Saturday, March 31, 2012

Celebrate Human Achievement Hour - March 31st 8:30pm

From the Competitive Enterprise Institute (CEI)-- "On March 31, some people will be sitting in the dark (like the North Koreans do every night) to express their "vote" for action on global climate change. Instead, you can join CEI and the thousands of people around the world who will be celebrating Human Achievement Hour (HAH). Leave your lights on to express your appreciation for the inventions and innovations that make today the best time to be alive and the recognition that future solutions require individual freedom not government coercion."

YTD Portfolio Performance - End of 1st Quarter

After a tough 2011, our sample highly diversified balanced portfolio returned a positive 8.60% for the 1st quarter, underperforming the S&P 500 return of 12.59%. Stocks had a tremendous 1st quarter, while bonds lagged last years performance. It's hard to see much upside potential in bonds at current yields.

Friday, March 30, 2012

Abbott and Costello do Unemployment

U.S. Unemployment Up in February | Underemployment is 19.1%, up from 18.7% in January

COSTELLO: I want to talk about the unemployment rate in America .
ABBOTT: Good Subject. Terrible times. It's 9%.

COSTELLO: That many people are out of work?
ABBOTT: No, that's 16%.

COSTELLO: You just said 9%.
ABBOTT: 9% Unemployed.

COSTELLO: Right 9% out of work.
ABBOTT: No, that's 16%.

COSTELLO: Okay, so it's 16% unemployed.
ABBOTT: No, that's 9%...

COSTELLO: Wait a minute. Is it 9% or 16%?
ABBOTT: 9% are unemployed. 16% are out of work.

COSTELLO: IF you are out of work you are unemployed.
ABBOTT: No, you can't count the "Out of Work" as the unemployed. You have to look for work to be unemployed.

ABBOTT: No, you miss my point.

COSTELLO: What point?
ABBOTT: Someone who doesn't look for work, can't be counted with those who look for work. It wouldn't be fair.

COSTELLO: To whom?
ABBOTT: The unemployed.

COSTELLO: But they are ALL out of work.
ABBOTT: No, the unemployed are actively looking for work. Those who are out of work stopped looking. They gave up. And, if you give up, you are no longer in the ranks of the unemployed.

COSTELLO: So if you're off the unemployment roles, that would count as less unemployment?
ABBOTT: Unemployment would go down. Absolutely!

COSTELLO: The unemployment just goes down because you don't look for work?
ABBOTT: Absolutely it goes down. That's how you get to 9%. Otherwise it would be 16%. You don't want to read about 16% unemployment do ya?

COSTELLO: That would be frightening.
ABBOTT: Absolutely.

COSTELLO: Wait, I got a question for you. That means they're two ways to bring down the unemployment number?
ABBOTT: Two ways is correct.

COSTELLO: Unemployment can go down if someone gets a job?
ABBOTT: Correct.
OSTELLO: And unemployment can also go down if you stop looking for a job?
ABBOTT: Bingo.

COSTELLO: So there are two ways to bring unemployment down, and the easier of the two is to just stop looking for work.
ABBOTT: Now you're thinking like an economist.

Nassim Nicholas Taleb - How to Prevent Other Financial Crises

Nassim Nicholas Taleb (author of Fooled by Randomness and The Black Swan) co-wrote a paper with George Martin that appears in the SAIS Review of International Affairs vol XXXII no. 1 (Winter-Spring 2012).

This article argues that the crisis of 2007–2008 happened because of an explosive combination of agency problems, moral hazard, and “scientism”—the illusion that ostensibly scientific techniques would manage risks and predict rare events in spite of the stark empirical and theoretical realities that suggested otherwise. The authors analyze the varied behaviors, ideas and effects that in combination created a financial meltdown, and discuss the players responsible for the consequences. In formulating a set of expectations for future financial management, they suggest that financial agents need more “skin in the game” to prevent irresponsible risk-taking from continuing.

[N]obody should be in a position to have the upside without sharing the downside, particularly when others may be harmed. While this principle seems simple, we have moved away from it in the finance world, particularly when it comes to financial organizations that have been deemed “too big to fail.”

The best risk-management rule was formulated nearly 4,000 years ago. Hammurabi’s code specifies:
“If a builder builds a house for a man and does not make its construction firm, and the house which he has built collapses and causes the death of the owner of the house, that builder shall be put to death.”
Clearly, the Babylonians understood that the builder will always know
more about the risks than the client, and can hide fragilities and improve
his profitability by cutting corners—in, say, the foundation. The builder can
also fool the inspector (or the regulator). The person hiding risk has a large
informational advantage over the one looking for it....

The Hammurabi rule marks the separation between an agent’s interests and those of the client, or principal, she is supposed to represent. This is called the agency problem in the social sciences. Often closely associated is the problem of moral hazard, wherein an actor has incentive to behave in an economically or socially suboptimal manner (e.g. overly risky) because she does not bear all of the actual and/or potential costs of her action. In banking, these two are combined most acutely in the case of large institutions that may be deemed “too big to fail,” as increased risk taking (moral hazard) may lead to greater interim compensation to management (agent) at the expense of junior claimants such as shareholders and guarantors (taxpayers, etc.) (principals). The Hammurabi rule solves the joint agency and moral hazard problem by ensuring that the agent has sufficient non-diversifiable risk to incent the agent to act in the joint interest of the agent and the principal.

Read the full paper here [PDF].

Thursday, March 29, 2012

Mini Kiev

A detailed miniature animated portrait of the capital of Ukraine.

Where in the Constitution is Congress Granted the Power to Enact an “Individual Mandate?"

To set the stage: An individual mandate is a requirement by a government that certain individual citizens purchase or otherwise obtain a good or service. In the case of the Patient Protection and Affordable Care Act signed in 2010, the government requires people to buy a good or service as a condition of lawful residence in the United States, namely a health care insurance plan approved by the government or pay a penalty. Under the rule, most Americans will have to carry insurance starting in 2014. Otherwise, the federal government will levy a penalty on them starting at $95 a year or 1% of their taxable annual income, whichever is greater. By 2016, the penalty rises to $695 a year or 2.5% of taxable income, up to a maximum of $2,085 a year for a family. Individuals and employers will have to inform the federal government of whether they are carrying insurance and whether it meets the law's requirements.

Such a requirement to enter into an act of commerce or pay a penalty is largely unprecedented in US law; hence, the case pending before the Supreme Court.

Now for the entertainment: Here's how some of our best and brightest in Congress responded to the question "where does the Constitution gives Congress the power to enact an “individual mandate?”:

Rep. XXXX - "Are you serious? Are you serious?"

Rep. XXX cited the “Good and Welfare Clause” as the source of Congress’s authority [there is no such clause].

Rep. XXX responded, “the federal government can do most anything in this country.” [fails to grasp the concept of enumerated and limited powers]

Rep. XXX replied, “There’s nothing in the Constitution that says the federal government has anything to do with most of the stuff we do. How about [you] show me where in the Constitution it prohibits the federal government from doing this?”

Rep. XXX said “I don’t worry about the Constitution on this, to be honest [...] It doesn’t matter to me.” When asked, “Where in the Constitution does it give you the authority …?” He replied, “I don’t know.”

Sen. XXX said he is “not aware” of which Constitutional provision authorizes the healthcare bill.

Sen. XXX added, “We have plenty of authority. Are you saying there’s no authority?”

Sen. XXX told a questioner, “I’ll leave that up to the constitutional lawyers on our staff.”

(Names withheld to spare those who voted for them the embarrassment.)

Yes, these are some of the genius sworn to protect and defend the Constitution. "I, (name of Member), do solemnly swear (or affirm) that I will support and defend the Constitution of the United States against all enemies, foreign and domestic; that I will bear true faith and allegiance to the same; that I take this obligation freely, without any mental reservation or purpose of evasion; and that I will well and faithfully discharge the duties of the office on which I am about to enter. So help me God."

T. Boone Pickens: Energy Realist

In the history of America, we've never had an energy plan. We don't even realize the resources that we have available to us.

~ T. Boone Pickens

The US Energy Advantage

Anyone want to buy a slightly used taxpayer-financed solar plant?

Where the Money Goes

Jim Simons of Renaissance Technologies on Improving Math Education

Math for America


Sunday, March 25, 2012

The Power of Wind Power

Sunday Verse: Michaelangelo

To The Supreme Being

The prayers I make will then be sweet indeed,
If Thou the spirit give by which I pray:
My unassisted heart is barren clay,
Which of its native self can nothing feed:
Of good and pious works Thou art the seed,
Which quickens only where Thou say'st it may;
Unless Thou show to us Thine own true way,
No man can find it: Father! Thou must lead.
Do Thou, then, breathe those thoughts into my mind
By which such virtue may in me be bred
That in Thy holy footsteps I may tread;
The fetters of my tongue do Thou unbind,
That I may have the power to sing of Thee,
And sound Thy praises everlastingly.

~ Michaelangelo, translated by William Wordsworth (1770-1850)

The Growth of Wal-mart and Sam's Club

Thursday, March 22, 2012

Quote of the Day: Cicero

The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.

~ Cicero, 55 B.C.

HT: Maggie's Farm

Grouch: The problems caused by government have changed little over the centuries, which is why the founders sought to put severe restraints on governmental power and authority.  Unfortunately, all politicians, whatever the party, seem to be extremely cleaver at gaming the system, spending other people's money folishly, and circumventing or altering the rules to ensure themselves and their cronies are more equal than everyone else.

High Gas Prices Explained

Hint: it's the Bernank.

Tuesday, March 20, 2012

Quote of the Day: Pascal-Emmanuel Gobry

If you had asked an 11-year-old Jeff Bezos to let his imagination run wild and think of the stuff that he would most dream to have as an adult, he might have said:

  • The world’s biggest bookstore! Maybe even a bookstore that can beam any book directly to your hand in an instant (and movies and music, too!).
  • A giant sky computer that can imitate human intelligence.
  • A spaceship.
  • …And maybe even a robot army.

Of course any adult would have smiled slightly condescendingly, patted him on the head and helpfully explained that these things aren’t possible.

~ Pascal-Emmanuel Gobry, from Jeff Bezos Is Indulging His 11-Year-Old Self And We Love It

Round and Round We Go, Where the Subsidies Stop, No One Knows

From The Examiner:
A heavily subsidized solar company received a U.S. taxpayer loan guarantee to sell solar panels to itself.

First Solar is the company. The subsidy came from the Export-Import Bank, which President Obama and Harry Reid are currently fighting to extend and expand. The underlying issue is how Obama’s insistence on green-energy subsidies and export subsidies manifests itself as rank corporate welfare.

Here’s the road of subsidies these solar panels followed from Perrysburg, Ohio, to St. Clair, Ontario.

First Solar is an Arizona-based manufacturer of solar panels. In 2010, the Obama administration awarded the company $16.3 million to expand its factory in Ohio — a subsidy Democratic Gov. Ted Strickland touted in his failed re-election bid that year.

Five weeks before the 2010 election, Strickland announced more than a million dollars in job training grants to First Solar. The Ohio Department of Development also lent First Solar $5 million, and the state’s Air Quality Development Authority gave the company an additional $10 million loan.

After First Solar pocketed this $17.3 million in government grants and $15 million in government loans, Ex-Im entered the scene.

In September 2011, Ex-Im approved $455.7 million in loan guarantees to subsidize the sale of solar panels to two solar farms in Canada. That means if the solar farm ever defaults, the taxpayers pick up the tab, ensuring First Solar gets paid.

But the buyer, in this case, was First Solar.

A small corporation called St. Clair Solar owned the solar farm and was the Canadian company buying First Solar’s panels. But St. Clair Solar was a wholly owned subsidiary of First Solar. So, basically, First Solar was shipping its own solar panels from Ohio to a solar farm it owned in Canada, and the U.S. taxpayers were subsidizing this “export.”

First Solar spokesman Alan Bernheimer defended this maneuver, saying this really was an export, pointing out that First Solar paid sales taxes on the transaction.

But this subsidy undermines the arguments for Ex-Im’s existence. Ex-Im, whose authorization expires May 31, is supposed to be a job creator, helping U.S. manufacturers beat foreign manufacturers by having U.S. taxpayers backstop the financing.

“It is critical that we encourage more American companies to compete in the global marketplace,” Ex-Im Chairman Fred Hochberg said about the First Solar deal, saying the subsidy “will boost Ohio’s economy, create hundreds of local jobs and move us closer to President Obama’s goal of doubling U.S. exports by the end of 2014.”

The implication here is that First Solar was “competing” with foreign solar panel makers in order to sell solar panels — to First Solar.

Ah, yes, the old Government shell game at its finest. Nothing like using taxpayer money to buy products from yourself.

The Next Financial Crisis is Almost Here

The Occupods aren't the sharpest folks around (especially when it comes to cause and effect analysis), but they are onto something in demanding student loan forgiveness from the Government. They are painfully aware most of them will never be able to pay their student loans back. Just look at the types of degrees many are getting (Medieval Poetry, etc.). While it is a noble goal for government to try to increase the education levels of young people, they have once again taken it to excess as with the recent housing crisis. Easy access to money for college loans has led to the overexpansion of debt to levels beyond the repayment ability of a large percentage of borrowers, with government guaranteeing much of the debt. This easy money has also driven up demand for higher education resulting in costs way out of alignment with inflation. The creation and expansion of federally subsidized student loans has created another credit bubble that will pop someday soon and leave all taxpayers on the hook.

Monday, March 19, 2012

Frank Capra Does Banking

Before the feel good Christmas movie, It's a Wonderful Life, Frank Capra directing a movie called American Madness in 1932, a propaganda piece for the populist ideas that banks were the problem, people were hoarding money, and “good” people deserve loans to get the economy going. This speech, delivered by Walter Huston, the bank president, sounds remarkably contemporary and could have been made in 2008 or 2011.

Sunday, March 18, 2012

Somewhere Between Thailand and the USSA

Is there such a thing as a a happy median somewhere between Thailand and the USSA, where the government would do what it is supposed to do and otherwise leave us alone?

Friday, March 16, 2012

Cartoon of the Day: A Sprinkle of Pixie Dust Makes the Unbelievable True

North Dakota's Bakken Shale from Space

NOAA's National Geophysical Data Center has produced this image of the upper Midwest with the recent activity in the Bakken Shale highlighted in red. The image is a composite of cloud-free images collected over several years have been combined to make this picture: 1992 is shown in blue, 2000 in green, and 2010 in red. Places that had lots of light in all three years show up bright white (equal amounts of blue, green and red) -- that basically shows established cities and towns (like the Twin Cities) that haven't changed much over that time period. The red color indicates an area of bright lights in 2010 that was dark in 2000 and 1992. Bakken Shale oil-drilling boom got underway a few years ago. Oil is being produced from the Bakken by drilling and hydraulically fracturing long horizontal wells. The rigs and other facilities are highly illuminated at night because drilling is a 24/7 proposition - time is money so there is no 'down time.'

North Dakota is on-track to soon surpass Alaska and Texas as the number one oil producing state and this is going through an economic boom.

Contrast this with production statistics on federal lands recently published from the EIA:

Contrary to what the politicians say, fossil fuel (coal, oil, and natural gas) production on Federal and Indian lands is the lowest in the 9 years EIA reports data and is 6 percent less than in fiscal year 2010. Thank goodness production on private lands is making up the difference.

HT: Carpe Diem

Thursday, March 15, 2012

Quote of the Day: Donald Boudreaux

During this morning’s 8 o’clock hour I heard one of the most ironic lines that I’ve heard in some time. That this irony was unintentional makes it all the more telling.

Asked by your “pump patrol” reporter about rising gasoline prices, a motorist at a gasoline station noted that “My tank is actually way more than half full now. I’m topping it off because I’m sure the price will be even higher this weekend.” When your reporter then asked her “What do you think explains these rising prices?” she replied “Speculators.” Your reporter followed up with “Do you think they should be stopped?” The motorist responded immediately: “Of course! They’re criminal.”

Speculating that the price of gasoline will rise, this motorist took action today – buying gasoline that she otherwise wouldn’t have bought today – that puts upward pressure on the price of gasoline today.

Had your reporter pointed out that this motorist herself is speculating in gasoline, I wonder if this motorist would have persisted in regarding speculation as being criminal. I wonder, too, how she would react if government – heeding her advice to stop speculation – were to forcibly prevent motorists from topping off their tanks.

~ Donald Boudreaux, from A Letter to the Programming Director at Washington, DC’s, WTOP Radio

Cartoon of the Day: Government Innovation

Tuesday, March 13, 2012

Who to Vote For in 2012: Solved

Click to Enlarge

Proof that Capitalism Works

Move over Gillette and Schick, here comes some competition.

The Scale of the Universe

You need a more recent version of Adobe Flash Player.

The Scale of the Universe - Interactive

Flash Animation Credit & Copyright:
Cary & Michael Huang

Did Government Policy Cause the Financial Crisis? -- "AEI's Peter Wallison argues in the video above that the financial meltdown was largely a consequence of government housing policy that underwrote unsustainable economic activity. He draws heavily on the research of Fannie Mae's former chief credit officer, Edward Pinto (now at AEI), which found that federal housing agencies drastically underreported the number of high-risk mortgages on their books. According to Wallison and Pinto, there were about 28 million high-risk mortgages in the U.S. in 2008; roughly 70 percent of those mortgages were owned by government-sponsored enterprises such as Fannie Mae and Freddie Mac."

Grouch: The jury will probably always be out on this question. There'll never be a definitive answer, just a lot of competing theories shaded by political agendas. My own personal belief is that government provided the fertile ground for the banks, mortgage lenders and Wall Street firms to plant the seeds of greed and recklessness. No one area is completely responsible, but collectively they are all responsible. While it is a noble goal for the government to want to increase home ownership, this policy often results in distortions of lending standards and perverse incentives that lead to malinvestment and people in homes with mortgages they can't afford.

Monday, March 12, 2012

Steve Bridges, 1963-2012

Pet Peeves: Traveling

Sure, sports is nothing more than entertainment. But I want it to mean something more, especially college sports, or at least be honest and fair. NBA refs barely seem to know what traveling is anymore, and their foul calling is a tad inconsistent to the say the least..... sometimes you have to draw blood to get a foul called, and sometime just being within a foot of a player will get a foul called. This inconsistency really sours the pro game for me.

Now college seems to be getting in on the act. The NCAA officials in every game I've watched this year have forgotten the rules of the game and don't know how to call a walk. Is it just that the athletes have gotten so athletic the refs can't keep up? I don't think so. The game has become pure entertainment and they let the rules slide to keep the fans entertained with the spectacular play. I, for one, am sorry to see this trend develop.

This doesn't mean I won't be watching the NCAA tournament games for the next several weeks, but the outcomes will seem tainted to me. Give me the pure, unadulterated game called straight-up according to the rules.

Are the Polar Ice Caps Completely Gone Yet?

So much for Al Gore's prediction back in 2007 that there would be no sea ice in five years. The above picture from the University of Illinois shows that Alaska and Greenland are having a very healthy year for sea ice.

Don Surber of the Daily Mail reports:
So much for an ice-free Arctic. Henry Hudson’s long-ago dream of a Northwest Passage that would link England to the Orient by sea will have to wait another century as Mother Earth gives him the cold shoulder. Again.

From Real Science: “1979 was the peak year for Arctic ice, yet 2012 has more ice around Greenland and Alaska than 1979 did.”

Same date satellite data seems to show that Iceland and everywhere else is iced over this year when they were feeling a little green 33 years ago.

Of course, our moral and intellectual superiors elsewhere in the press keep banging the drums of Man Caused Global Warming.

Sunday, March 11, 2012

Quote of the Day: Warren Buffett on Gold

Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.

Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.

~ Warren Buffett, Berkshire Hathaway 2011 Annual Report

Some Additional Wisdom from Buffett:

Friday, March 9, 2012

How to Peel a Head of Garlic in Less Than 10 Seconds

How to Brick a $100K+ Fisker Karma

According to Consumer Reports:

Our Fisker Karma cost us $107,850. It is super sleek, high-tech—and now it’s broken.

We have owned our car for just a few days; it has less than 200 miles on its odometer. While doing speedometer calibration runs on our test track (a procedure we do for every test car before putting it in service by driving the car at a constant 65 mph between two measured points), the dashboard flashed a message and sounded a “bing“ showing a major fault. Our technician got the car off the track and put it into Park to go through the owner’s manual to interpret the warning. At that point, the transmission went into Neutral and wouldn’t engage any gear through its electronic shifter except Park and Neutral.

We let the car sit for about an hour and restarted it. We could now engage Drive and the same error message disappeared. After moving it only a few feet the error message reappeared and when we tried to engage Reverse the transmission went straight to Park and again no motion gear could be engaged. After calling the dealer, which is about 100 miles away, they promptly sent a flatbed tow truck to haul away the disabled Fisker.

 We buy about 80 cars a year and this is the first time in memory that we have had a car that is undriveable before it has finished our check-in process.

The taxpayers are only into this company to the tune of $528.7 Million through the Stephen Chu Hedge Fund Venture Capital Fund at the Department of Energy.

Reasons to Buy a Chevy Volt

Chevy Volt - Building a Better Tomorrow from Ben Howe on Vimeo.

As Richard Prior said, "when you are running down the street with your hair on fire, people will get out of your way."

But in all seriousness, this is yet another tax break for the top 10% (if they choose to buy such a toy) at the expense of the 90% to subsidize a product that could not succeed in the free market. Not many people can afford to pay $40-50K for a car that only has a range of 30 miles and might burn the house down if they park it in their garage.

A Civics Lesson About the Forms of Government

Wednesday, March 7, 2012

The Grouch's Millionaire Secrets

“Earnings are only a means to an end, and the means should not be mistaken for the end. Therefore, we must say that a stock derives its value from its dividend, not its earnings. In short, a stock is worth only what you can get out of it. Even so spoke the old farmer to his son: A cow for her milk/ A hen for her eggs/ And a stock, by heck/ For her dividends.”

~ John Burr Williams, “The Theory of Investment Value” (1938)

Many books have been written over the years on how to become a millionaire. Some are based on sound business and investment principals while others are based on the latest fad of the moment. But you don't need to waste your money on these types of books (invest it instead). In the simple world of the Grouch, they can all be boiled down into a handful of key items that can fit on a single sheet of paper.

1. A million bucks ain't what it used to be. The younger you are, the more money you will need to live independently. You should set your goals higher, probably somewhere in the 3 - 5M range, before telling your current boss goodbye for good.

2. Your house is not an investment. It is a place to live. The days of massive real estate gains are over. Long term house price tend to move in line with inflation. The current correction in real estate is a reversion to the long term trend line. Until we have a good dose of inflation and higher employment rates, don't expect to see prices rise significantly.

3. Gold is not an investment. At best, gold is an insurance policy against fear. Gold has no fundamentals, no earnings, no cash flow, no dividends or interest. Its price is determined by supply and demand, and most of all by fear. In troubled times, its price will move higher as stocks move lower. In good times, its price will tend to drift lower.

4. Invest early and often. Let the power of compounding work for you and be happy with the 7 - 12% average gains of the market over the long term. Compounding is a magical thing that can turn small sums of money into large sums of money.

5. Choose low cost investments. Cost are subject to the laws of negative compounding. A 2% expense ratio is a tough hurdle to overcome year after year. Even the most talented stockpickers must take extra risk to beat the market. An index with an expense ratio of .07% is much more likely outperform a fund with an expense ratio north of 2%. It does happened, but it is usually luck rather than skill that lands a person in these fortunate funds. Odds are not in an investors favor with high expenses. Why buy yachts for your broker or fund manager instead of yourself?

6. Stay away from today's hot hand and pick managers based on investment philosophy, or invest your own money. Statistically, value investing produces higher returns over the long-haul as compared to growth investing. Chasing performance only works occasionally, and usually results in permanent loss of capital. Pick managers that apply a consistent discipline to their investments and only buy assets that they believe are selling for cents on the dollar.

7. Be a contrarian. The best deals are to be found in what investors are currently shunning. Major stock market corrections like in 2008 and 2009 are a prime example of this. But it is hard to control the emotions and be rational when fear is so thick in the air you can almost cut it with a knife. So do your homework and make sure the current problems with a business or security aren’t of a permanent or fatal nature.

8. Be frugal. Live well below your means. Make bargain-finding a lifestyle. Be a coupon-clipper at the grocery store, and put at least 100K miles on your cars.

9. Use demographics in your favor. Observe the world around you with fresh eyes every day. See where the population trends are heading and invest in these areas prior to discovering trends with the masses from Money Magazine, Kiplingers or Smart Money. By then, it is too late.

10. Look at everything with a skeptical eye. Try to poke hole in every investment thesis, and understand the potential downside of every investment before committing capital. This is more important than understanding the potential upside of investments.

11. Keep a balanced approach. Use some income assets to help you deal with portfolio volatility, and to provide stability in the bad times. But realize you will never get rich off of these type of investments. At best you will stay 1 or 2 percentage points ahead of inflation.

12. Invest in yourself. Always seek to grow your base of knowledge every chance you get, whether through formal or informal education. Reading books, youTube and blogs are a great source of knowledge as well as misinformation so you have to apply a filter to everything you experience to separate the wheat from the chaff.

13. Have fun. Life's an adventure. If you don’t enjoy compounding wealth, then by all means be like most people and live paycheck to paycheck. Buy whatever your heart desires, but don’t come boo-hooing to Uncle Sam that the taxpayers should fund your dream retirement. This isn't Greece. But for those who want to try something different, compounding wealth can be a lot of fun. Not just for misers, but for regular folks who may ultimately want to give it all away to their favorite cause, or just take care of their families.

Ok. So there’s nothing secret about anything in this list. It’s all just common sense, and if applied consistently throughout your life will make you very wealthy, much more than your friends who will be laughing at how cheap you are. It all comes down to what you want to do with your life. If being financially independent is important, these items can provide some general guidance. Each person will have to individually map out their course to wealth, but the principles are universal and timeless.

Monday, March 5, 2012

The Case for Optimism and Abundance

At TED2012, Peter Diamandis makes a case for optimism -- that we'll invent, innovate and create ways to solve the challenges that loom over us.  The last 100 years have been an absolutely incredible time to be alive.

Sunday, March 4, 2012

Quote of the Day: Matt Ridley

The entire argument for green jobs is a version of Frederic Bastiat’s broken-window fallacy. The great nineteenth century French economist pointed out that breaking a window may provide work for the glazier, but takes work from the tailor, because the window owner has to postpone ordering a new suit because he has to pay for the window.

You will hear claims from Chris Huhne, the anti-energy secretary, and the green-greed brigade that trousers his subsidies for their wind and solar farms, about how many jobs they are creating in renewable energy. But since every one of these jobs is subsidised by higher electricity bills and extra taxes, the creation of those jobs is a cost to the rest of us. The anti-carbon and renewable agenda is not only killing jobs by closing steel mills, aluminium smelters and power stations, but preventing the creation of new jobs at hairdressers, restaurants and electricians by putting up their costs and taking money from their customers’ pockets.

We now have an estimate, from meticulous work in a new report by the Renewable Energy Foundation, of just how costly those subsidies are going to get in a few years’ time: £15bn a year, or 1 per cent of GDP. Ouch. That’s more than this year’s growth.

Contrast that with news from the United States that, according to a report from IHS Global Insight, the cheap shale gas revolution now in full flow has created 148,000 jobs directly within the gas industry and – by making energy cheaper – has created at least another 450,000 jobs elsewhere in the economy. By 2015, the total impact of shale gas will be 870,000 new jobs, says the report.

Shale gas now provides more than a quarter of American gas from a standing start about five years ago. Its effect has been dramatic. Whereas gas prices rose sharply here in the last two years, pushed up by oil prices, the Libyan civil war (which constricted supply) and the Japanese earthquake (which boosted demand), by contrast they stayed low in the United States.

~ Matt Ridley, from In America, the shale gas revolution is creating jobs and growth. It can here too

Grouch: Ridley is his usual brilliant self in this editorial. Here in America, I'd say the shale gas revolution is happening in spite of the politicians and the resulting lower prices are prompting many, many folks to convert from oil and propane heating over to natural gas. Our anti-Energy Secretary Stephen Chu has wasted billions of taxpayer dollars on green energy companies with political connections, many of which have gone bankrupt even with massive government loan guarantees. Let's hope the political insanity on both sides of the Atlantic will end soon.

drill, drill, drill = supply, supply, supply = low, low prices