality of materials and work they promise.

Again, Petroski places the blame on “suppliers and contractors” and is silent about my tendency to do everything possible to reduce my tax liability.

Meanwhile, some fellow citizens shout that they are “Taxed enough already!” and mindlessly argue that “the government is so wasteful and incompetent, it must be starved.” Any notion of public goods is lost on them. As is the quality of life of our children’s children.

My politics are different than theirs, but I’m susceptible to the same mindless, short-sighted frugality. Until I adopt a more nuanced, enlightened form of frugality, I’m partly to blame for our deteriorating homes, airports, highways, and harbors.

What People Get Wrong About Financial Literacy

Every spring a friend in North Carolina and I have a NCAA college basketball tournament bet. He takes the teams representing the Atlantic Coast Conference and I get those representing the Pacific-12. If his teams win more games, I send him a t-shirt, if mine win more, I anxiously await my cotton trophy. This year, neither conference did well, but I barely won a stylish long sleeve Guilford College tee*.

We met teaching and playing noon basketball at Guilford College in Greensboro, North Carolina, in the 90s. This year, along with the shirt(s—one for the Good Wife too, and a coffee mug, Christmas in April), he included four copies of recent Guilfordians, the liberal, liberal arts school’s student paper.

Reading them made it seem like time had stood still. Faculty salaries were still the lowest among a large comparison group of peers. Enrollment was down. Faculty morale was flagging. Some well-liked faculty were leaving to the disappointment of students. Students were protesting the administration’s salaries, which had increased markedly, and were at least average among the same comparison group. Tucked in one of the articles was a devastating detail that will make the new president’s job especially difficult. The small Quaker school has $16m in deferred maintenance. They budget $1.8m a year for continuing maintenance, meaning they’re eight years behind. Some students complained about mold in the dorms.

Colleges on the financial edge routinely defer maintenance. “Let’s delay the roof on the science lab another year.” Eventually, the quality of life for students and faculty suffers, and as with mounting credit card debt, the financial challenges multiply and trustees fret they’ll never catch up. Public schools, churches, and city council’s everywhere face the exact same challenge. Can we manage our finite revenue—whether bonds or levees, charitable contributions, or taxes—well enough to maintain our existing buildings, roadways, and parks? If you want to assess the health of a school district, church, or city, find out how much maintenance they have deferred.

We’re fortunate that our Washington State home backs up to beautiful woods that we’ve enjoyed for sixteen years. In the woods there are hiking and running trails, deer, owls, and a path to a nice city park. Now the woods are for sale and three different developers are interested. Many in our community who have organized to save the woods from being turned into another housing development attended the City Council meeting last week to implore the Council to follow through on their own five-year plan for creating more park space.

The organizing committee has done great work thinking creatively about grants and related funding that makes the purchase seem feasible. imgres But the city has been deferring maintenance on our existing parks. One includes a nice boardwalk along the Puget Sound, a walkway so neglected, parts of it will be closed to the public this summer. While sympathetic to our arguments, the city manager and council both regretted that the city can’t afford to purchase and preserve the woods because they’ve deferred far too much maintenance.

It’s human nature to put off saving for future expenses. Just like colleges, school districts, and churches, I do it all the time too. I replace my nicked up bicycle tires after flatting a few times. I get my lawn mower tuned up when it won’t start. I go to the doctor when I’m near death.

I talked to the college senior recently about car ownership. Most twenty-one year olds think exclusively about the purchase price, “If I can just save $5k for that $5k car.” I impressed on her the need for a “cushion” for additional costs like insurance, gas, and regular maintenance including oil changes, the battery, and tires. In an ideal world, she’d also factor in replacement costs, but that’s pie in the sky. Once I broadened her thinking about car ownership, she realized it’s not financially feasible yet.**

Most financial literacy talk is seriously flawed. Everyone overemphasizes technical knowledge. Do you know the “rule of 72”? Do you understand the power of compounding interest? Do you understand asset allocation, mutual funds, investing costs, dollar cost averaging, and taxes impact on your returns?

People think if schools just taught that knowledge all would be well, but it’s not that people don’t know enough about personal finance, it’s that they lack the self-discipline to spend less than they earn. Including legions of college educated people who would pass a personal finance multiple-choice test.

Schools can’t teach young people to defer purchases, to set aside money to adequately maintain and eventually replace possessions, to live within one’s means. The only way to teach anyone the limits of consumerism, to delay gratification, the importance of savings, and how to live within one’s means, is to model it for them over time.

Fortunately, my parents, especially my dad, taught me those habits without ever sitting me down for any sort of money talk. For colleges, churches, cities, and families, “deferred maintenance” means “We’re in the habit of spending more than we have.” Like mounting interest charges, it ties the hands of college administrators, church councils, city councils, and families.

We are extremely fortunate to be able to meet our family’s basic needs each month with some money left over. We can do one of three things with our surplus. 1) Succumb to status anxiety and buy unnecessary luxury items; 2) Keep existential questions about life’s larger purposes at bay through mindless consumerism; or 3) Set some of the surplus aside for anticipated future expenses.

* During graduate school, my friend was a UC Santa Cruz hippie. The UC Santa Cruz mascot is the banana slug. Second Born and I had lunch in downtown Santa Cruz in late January. After lunch we found a must have t-shirt that featured a large banana slug with the caption “SLUG LIFE”. The perfect gift for my next loss. So good in fact we decided I had to send it this year win or lose. He was very grateful and assured us he’ll get a lot of grief for it from his Geezer basketball pals. That, of course, was our hope.

** Odd to me that she’s not more motivated to make it financially feasible. At eighteen, I couldn’t wait to own my own car. So I parked golf carts and picked up range balls for a few years and bought a VW Bug for $1,500. Most gratifying purchase of all time. For the time being at least, in keeping with her peers, she’s perfectly content to bicycle, use public transportation, or, and maybe this is the problem, use her parents spare car.

You Don’t Need a Financial Planner, You Need Financial Teachers

The things I don’t know how to do dwarf the things I do. It’s sad really. Altogether, my incompetence is pretty staggering. I can’t speak any foreign languages. I can’t play any instruments or sing. I can’t listen patiently. I’m hopeless when it comes to plumbing, electrical work, bicycle and car repair. I don’t know how to sew and I can’t do my own taxes. I don’t know how to garden, bake bread, make beer, or fix the ice maker in our fridge. I can’t keep pocket gophers from tunneling all over our backyard. I don’t know how to backstroke underwater and html baffles me. I could go on and on, but you get the drift.

Despite this pathetic reality, I went against type recently and taught myself two things, how to create excel documents and how to prepare a Starbucks-like green tea latte. Life is especially good now that I don’t have to spend my weekends adding numbers or pay $4 for my daily kickstarter of choice.

Few people know how to manage money well so they turn to financial planners for help. Gail MarksJarvis ask whether there’s any value in financial advisors who get it wrong.* She points out that:

. . . the recently released 2008 Federal Reserve transcripts showed that even economists of the world’s most powerful economy didn’t have a clue. Even as Lehman Brothers collapsed, they expected the economy to grow, not go into the worst recession since the Great Depression.

That, she adds, should. . .

pierce an illusion many individuals embrace as they pour trillions of dollars into the hands of financial advisers they think can read the future and thereby deliver riches and safety.

Individuals, she says, entrusted about $13 trillion to advisers, ranging from financial planners to brokers and insurance salespeople, through the end of 2012.

Ed Gjertsen II, president of the Financial Planning Association admits, “We do not have a crystal ball. We make guesses.”

Gjersten laments:

Clients demand: Give me a hot tip so I can spend whatever I want. But the truth is, the individuals have more control over the outcome based on what they spend than the adviser has with investments.

MarksJarvis adds:

Even economists are more fallible than people might believe. The transcripts of the Federal Reserve in 2008 showed it relying on faulty models that didn’t take into account unique circumstances of the banking crisis. Based on little knowledge, they give very firm opinions.

In my early 30’s I taught myself how to manage money when it became apparent that the financial planner I hired didn’t really give a damn about my family’s future. Over time, I realized that he recommended investments that paid him generous commissions. Investments that not only took time and money to undue, but ones that performed worse than bond and stock index funds.

There are two types of financial planners—commission based and fee based. Fee based planners who charge by the hour are far better than commission based ones who are prone to recommend investments that enrich them more than their clients. What people really need are skilled financial teachers who can help people learn to manage their money themselves because of the lesson I learned the hard way two decades ago, no one cares about you or your family’s future nearly as much as you. But where are the financial teachers?

13 trillion dollars! Much of that spent on investment strategies that underperform market averages. What a travesty.

If the world’s most incompetent person learned to manage money, odds are you can too. Start with The Elements of Investing by Burton Malkiel. But don’t succumb to the widely held view that technical knowledge is the key to personal financial success. The key is defining “success” yourself and developing a complimentary mix of technical knowledge; self discipline; and dare I say, spiritual depth; to create the future you want for your loved ones and you.

* Thanks to the best ex-mill hunky for this reference.

Dare to Disagree

Interesting few days at Wimbledon, the US Supreme Court, and the humble blog. It all started when I criticized “Mr. Money Mustache” in his comment section for ripping into one of his readers. As I explained in the previous post, MMM is a wildly successful blogger who writes about personal finance and early retirement.

He provides excellent details on how he’s managed to retire early and offers no-nonsense advice on how to replicate his success. Understandably, his legion of readers dig him for the tangible help he’s provided them. He typically responds to every tenth or twentieth reader comment, and because nearly every one is in essence an “amen to that” I thought he’d return serve following my critique. But he didn’t. That is, until his next post, in which he not only referred to my criticism, but linked to my previous post titled “What Engineers Get Wrong”.

As a result, on Monday and Tuesday, I had a month’s worth of page views. An unintended part of my fifteen minutes of fame. Most of the mass of visitors just quietly poked around, some engineers however, took the time to rip into me for my criticism of them. If the thought of me being ripped into brings even a small smile to your face go back and read their comments. Or at least Allison’s who it doesn’t seem likes me very much. All I have to say to Allison is I’m much more charming in person. Ask my mom.

I’ve dared to disagree with MMM before and felt some of his readers’ wrath, so now I know what to expect. It’s an interesting phenomenon. It’s almost like he’s a cult leader whose followers refuse to question him. He’s even charismatic, but unlike most cult leaders, he’s not selling his personality or whacked out made up ideas, the vast majority of his content makes excellent sense. What I now realize is hIs readers so appreciate his writing that they don’t take kindly to anyone disagreeing with him. Which of course threatens to make his readers’ comment section a sleep inducing echo chamber.

But then again, you might argue the internet writ large, just like the media more generally, is an echo chamber. The sad truth is civic discourse, in which reasonable people disagree about topics that matter, is a lost art. One reason for that is no one likes to be criticized. We’re all defensive, to varying degrees. So much so we struggle to process contending viewpoints.

For example, MMM wrote that I “criticized his blog’s approach,” but my criticism was of a specific aspect of his thinking. The truth of the matter is I’m down with 90% of what he writes and if we had the chance, I have no doubt we’d enjoy cycling together, drinking a craft beer afterwards, and talking personal finance. I’m not lifting weights with him though.

Especially initially, I struggled to process all the engineers’ criticisms of me too. I’d zero in on one particular sentence that I believed to be especially wrongheaded and slight everything else. Just as my criticism was somewhat muddled in MMM’s head, their messages were muddled in mine.

The youngest daughter got a kick out of these events. “You’ve gone viral!” After she read Allison’s lengthy criticism of my last post, she asked, “So did what she write change your thinking?” That’s the all important question. After the first reading, I would have had to answer no, not at all, because I read it defensively. But thinking aloud, I said to youngest daughter, “It would be awfully hypocritical of me to blow her off when my whole point is to promote critical inquiry.”

Then I considered the criticisms more carefully and realized they had one thing in common—that I had unfairly overgeneralized about one group of professionals. Even though it was a literary device of sorts, I understand why it was upsetting. Because they showed the courage of their convictions and took the time to disagree with me, my thinking was challenged and deepened, and hopefully, that of new and old readers’ as well.

And as a result, my little slice of the internet, for at least a brief moment in time, was anything but an echo chamber.