The quintessential parenting experience

So we're at my in-laws' house in OH and my daughter (age 5) alerts me this morning at 6 AM that her 'tummy hurts'. I, being the sensitive father that I am, tell her to take a drink of water and go back to sleep.

I proceed to go downstairs and continue working on a blog post. About 20 minutes later, I hear a muffled yell coming form her bedroom. I run up-stairs an find her laying in bed with both of her hands clamped over her mouth and now she's whimpering. She's being a total trooper and trying to keep her yak off the bed.

I quickly scan the unfamiliar room looking for a trash can or bucket she can unload into. No luck.

I make the decision to pick her up and carry her to the bathroom. Here's where I made a critical error... I carried her facing me. Needless to say, after about 7 steps, I looked like a first row audience member of that watermelon-smashing idiot - Gallagher.

Lesson learned: never carry a loaded weapon or sick 5-year-old with the business-end facing you.

Do you need to refinance to eliminate PMI?

Private Mortgage Insurance (PMI) is one of the most avoidable expenses that home owners experience. Your bank will charge you PMI if your mortgage balance exceeds 80% of the appraised value of your home. Most folks who get hit with this expense are just entering financial adulthood and don't know that it's easily avoidable.

You can avoid this expense up front by combining a 80% first mortgage with a Home Equity Line of Credit or Home Equity L0an. This is the best strategy to take when you are in the home buying process.

If you've already made the PMI mistake, here's your plan of action:

1. Determine if you are below 80% LTV (Loan to Value) based on the original purchase price of the home. Hopefully you remember what you paid for your house... just divide your remaining mortgage principle (found on your mortgage statement) by the purchase price. If this number is below 0.80, you have a great case for calling your lender and demanding that they cancel the PMI. If your purchase price LTV is > 0.8, go to step 2.
2. Determine if your current appraised LTV is less than 80%. This is a bit more difficult and will take some research and, potentially some expense. If you can justify to your mortgage company that your property has appreciated enough to drive your LTV under 80%, they are required by law to cancel the policy.

• The easiest approach is to simply call and, if necessary, beg your mortgage company to cancel the policy
• If that doesn't work and you're pretty confident your house as appreciated enough, get an appraisal from a state licensed appraiser... by law your mortgage company must accept the result.

If you still don't have a LTV below 80%, you may need to look into getting a HELOC and paying-down your primary mortgage. Just make sure you shop around and watch-out for any and all extra fees... you should be able to find HELOCs at or below the Prime Rate and without any application or annual fees.

Do you hate talking to customer service computers?

Paul English has devoted a site to listing all of the 'cheat codes' for those annoying voice response computers your banks and utilities have installed to dissuade you from talking to an actual human employee.

Click here and enjoy...

ER Book Review: First, Break All The Rules

This is one of my favorite leadership books. It's written by a couple of smart guys from the Gallup organization. They set-out to determine what leadership behaviors generated the most discretionary effort from their employees. Discretionary effort is the time and emotion that employees may give their employers (actually they give it to leaders, not companies) above and beyond what is required for their continued employment.

Their findings were based on interviews with over 1 million employees and over 80 thousand leaders. A few of their unconventional conclusions...

• Focus on the strengths and talent of your employees. Put employees in job where they are sure to succeed.
• Don't spend time trying to 'fill-in' the weakness of your employees... you won't be able to change them and fixing their weaknesses won't deliver any incremental value to the organization
• People are people first and employees second. As a leader, you cannot avoid the personal lives of your team. When they have personal struggles, you have to be open to helping them deal with their issues.
• Employee talent and leadership ability are not really learned... you either have a particular talent or your don't. Sure, you can learn new skills (typing, programming, woodworking)... talent (logic, creativity, competitiveness, etc.), however, is born and developed early in our life and cannot be developed in a seminar

If you are a leader or you want to understand your leader, this book is one of the best.

Priceless

Brand New Dell 6000 Laptop: $850

Annual Internet Connection: $540

Annual Forbes Subscription:$45

Investment Newsletters: $400

Early Riser Blogging Income for 2005: $3.76

$1,831 Tax Loss For My Blogging Business: Priceless (well... actually $613 in tax savings)

No, this blogging thing is not a hobby for me. I intend on publishing interesting enough content to get a loyal, ad-clicking, google searching readers who can support me - or, at least, my Starbucks habit.

If you like what you read here, check-out my advertisers and use the google search bar. If you think I suck, click on the ads a bunch and negate my tax loss... I'll really be pissed.

401k Versus Roth - A New ER Ratio!

So you are one of those people who can afford to save some money, but you are bewildered as to which investment vehicle will be your best bet... pre-tax 401k or post tax Roth IRA. I hate to break it to you but there is no 'one size fits all' answer.

Before I get into the decision discussion, I need to make sure you are ready to make such a decision. Make sure you are doing the following...

• You should be contributing enough to your company's 401k to get the company match. This is free money and usually a great deal. My company will contribute 4% of my salary if I put 5% or more into my 401k... that's a risk free 80% return on my investment!
• Your non-mortgage consumer debt (credit cards, car loans, etc.) should be at interest rates below the average return for the market (8-12%). If you are paying 18% interest on your CCs, use your extra money to pay-off that debt.
• You are spending less than you earn.

OK... so we're talking about whether you should invest your money in a 401k or Roth. Let's make sure we're all on the same page as to our definitions of each account:

401k

• employer sponsored
• pre-tax contributions- that means no federal, state or social security taxes are withheld from your earnings if they are contributed into this account
• tax deferred - you don't pay taxes now - but when you withdraw this money, it will be taxed like normal income
• $14,000 annual contribution limit (more for older folks)

Roth IRA

• you can pick one up at your broker or bank
• income limits - if your AGI exceeds $150k (married), you cannot contribute
• post-tax contributions - you use money from your after tax earnings to fund this account
• tax free earnings - you will not pay any earnings on the investment gains if you wait to withdraw the money in retirement

Both of these investment accounts have a bunch of restrictions and rules which are important but won't be covered in this article. Read your plans' rule carefully, blah, blah, blah.

So... I've worked-out the math on which account is more advantageous. It's easier than I thought it would be:

x= marginal tax rate today

y= marginal tax rate when you retire

TERRAR (The Early Riser Retirement Account Ratio) = (1-x) / (1-y)

TERRAR tells you the after-tax value ratio of a tax-free Roth compared to a tax deferred 401k. If the TERRAR is <> 1, you should go with the Roth. Let's do an example...

x= today's marginal tax rate = 28%

y= retirement marginal tax rate = 15%

TERRAR = (1-0.28) / (1-0.15) = 0.72 / 0.85 = 84.7%

This would tell me that my after-tax R0th balance would be 15.3% less than my after-tax 401k balance.

Easy... right? Well, you ask, how do I know my marginal tax rate when I retire? Good question. For the older folks in the audience, you should estimate your annual retirement income and look at the current tax tables. For those of us who are 20 or more years away from retirement, you have to be a fortune-teller.

I personally believe that when I retire (2040 or so), taxes will be less than they are today. This is especially the case if you believe the Singularity is near.

Ratio - smatio you say... give me some practical advice! OK... here's where I would put my money in descending order:

• Employer Stock Purchase Plan - slam dunk if the terms are favorable
• 401k to get employer contribution - you should put enough in to get the employer match
• pay off all debt is APR over 10%
• split remaining $ between 401k and Roth

Remember, everyone's financial situation is different. There are significant estate impacts to these different investment vehicles. If you are unsure about what to do, go find yourself a fee-only financial planner to work-out the numbers.

Related Posts

Kiddie Tax 2006 , I Love Dividends , Investment Newsletter Review: Prudent Speculator, Employee Stock Purchase Plan

Trying-out Picasa

 

Coming To Terms With Christmas

For those of you who don't know me... I was raised Jewish (conservative), became a negative atheist shortly after my Bar Mitzvah, married a Catholic 10 years ago, and I'm now on The Board of our UU church. My reaction to all things surrounding Christmas has gone from jealously, to hatred, to silence and finally to acceptance.

Growing up Jewish in the Midwest (70's & 80's) was a somewhat isolating experience. Sure there was a "Jewish Community" in my town, I interacted with it once a week at Hebrew school and a few times a year during the High Holidays. For the uninitiated, Hebrew school is the Jewish equivalent of CCD or Wednesday night church school. I don't remember much... other than the fact I have absolutely no ability to learn foreign languages. Christmas-time was pretty painful. Everywhere I went (except at our Synagogue), I was reminded that I was different and an outsider. I never felt discriminated against, though, and I cannot remember any insensitive comments concerning my religion. I do remember thinking that 'those Christians seem to enjoy Christmas more than I enjoy Hanukkah.'

In junior high and high school I was a devout and in-your-face atheist. I was especially hostile toward Christians and Christmas-time brought out some of my strongest feelings. Any Christmas song, decoration or greeting set me off and many times would trigger a snide comment or, at the least, an eye-roll. My attitude toward Judaism was disinterested tolerance out of respect for my family.

I met my wife in college and very quickly had to deal with the mixed feelings of being madly in love with a Catholic woman. I think meeting and loving my wife has been one of the key turning points for my Christmas attitude. We have spent almost every Christmas with her family for almost 15 years and I've been able to see Christmas from the 'inside'. Other than attending Christmas Mass, it's a pretty secular event at their household. This fact led me to my first self-revelation - my disliking (no... hatred) of Christmas had not been rooted in religion - it was a manifestation of isolation.

Having children was the next major event that changed my attitudes. Once my daughter was old enough to understand the holidays and our unique family situation, I became very aware of my outward Christmas reaction and I had to make a conscious decision not to denigrate Christmas in front of my daughter. At this same time, my friendship with my token Mormon and Evangelical friends blossomed and I came to really respect their faith. My second self-revelation? Nobody was isolating me, I was isolating myself.

My daughter's coming of Santa-age also, unfortunately, coincided with the nihilist destruction of 9/11. Up to that point, I was a moderate Democrat. I remember talking to one of my conservative friends on 9/11 and remarking that although I had voted for Gore, I was glad Republicans were 'in charge' during a crisis of that magnitude. In the following year, I gradually realized that I had outgrown the Democrat party and my aversion to Christian conservatives.

I now find myself having more in common with the Christian Coalition than the Rainbow Coalition. When I decided to open my ears and actually listen to those on the Right, I found them much more inclusive and intellectually vibrant than the always-offended Left.

The bottom line is that my acceptance and friendship with Christians has led me to accept Christmas as an important and joyous holiday for parts of my family, some of my closest friends and 95% of my country.

Iraqi Group Demands Withdrawal of Western Moonbats

From the People's Cube...

"Enough is enough," a masked group leader said to the camera in good English with a soft Iraqi accent. "We have given these clowns a lot of credit in the past. Their premise that we can't govern ourselves without a fascist dictator was insulting to our intelligence, but we forgave them, believing that they were well-intentioned, albeit misguided nutjobs. Their slights were offensive but we thought they had been misinformed about what life had been like under Saddam Hussein. We pitied them because we knew they had been mentally abused by communist professors in college. But how many more innocent Iraqis must die at the hands of Zarqawi and his foreign goons before the spoiled buffoons in the West realize that supporting terrorists and opposing democratic forces is not only diabolically immoral, but also atrociously criminal!"

Read the whole thing...

Investment Newsletter Review: Canadian Edge

As I mentioned in my CanRoy post, I recently purchased a one year on-line subscription to Roger Conrad's Canadian Edge investment newsletter. The subscription cost $399 and it has a 'no questions asked' money back guarantee. The guarantee satisfies both my first & second newsletter rules...

Newsletter Rule #1: Low risk purchase

Newsletter Rule #2: Publisher must stand behind the quality of the newsletter

I ran across Mr. Conrad as I was desperately trying to research CanRoys. Canadian Edge only covers CanRoys and I have to say that Conrad's understanding of this market-space is surprisingly comprehensive. Conrad also publishes (both on-line and via mail) the Utility Forecaster newsletter which focuses on... you guessed it... utilities. He's been publishing Utility Forecaster for quite a while and is a recognized expert on the industry. This satisfies rule #3...

Newsletter Rule #3: Author must have unique knowledge or skill that cannot easily found in the market

Canadian Edge tracks about 100 CanRoys on a regular basis. The 'How They Rate' page of the newsletter is where I spend most of my time. This page has...

• each CanRoy's name
• Canadian stock symbol
• US stock symbol
• the up to date price in US$
• current yield %
• annual dividend in US$
• dividend frequency (monthly or quarterly) and timing (day of the month)
• payout % - this is the portion of the CanRoy's income that is paid to trust holders. The lower the number, the 'safer' the yield.
• share growth - this represents how many new shares have been issued as a percent of total shares. This dilution is the only way the trusts can raise additional capital but it can cause yield erosion if the trust's management does not invest wisely.
• Canadian Edge Safety Rating - this is Roger's opinion of the risk associated with each CanRoy. It's a rating of 1 to 5... where 1's & 2's are suitable for widows and orphans and 4's & 5's need to be closely watched and are only suitable for diversified portfolios.
• comments - a few phrases about trends / concerns for each trust
• advice - buy / sell / hold recommendations with price limits

This data is fantastic and satisfies my 4th rule...

Newsletter rule #4: Newsletter must provide timely and actionable information

I purchased two oil & gas Canroy's from Rogers 'buy' list and we'll see how they perform. Once I have a few months of actual performance in my portfolio, I'll be able to determine if Canadian Edge satisfies my last rule...

Newsletter Rule #5: The newsletter must produce uniquely good results for me.

This is key... the newsletter may offer great advice and have a great track record, but if, for whatever reason, I don't make money with their picks that I actually feel comfortable enough to buy, I won't continue reading and paying for the newsletter. I firmly believe each investor has their own style and risk / loss tolerance. If you deviate from your style (assuming you have been successful), you may become uneasy and make bad decisions. I'm, by nature, a value investor. I love dividends and long-term capital gains.

I'll keep everyone up-to-date with my CanRoy's performance and let you know when and if I can rate Canadian Edge a 'BUY'.

Employee Stock Purchase Plan

Want a risk free (almost) investment that has (in my case) an annualized return over 100%? No, I'm not talking about Scamway or some other MLM waste of money. I'm talking about Employee Stock Purchase Programs. In general, these employer sponsored plans allow you to purchase your employer's stock at a discount. My company's program has the following features:

• purchase periods every 3 month
• can purchase up to 15% of your gross salary through payroll deductions
• price is based on the closing stock price at the end for the 3 month period minus 15%
• shares get deposited in a brokerage account 2-4 business days after the 3 month period
• can sell stock as soon as it's in your account
• fess are approximately $20 per selling transaction

So your are thinking to yourself: how does a 15% discount turn into over a 100% return? Buy as much as you can and sell as soon as you can. Let's look at an example (I'll be using trivial numbers for easy math):

• annual salary = 40,000
• quarterly purchase periods
• 15% discount
• stock price at end of period = 100
• $20 commission

Step 1 - Calculate your gross return for one period

quarterly salary X 15% purchase limit X ((1/(1-15% discount))-1)

10,000 X 0.15 X 0.17647= $ 264.71

note: that weird transformation we did at the end of the calculation was to convert the discount to a rate of return

Step 2 - Deduct trading expenses to get net quarterly return

$264.71 - 20 = $244.71 net return

Step 3 - Calculate Annualized Return

(quarterly net return X number of purchase periods per year) / average invested dollars

($244.71 X 4) / ??

Step 3a - Calculate Invested Dollars

This is key... you can't simply look at the total investment because most of these programs are funded through regular payroll deductions. Therefore, at the beginning of each period you don't have any money invested and, in this example, you have the full 15% of your quarterly salary invested at the end of the purchase period. Your average invested dollars is really one half of the 15%. So, to calculate our average invested dollars...

(quarterly salary X 15% ) / 2

10,000 X 15% / 2 = 750

Step 3b - Plug & Chug

$244.71 X 4 / 750 = 130.1% annualized return

With the magic of algebra we can create a formula for the TERESPR (The Early Riser Employee Stock Purchase Return)...

d=stock discount

p=number of annual periods

s=annual salary

c=commission

x=percent of your salary you will be contributing

TERESPR= 2p/(1-d) - 2p - 2cp^2/sx

If we plug our prior example...

2*4/.85 - 2*4 - 2*20*4^2/(40000*.15)

8/.85 - 8 - 640/6000

9.41176 - 8 - .106667

1.30501 or 130.5%

A few words of caution:

• Each ESP plan is structured differently so read yours carefully
• The key to this being almost risk free is your ability to sell the stock immediately - if your plan restricts your selling, you have much more downside risk and this may not be for you
• The profit is taxed like regular income... make sure you save some of your profits to pay the tax man
• THIS IS NOT INVESTMENT ADVICE!!!

UPDATE: Political Calculations has built an on-line calculator!

I Jumped on the CanRoy Bandwagon

*** This is not investment advice ***

I sold a few of my losers (FCC - a convertible bond fund and BDV - a closed-end stock fund) yesterday for tax reasons. I decided to take the proceeds of these sales and some of my stock option money to invest in two Canadian Royalty Trusts (aka CanRoys). The CanRoys own interests in oil and gas wells. They distribute monthly dividends to the trust unit holders. I purchased:

• Provident Energy Trust (PVX) - it yields 10.8%
• Harvest Energy Trust (HTE) - it yields 13%

My understanding, after dropping $400 on a specialized investment newsletter dealing strictly with CanRoys, is that after all forms are filed and all monies are dispersed, the profits from the trusts are taxed at a total of 15% - including both corporate and personal taxes. Now to get this wonderfully low tax rate I will have to jump through a few tax preparation loops:

• My broker will withhold a 15% foreign tax
• When I file my taxes, I can get this money back as a foreign tax credit
• I then report the gross dividend income as qualified dividend income and it gets taxed at 15%
• Unfortunately, my broker will probably mis-report the CanRoy income as unqualified and I'll have to spend some time calculating my true tax exposure

The price of crude oil is the largest single risk to these investments. I view it as a hedge. If oil drops down to $10 a barrel, I'll loose my shirt on my CanRoys but the economy (and the rest of my portfolio) will boom (not to mention the sheer joy of teasing my friends who are peak oil fanatics). If peak oil is real and oil goes to $150 per barrel, the CanRoys will shine.

Asset Allocation Based on Account Type

I have become more aware of what types of investment assets should be in what type of accounts. The higher awareness is due to my liking of dividend paying securities and my extreme dislike of taxes.

Here are my thoughts:

Normal Taxable Accounts

• Qualified Dividend Paying Stocks - these are the companies who pay dividends that qualify for the 15% special taxation
• Long-Term Stock Investments - long term capital gains are taxed at 15%
• Municipal Bonds - tax free baby!! (in my best Dick Vitale voice)
• Low turnover mutual funds & ETF's

401k, Roths & Tax Deferred IRAs

• REITS & MREITS - real estate & mortgage investment trusts do not qualify for the 15% taxation of other dividends due to the fact that REITS don't pay taxes on their earnings
• Short Term Stock Investments - if you are holding stocks less than 12 months, this is where to be
• Non-municipal Bonds - with no special tax treatment, keep these out of your taxable accounts
• High Turnover Mutual Funds

A few key points:

• This is not investment advice... it's just the ramblings of a somewhat successful investor
• If you have Kiddie Tax optimizing accounts, use the 401k & IRA list of assets to get the best bang for your buck

I'm still researching where I should put dividend producing non-US stocks (like FRO), CANROYs, and MLPs. I just need to sit down and look-up the tax code... I'll try to get this done in the next week.

More on PML

*** This is NOT investment advice!*****

I just received a request for more information on my muni-bond investment vehicle, PIMCO's Municipal Income Fund II (PML). Here's a quick rundown of the stats:

• Yield = 6.43% (tax free for Federal taxes)
• Price Variability - in it's 3.5 year history it's been as low as 13 and it's high has been 15.80
• Dividend Variability - a few months it was lower and a few higher. Check it out your self.
• It's a closed-end, exchange traded fund

My tax equivalent yield (yield / (1-marginal tax rate)) for this is very close to 9%. This is not state tax free for me due to the fact that most bonds are not Virginia-based.

He's what I love about this fund:

• Great almost tax-free yield
• Dividents come monthly
• Exchange traded so I can quickly exit and reinvest elsewhere as I see fit
• Closed-end funds such as this are not impacted by big fund inflows or outflows
• It's managed by PIMCO - arguably the best bond fund managers in the world
• 80% of the bonds are rated as investment quality

I'm using this fund as a parking lot for my cash holdings and I'm pretty happy with it.

Ughh... Jet Lag

I had an entirely miserable trip back from San Francisco. My flight left Friday night at 11:30. I was smart enough to call Delta and get a window seat in the exit row... not so smart. The seats in my row did not recline.

The other not so smart decision I made? I drank a fair amount of beer and wine at dinner Friday night... not enough to still be buzzed on the plane. Just enough to have a same-day hang-over as I boarded the plane.

I was useless yesterday and I'm not quite up to speed today. Early Rising didn't happen this morning and I'm predicting a battle with the snooze button tomorrow at 5AM. I'll still post tomorrow, but I'm not making any promises on the time.

Iraqi Election?? - Who Cares?

This is the attitude of the MSM. Neither the New York Time's nor the Washington Post's editorial pages bother mentioning the incredible turnout of the Iraqi elections. Victor Davis Hanson explains....

For some time, a large number of Americans have lived in an alternate universe where everything is supposedly going to hell. If you get up in the morning to read the New York Times or Washington Post, watch John Murtha or Howard Dean on the morning talk shows, listen to National Public Radio at noon, and go to bed reading Newsweek it surely seems that the administration is incommunicado (cf.“the bubble”), the war is lost (“unwinnable”), the Great Depression is back(“jobless recovery”), and America about as popular as Nazi Germany abroad (“alone and isolated”). But in the real adult world, the economy is red-hot, not mired in joblessness or relegating millions to poverty. Unemployment is low, so are interest rates. Growth is high, as is consumer spending and confidence.

Our Katrina was hardly as lethal as the Tsunami or Pakistani earthquake. Thousands of Arabs are not rioting in Dearborn. American elderly don’t roast and die in the thousands in their apartments as was true in France. Nor do American cities, like some in Chinese, lose their entire water supply to a toxic spill. Americans did not just vote to reject their own Constitution as in some European countries.

The military isn’t broken. Unlike after Vietnam when the Russians, Iranians, Cambodians, and Nicaraguans all soon tried to press their luck at our expense, most of our adversaries don’t believe the U.S. military is losing in Iraq, much less that it is wise now to take it on. Instead, the general impression is that our veteran and battle-hardened forces are even more lethal than was true of the 1990s — and engaging successfully in an almost impossible war.

Nor are we creating new hordes of terrorists in Iraq — as if a young male Middle Eastern fundamentalist first hates the United States only on news that it is in Iraq crafting a new Marshall Plan of $87 billion and offering a long-oppressed people democracy after taking out Saddam Hussein. Even al Jazeera cannot turn truth into untruth forever.

Light Blogging For A Few More Days

For my loyal readers (or should I maybe say reader), I just want to let you know that my blogging will be light as I'm packing-up here in San Francisco and heading home on a red-eye tonight. I'll be useless tomorrow but I'll make up for it with massive posting on Sunday.

Thanks for your continued support and please - visit my advertisers... I just checked Google Adsense and I've only earned $0.02 since I've started blogging. Everyone should have applied for the Blue Cash Card - it's too good to pass up.

Response to the Response

A semi-anonymous poster responded to my latest UU post and I have responded...

here it is (scroll down to the comments)

Response to My UU Post

I received an interesting comment to my post on being a capitalist Republican Unitarian Universalist...

Roci wrote:

Why would you belong to a "church" that doesn't believe in anything?Even the elks have more than that.On what basis does your "leader" get his moral authority to tell you anything?Not trying to throw stones, but I don't see the point in anyone attending such a "church", liberal or conservative.

Roci asks some good questions. It’s not uncommon for outsiders to think that UU churches don’t have beliefs or morals. If your definition of ‘beliefs’ and ‘morals’ is based on supernatural entities magically meddling with the natural world, then I would agree that we UUs don’t believe in anything (except for UU Wiccans, UU Christians, UU Polytheists, etc.). Seriously though, a majority UUs believe in the same Judeo-Christian moral teachings that most non-UU folks believe in. Most UUs deviate, however, from main-line religions when it comes to importance of supernatural forces.

Many UUs believe in God or gods and you can find your fill of supernatural talk if you know where to look. There are, however many more humanists than theists. I and the humanists I’m close to believe that the world’s religions are compilations of human wisdom sexed-up with mysticism. We choose to take the teachings and leave magic.

UUs do have seven guiding principals (inherent worth of all people, responsible search for truth, yada yada yada) that are pretty easy to accept. The thing I really like about UUism is that it acknowledges that no single religion has found ‘The Answer’ (in fact we have a hymn with the line: “to question is the answer”). Most UUs are well educated, thoughtful folks who never felt at home in the birth religion.

All that being said, UUism isn’t perfect. A few of my gripes:

1) Political correctness runs rampant

2) Too politically liberal– I’m convinced our national office is a front for the DNC

3) Hostile toward believers (really just Christians… I’ve never heard a UU minister attack Islam many faults)

4) Cheap – UUs give less (% of Income) to their churches than most other denominations

5) Too tolerant of bad behavior – both adults and children get away with horrible manners

The bottom line for me is that it’s really the only place my family can go to be a part of a religious community without having to make intellectual compromises. I was raised in a Jewish (Conservative) household and realized I was a humanist shortly after my Bar Mitzvah. My wife is a non-practicing Catholic who still enjoys the ritual of Catholicism but doesn’t have strong theological ties to religion. We have two kids that we wanted to expose to a religious community. UU is the only available option.

Two of my close friends are quite religious (Mormon and Evangelical Christian) and I’m somewhat jealous of the non-theological aspects of their communities: very sociable & thoughtful members, high level of commitment to their religious communities ($$ and time), welcoming to politically conservative views. Both would be a perfect fit for me if I could deal with all of the God talk. Actually, I could deal with it… I just don’t want my kids exposed to it.

I'm Sitting on a Pile of Cash

After exercising some of my options and a bit of tax loss selling, I now have some cash awaiting investment. I'm torn between a very risk-adverse move like muni-bonds ( PML is my favorite... it's yielding 6.5 % tax free) or a slick tax dodge like a working interest in an oil and/or gas well. (For those of you who don't know - you can deduct up to 70% of your investment in a working interest deal and then you also get a potions of the returns sheltered from taxation.)

The working interest challenge is that there is very little performance / reliability information easily available (i.e. on the internet) to small fry investors like me. Most of these deals get sold through financial advisers and CPAs... neither of which I currently employ. The risk of getting scammed has kept me away from pursuing this type of investment. I'm going to tap into a financial planners web site I frequent and see if they can give me some leads.

As always, I'll keep you updated and your suggestions are always welcome.

Blogging in San Fancisco

Good morning from San Francisco. It's nice to escape the harsher weather of the East. It's going to be ~60 here in SF today.

Also, I would like to welcome folks that are just now discovering my brilliance by being directed to this site from the various carnivals that have published links to me...

Carnival of the Capitalists

Virginia Blog Carnival XV

Carnival of Personal Finance

I'm going to stop for a while and go have a ridiculously expensive breakfast at my hotel.

Early Rising in San Francisco

I'm leaving for San Francisco tomorrow evening and I'm a bit concerned about the whole early rising thing. See, I live on the East Coast and I don't want to be waking-up at 2AM West Coast time next week. I'll probably try to wake at 5 AM local time... this shouldn't be too hard. It's just going to be another struggle to get back on the 5AM EST schedule next weekend.

Oh well... I'll keep on posting next week - just don't expect to see anything before 9 AM EST.

Best Cash Back Credit Card

As promised, here is a link for AMEX's BlueCash Card.



This one pays you up to 5% on some purchases and 1.5% on everything else (after you reach $6k in purchases). Last year I received a rebate credit on my Blue account for over $800! Remember... just don't carry a balance... become a Phase 7 CC user.

PS - Yes, I do get paid for folks following this link and getting a card.

Great Investment Resource

The folks at Callan Associates have constructed a truly unique look at investment returns over the last 20 years. Visit this link (you'll need Adobe Reader) and look at how the returns from various investment indices change from year to year. Conclusion: owning the S&P 500 index is not enough diversification for most portfolios.

I have purchased more focused index funds that cover sections of the market like: small cap value, large cap growth, etc. Also, don't forget international and real asset exposure.

Check out the annual endowment report for Yale... these guys really know what they're doing.

The Seven Phases Of Credit Card Maturity

Phase 1: no credit cards of your own (me until 1989)

Phase 2: low-limit cards in college + minimum payments - who cares about interest expense... it's all about cash flow! (1989 - 1992)

Phase 3 (optional) : can't make monthly minimum payments (a.k.a. wreck your credit) - don't answer the phone because Discover is calling (1992 -1993)

Phase 4: slowly start paying down credit card balances - credit still sucks and all of your consumer lending expenses are way too high (car, mortgage, etc.) (1993 - 1994)

Phase 4.5: you hate all forms of credit and resolve to pay cash (I skipped this one)

Phase 5: use credit cards as a convenience but always pay them off every month - this is where my parents live (1994 - 1999)

Phase 6: start getting reward & miles cards - charge like crazy, receive unusable miles & fret about it (1999 - 2002)

Phase 7: seek out cash-back cards and attempt to use them exclusively (a.k.a. easy money) (2002 - present)

Phase 7 is netting me about $1,100 per year of tax free savings and an extra month's float on $2-4k of expenses. The float's annual value is between $50 - 100 (based on my tax-free muni sweep interest in my E*Trade account).

Some would argue that using balance transfer offers to arbitrage interest rates could be a Phase 8, but I don't like the effort and potential credit score risk.

As soon as I figure out how to link you to my favorite cards, I'll post a follow-up

More Stock Option Talk...

Check out this Employee Stock Option discussion...

The Personal Finance Blog You Must Read

Did you ever notice that most personal finance bloggers are relatively early in their careers and have yet to amass much of a fortune? This mold is definitely broken at Harry Newton's daily column: In Search Of The Perfect Investment. Harry is a semi-retired rich guy (built and sold a publishing company) who shares his daily struggle of where to invest his money (mixed with good advice on life and a daily joke) with the world.

What makes Harry different is that he's an Accredited Investor. The SEC has bestowed upon him the right and ability to invest in non-listed securities including hedge funds, syndicated real estate deals, and oil wells. Harry has to wade through pitch after pitch of people who want his money and there's no Morningstar or Yahoo! Finance that helps him make his decisions. While Accredited Investors are not rare, finding one that will tell you about his investing life certainly is.

After you read the best new personal finance blog each day, go visit Uncle Harry for some good advice and a laugh.

On Being a Capitalist Unitarian-Universalist

That's right... I'm an out-of-the-closet conservative in an overwhelmingly liberal church. Our church has approximately 400 members and I know of only one other Republican and he's only the spouse of a member - he's smarter than me. Why should I be in a congregation that is so liberal when I'm a conservative? It's a long story that I'll get into sometime, but for now, you'll just have to trust me.

This past Sunday, our minister (whom I really like) went on an anti-capitalist, our-country-is-on-the-verge-of-collapse, why-can't-we-just-be-socialists rant. This, unfortunately, is not a rare occurrence in UU-land. It got me thinking: what's so bad about income disparity in and of itself.

Our county has the richest of the rich and a not-insignificant number of folks who rely on government assistance and/or minimum wage jobs. The Gini coefficient has become the de facto measurement of "income disparity" in a given country. I think this measurement is bogus - it's too impacted on the highest income echelon. It allows a country devoid of entrepreneurs appear to be a more 'fair' economy, when, in fact, that economy is simply not producing wealth for anyone.

Here's what I want to see: I would like to see each country's average income (in normalized US $) by decile divided by the US income by decile. We really shouldn't care if our rich are richer that French rich (I'm sure they are), we should look at the bottom five quintiles and really see how the 'poor' in each county compare.

I don't have the data to calculate this. I'm going to forward this post to EconoPundit & Skeptical Optimist... hopefully these smart guy could get the analysis going.

I'll report back on the results.

My Best Tax Move for 2005 - The Kiddie Tax

*** This is NOT investment advice!***

If you have young dependent kids and significant unearned income (interest, dividends, etc.), you can convert a portion of that high taxed income to tax free with a few clicks of a mouse. Here's why: your children can earn up to $800 per year of interest and dividends tax free and another $800 taxed at only 10%. Anything over $1,600 will be taxed at your rate.

Here's what I did:

1. I created a custodial account for each of my children @ E*Trade (all of my accounts are with E*Trade)
2. My wife and I made tax free gifts to each of their accounts - each kid got a total of $15k
3. I invested their new found money into high dividend stocks such as FRO, SFI, ACAS (no need to put the money into stocks that allow the 15% dividend tax - I went for maximum gross dividends)
4. At tax time, I simply file a IRS Form 8615 for each kid on my return and the income gets tax at the reduced rate.
5. With 2 kids @ $1600 of income per child, I'll save $736 in taxes just this year! (My marginal rate is 28%)

Words of caution:

• Always consult a tax adviser if you are unsure of how this would impact you
• When you give your children money, it's theirs... it can only be used to their benefit or you risk losing the tax benefit
• Just because it works for me, doesn't mean it will work for you.

Employee Stock Options - Part 4

In Part 3 of the Stock Option discussion I basically tapped-out my analytical abilities. While doing my research for my prior posts, I ran across a great program that goes Beyond Monte Carlo and runs a pretty detailed stock option analysis that factors risk, taxes, your company's return and variability, and your alternate investment's return and variability. The application is called: Stock Option Risk Analyzer... not as good as a name as my TERSOR ratio, but it's a solid app.

I was able to download an evaluation copy at Brentmark but it appears that it's not available anymore.

A review of the product can be found here.

Anyway, the neat thing is that it confirmed the results of my down-n-dirty simulation.

TERSOR Ratio Calculator

My new best friend, IronMan, at PoliticalCalculations has built an online tool for my TERSOR ratio. Check it out!

Early Rising - Day 5

Five days ago I began waking-up at 5AM based on a series of posts at Steve Pavlina's blog. I started my early rising experiment after I had an especially hectic evening at home (cooking dinner, convincing my 5-year-old daughter to practice her violin, giving a bath to my 1.5 year-old-son, etc) that followed an especially hectic day at work.

Steve has moved past simply rising early, he's now on a polyphasic sleep schedule. Now that he only sleeps 3 hours in every 24 hour cycle day, he reports that he has basically 'created time' that he never had access to in the past. This was my sole motivation for becoming an early riser.

My first three days (Wed - Fri of last week) were relatively easy... waking-up at 5 AM was still a novelty. Saturday was hard - my brain knew I was waking 3 hours earlier than normal. Still, I got up and decided to create this blog.

Yesterday (Sunday) I was so tired at 5 AM that I reset my alarm for 6AM. It felt good to go back to sleep, but I was disappointed with my weak internal discipline. This morning, I naturally woke at 4:55 and almost bounced out of bed. We'll see if this continues, but I'm pretty excited that my body may be liking a consistent, early waking time.

Employee Stock Options - Part 3

Monte Carlo simulation is a problem solving methodology that uses a large number of random simulations to obtain a probability of success for a given situation. Case in point:

I want to know the probability that in 5 years my options will be worth less than they are worth today assuming a 5% discount rate.

Here's the process:

1. Determine Average Return and Standard Deviation of Return - I looked at the last 5 years of annual returns, calculated the average and used Excel to calculate the standard deviation. For my company, these values were: 13.5% annual return w/ a 35% standard deviation.
2. Create Random Returns - I used the Random Number Generator in Excel's Analysis Toolpack to create 5 columns of 10,000 normally distributed (using the avg. return and std. dev. numbers from step 1) returns. The columns are years 1-5 and the 10,000 rows represent different potential 5 year periods.
3. Calculate Cumulative 5-Year Return - create a sixth column that multiplies each of the returns together to get the cumulative return. Remember to add 1 to each return in the formula: = (1+Year 1)*(1+Year2)*...(1+Year 5)
4. Calculate the Value of Each of Your Options in Year 5 - create a column for each of your grants and calculate their theoretical value at the end of year 5. Here's the formula:
   
   =if(5YearReturn * CurrentStockPrice <= OptionStrikePrice , 0 , ((5YearReturn * CurrentStockPrice) - OptionsStrikePrice)* NumberOfShares)
   
   
5. Add the 5 Year Values Together and Discount - sum up the value of your options in Year 5 and multiply this value by (1+ discount rate)^0.2 . This gives you the net present value of your options.
6. Sort the Entire Spreadsheet by The Five Year Value - sort ascending
7. Calculate the Probabilities - here's the fun (if you're a geek like me). How many five year values are zero? Divide this number by 10,000 and you'll have the probability of your options being valueless at the end of 5 years (1.3% for me). How many rows have values less than the current exercise value of your options? 34% for me. Greater than double today's value? 51% for me.

A few reservations:

• Result is highly dependent on the statistics you calculated in Step 1.
• Only you can determine your risk or, in most cases, loss tolerance.
• This IS NOT investment advice.
• This does not analyse the tax implications of exercising options.

In Part 4, I'll introduce to a commercial program I found that goes well beyond my rudimentary analysis.

Employee Stock Options - Part 2

So now we understand the relationship between our in the money options and alternate investments. The problem, however, is that we have not factored variability (aka risk) into our analysis. Easier said than done.

The first evaluation method is your gut. The key question you have to ask yourself is:
"Is the TERSOR big enough to outweigh the risk of having a significant portion of your wealth tied-up in your company's stock?" The key points are in BOLD.

- outweigh the risk: you have to evaluate risk and variability anytime you are comparing alternate investments. If your company has had big ups and downs in their stock price, you may want to take your money when you can get it.

- significant portion: if the exercise value of your options is insignificant as compared to your overall portfolio, you may be willing to accept more risk with your options.

- your company's stock: would you invest in your company's stock if you didn't work there? Most folks would say no. Your job and your 401k is often dependent on your company's continued success. Do you really need additional exposure to your company's stock?

For my situation (risk adverse, options are over 10% of my net worth & my company's prospects are just 'OK'), I'm going to strongly consider exercising any options with a TERSOR under 3.

Part 3 will look at performing a Monte Carlo simulation in MS Excel.

Employee Stock Options - Part 1

So... I just sold some of my employee stock options (non-qualified). They don't expire for 5+ years. I know, I know... you aren't supposed to sell NQ options until they expire.


My company's stock, however, has really ran-up in the past 12 months and the exercise value of my shares is now a material portion of my portfolio. One of my buddies and I came up with an interesting ratio to simply evaluate employee options:

The Early Riser Stock Option Valuation Ratio (or TERSOR for short)

TERSOR = Current Stock Price / (Current Stock Price - Strike Price)

This ratio tells you how much better an alternate investment must return as compared to your employer's stock. A few examples may help:

Stock Price = $50 Strike Price = $25
TERSOR = 50 / (50-25) = 2 or 200%
This tells you that your alternate investment must have a return that is double your company's stock return going forward. So if I expect my company's stock to return 5% per year and I can get 12% (or 240% of my company's return) in the market, I should seriously consider selling my options.

Stock Price = $26 Strike Price = $25
TERSOR = 26 / (26-25) = 26 or 2600%
Now my alternate investment would need to return 26 times my company's return to equal the potential appreciation of the options.

The key idea here is that options (when the strike price is very close to the market price) are leveraged investments. This leverage decreases, however, as the market price rises.

Volatility is a big issue when you evaluate your options. This will be discussed in Part 2.

The First Post

Welcome! Three days ago I decided to become an Early Riser by waking-up every day at 5 AM whether I need to or not. Now I have 1.5 hours per day (3 hours during the weekend) when I have no obligations (family, work, etc.) and I think a blog may be the best way to keep me occupied. My intent is to share my various rantings on topics that interest me...

• Personal Finance
• Politics
• uhh... I guess that's it... I'm pretty shallow

So, I hope you enjoy the blog. (interesting... I just ran the spell-checker on the Blogger site and the word 'blog' is listed as an unknown word)