Book Review: The Way We Live Now by Anthony Trollope


My wicked-smaht friend Melissa just reviewed a book on her literary site  that I’ve long been meaning to review here.  The Way We Live Now, by Anthony Trollope is a must-read for people interested in finance, upper-class society, and the way history constantly rhymes with the present.

Did you know that in 1875 Anthony Trollope depicted 2008 Bernie Madoff in fictional form, nearly perfectly?

It may be no surprise to you that classic financial bubble behavior, with greed and corner-cutting overwhelming character and personal judgment, has long been a feature of financial and political elites.  But Trollope’s story wraps that message in this brilliant satire of upper class England better than anyone else could.

I recommend getting the book, and I recommend Melissa’s review, where she writes

“The thing that probably sustained me most as I made my way through Anthony Trollope’s 762-page opus The Way We Live Now was that it really is pretty much about the way we live now, in 2013, even though it was written in 1875.  That’s partly because the novel was written in satirical response to financial scandals of the 1870s, and we’ve just lived through a similarly worldwide financial meltdown with some of the same root causes: unchecked greed and irresponsible speculation.”

The rest of Melissa’s review is here

Please see related post: All Bankers Anonymous Book Reviews in one place.

The Way We Live Now

Post read (6590) times.

Video: TEDTAlk on Philanthropy

In the spirit of my earlier posts on Philanthropy, I enjoyed this presentation, with its thought-provoking questions.

Question #1: Can I make a difference?

He offers this site as an innovative way to think about philanthropic giving, even on a modest salary: www.givingwhatwecan.org

Question #2: Do I have to give up my career?

He argues that banking and finance, for example, can allow you to earn a lot of money, in order to give away a lot of money.

Question #3: Isn’t charity bureaucratic and ineffective?  Some are more effective than others.  We can look at returns on charitable investment at a site like www.givewell.com

Question #4: Isn’t it a burden to give up so much?

This question and answer in particular made me think of the importance of philanthropy for feeling good about our place in the world.

ted_logo

Post read (1539) times.

On Housing, Part II – The Risks

Monopoly hotelsIn my previous post on housing I posit that the money we spend on housing may be thought of as fulfilling a combination of functions – namely necessity, consumption, and investment.  To do the investment part right, we should try to separate in a clear-headed way which function we’re spending money on.  Housing as an investment has many advantages, but its also not a slam dunk.  I review here some of the biggest risks of investing in your house.

Risks

1. Negative Cash Flow – Residential real estate generally is a negative cash-flow investment.  Unlike stocks or bonds, for example, which typically generate cash for their owners, real estate always costs money to own.  There are taxes of course, but also frequently utilities, complicated electrical and mechanical systems to repair, housing association fees, and lawns to cut.

In addition, if you borrow money to own real estate, the loan often constitutes your largest source of negative cash flow.  If you are like most people, negative cash flow under many scenarios can turn the whole investment into a nightmare.

2. Illiquidity – Real estate notoriously sells slowly and expensively.  Residential real estate cannot be transferred from one owner to another without thousands of dollars in transaction costs, and fees that constitute a meaningful percentage of value.[1]

The non-uniform nature of residential real estate also contributes to illiquidity.  An exchange-traded stock or a bond shares uniform characteristics with millions or billions of dollars in value of identical securities, allowing for easy transactions and uniform pricing. 

Every housing unit, by contrast, differs in price from every other unit.  Physical wear and tear of course alters from unit to unit.  Unlike a stock or bond, once a house is ‘born’ it begins to diverge in price even from its identical twin house.

Even identical floor-plan apartments can vary in price, due to differences in view, angle of light, height, or expected noise from the street. 

All of this variation leads to price uncertainty, partly justifying the high transaction costs for real estate brokers.

3. Degradation – While stocks and bond may fluctuate in value, the brutal elements of the physical world do not fray financial securities like it does real estate.  We don’t care if the paper certificate is ripped or dog-chewed or hole-punched, as the value of a stock or bond is electronic, notional, and immune to inclement weather.  Broken windows, chipped paint, and flooded basements, however, don’t fix themselves.  You can’t ever just let an improved property sit for 30 years the way you can with a stock or bond.

4. Leverage – Or: What goes up, can come down.  Conventional mortgages allow you to put down 20% of purchase value on a house, and obtain four times that amount in debt – something unavailable to small-time investors in any other investing situation.  With ordinary price appreciation or real estate inflation over time, the financial return on your down payment jumps dramatically.  When real estate declines in value, however, you end up losing your down payment just as quickly. 

Borrowing money, by itself, doesn’t make you money.  Borrowing money to make an investment just exaggerates the rate of return on your investment in whatever direction the asset moves, for better or worse.  This is why big-time real estate developers periodically lose extraordinary fortunes in economic downturns – it’s all about the leverage.  It’s also why declining real estate value in a city – like Detroit since the 1980s – eviscerates any home-owning middle class.  It’s all about the leverage.

Before you buy your shelter rather than rent it, I recommend digging into each of these risks as they apply to your own situation  If you decide, upon a review of the risks, that renting makes more sense, that’s ok.  I am certain that in the past decade we had too many buyers of their shelter, rather than renters.  Undoing the damage of too many buyers of shelter is painful and destructive for individual households and the economy.

Of course I don’t recommend renting forever.  In the next post I review some of the great personal finance opportunities only available through home ownership.

See previous post On Housing, Part I – What we do when we invest in a house

And subsequent post On Housing, Part III – The Opportunities


[1] Real Estate broker fees on residential real estate still start at 6%, while additional transaction fees push costs up from there.  Frequently to the 8% of sale value range and above.

Post read (13496) times.

Data Analysis: Understanding Bankers Anonymous Readers

Data, Data, Everywhere, but Not a Thought to Think.

We live in a data-rich, analysis-poor world.

What do I mean by that?

TEDtalk-type folks tell us we create more data every moment than we know what to do with, that the data created in just the last 10 years overwhelms the data generated in the previous millennia of human existence.

The goal of thinking people, therefore, is not data-creation or even data-collection, but rather data-analysis.  How do we separate the signal from the noise?  How do we discover and connect disparate pieces of data to form a coherent narrative?  We have all this information, but what does it all mean?

 

Information, and revenue, collected by Bankers-Anonymous.com

You probably don’t know this already, so let me blow the lid off of a rich vein of data currently being collected by Bankers Anonymous, largely under the radar.

For your convenience, I’ve linked all my book reviews – positive and negative – to pages where you can buy those books on Amazon.com.

At the same time, when you do buy something from Amazon.com after clicking through Bankers-Anonymous, I receive a small percentage of the sales revenue as an advertising affiliate of Amazon.com.

In the past year Bankers Anonymous readers have purchased 160 items with a total retail value of $2,403.72.  As a result, in the past year of running Bankers Anonymous, I have earned $145.28 from referral fees.[1]

This information is not meant as disclosure – although you might as well know – and not even to encourage you to buy things on Amazon.com via Bankers Anonymous as a way of showing your appreciation for my attempts to amuse and inform – although you might as well do that too.

Instead, this means that after a year of tracking Bankers Anonymous readers’ purchases online, I can now definitively describe the profile of a B$A reader.

The Bankers Anonymous reader profile, based on your purchases

Based on my analysis of the rich vein of Amazon data, I’ll tell you what kind of person you are: Bald and nerdy.

Only one reader made a beauty product purchase in the past year.  That beauty need?  Baldness.

Amazon data shows a B$A reader purchased a 3-month supply of easy-to-use foam Rogaine for Men, Hair Regrowth Treatment, 5% Minoxidil Topical Aerosol.

So with that one purchase – 100% of the beauty purchases over the past year – I can definitively say that baldness is the silent aesthetic tragedy that stalks Bankers-Anonymous readers.

How do I deduce the nerdy part?

By far the biggest set of purchases made by readers are finance books, including a book on math for science and business that I reviewed last month.

The nerdiness doesn’t end there but is amplified by other purchases, such as one for doing magic tricks with math, interpreting financial statements, and how to do Jiu-Jitsu.  Seriously, a book on Jiu-Jitsu?
[2]  Are you getting the picture here?[3]

But that’s not the final set of data; the sartorial choices of Bankers Anonymous readers seals the deal.

One reader bought a pair of men’s Dockers, flat front pant.  Another reader (maybe the same one?) purchased Calvin Klein 3-Pack Boxer Briefs.  Most importantly, I’ve collected referral fees for three separate purchases of Gold Toe Men’s Canterbury Over the Calf Dress Sock, Navy, 3-Pack, Sock size 10-13.

It turns out my Bankers Anonymous readers are exactly like me, but somehow out there in the world.  I can’t express how comforting this is.

Anyway, here’s my promise to you, the Amazon.com-purchasing readers of Bankers Anonymous.  If you keep clicking through and buying stuff to generate the data, I will continue to analyze the data and reflect back who you are, exactly, in the months and years to come.[4]

 Banana Slicer


[1] Yeah, that’s right ladies, $145.28 – but sorry, I’m married.  And fellas, don’t hate on me because I stack mad chips.  You don’t think this Hyundai pays for itself do you?

 

[2] I don’t know where to begin.  But first of all, in The Matrix, Neo learns Kung Fu, first.

[3] Upon seeing that particular data point I couldn’t shake the image of John Cusack in Better Off Dead, meeting his in-laws.  “Kick-boxing?  It’s a new sport, but it’s got a great future.”

[4] I was slightly disappointed to find no purchases of the Hutzler 571 Banana Slicer.  Can some reader please pick that thing up?

Post read (8654) times.

On Housing, Part I – What we do when we invest in a house

houses and hotelsWhat housing is and is not

Housing, in a personal investment sense, is a confusing combination of necessity, consumption, and investment.  Separating and naming these functions can clarify for you exactly what you’re looking for in a house.

Your house is your roof and shelter from the earthly elements first, as well as the place where you lay your head at night, and where you store some physical possessions. The portion of payments you make for a roof and shelter rank in priority just below payments you make to acquire water and food on a regular – ideally daily – basis.

In that sense your house is a necessity.

To the extent your payments for a roof and shelter provides a personal feeling of comfort, luxury, prestige, identity, and aesthetic personality, then part of your house payments go toward consumption. 

You want these things, but you don’t need these things in a fundamental survival-type way.[1] 

In the meantime, you can have all of these necessity and consumption functions from housing without ‘owning’ the roof, without ‘owning’ the shelter.  What I mean is you can rent and fully satisfy the first two uses of housing.

Owning a home is not a requirement of happiness or middle-class achievement.  It should not be a substitute for the “American Dream,” or fulfilling your wildest childhood fantasies of belonging to some social group.

If you do choose the path of home ownership, your house may also serve as an investment. 

What does the Financial Infotainment Industrial Complex have to do with this?

If housing is partly an investment, then know that the Financial Infotainment Industrial Complex is seeking to mold your thoughts.

The nexus of the real estate and lending businesses – a powerful branch of the Financial Infotainment Industrial Complex – would have you conflate the necessity, consumption, and investment functions into fuzzy thinking.

I’m not saying housing is not a great investment – of course it is.  I’m just advocating for a clear-headedness about what we’re doing when you choose ownership over rental.  A clear-headedness not overly determined by powerful forces shaping your thoughts.

If all goes well for you, and housing inflation continues at a regular clip throughout the period of your home ownership, that fuzzy thinking will work out just fine for you.  But I want to take a moment to ponder what you’re really doing when you launch into the investment side of housing.

Housing as an investment

The good news

First, there’s no other investment vehicle which has done so much to foster middle class savings and wealth accumulation as home ownership.

With 4 to 1 leverage,[2] housing inflation, affordable and forced monthly payments, income tax breaks for mortgage interest, and generous tax exemptions for capital gains – I mean, this is one big, fat, middle-class birthday present for people who invested in housing over a long-term period of time, say, any time in the last 100 years.

To repeat: Nothing (nothing!) combines so many advantageous factors for middle class wealth accumulation.

The bad news

On the other hand, housing as an investment periodically punishes the individual, a municipality, or an entire country for over-exposure to housing and its parallel ill, over-indedebtedness.  Just ask your foreclosed ex-neighbor, the City of Detroit, or, for example, the entire Spanish nation.

So, yeah, there are risks. 

I  review some of the risks, and opportunities, in the next two posts.

See subsequent post On Housing Part II – The Risks

and On Housing Part III – The Opportunities



[1] When the vampire apocalypse happens, for example, you will settle for housing that fulfills a necessity, rather than insist on consumption.  And that necessity is keeping those scary scary blood-suckers outside of your four walls and roof.  Heavy duty reinforced steel and a panic room is my advice there.

[2] Assuming a 20% down-payment, 80% mortgage at inception, you are getting in financial terms 4 times the amount of debt ‘levering’ your down-payment.  Hence my financial lingo “4 to 1 leverage.”  Nothing else broadly available in the ordinary retail investment world comes close to that kind of financial gearing.

Post read (14300) times.

On Entrepreneurship, Part III – the air, the taxes, the retirement

tps report formThe air is just different owning business equity rather than earning a fixed income with a salary.  Can you smell it?

I left Goldman in 2004 and have been downwardly mobile, career-wise, ever since. 

I’ve also never been happier.

I’ve written before that one of the keys to feeling and being wealthy is do something that you love and that you would do regardless of the compensation. 

Now, I can’t prove the following statements, but I believe them to be true:

Working for yourself, in a business you founded, makes it much more likely that you’ll do something you love. 

Working for someone else, for a salary, makes it much more likely that you’ll be asked to come in on Saturdays to work on the TPS reports.   And, um, Yeeeeahhh, that’d be great.

TPS Reports thatd be great

It’s weird to say this, but it’s true:  Doing the TPS reports for your own business doesn’t feel that bad.  Even on Saturdays, it’s kinda fun.

Doing the TPS reports on a Saturday for someone else, however, encourages the kind of anomic existentialism that puts you in deep communion with the overwhelming sadness of the universe.

In life, there’s no getting away from the TPS reports on Saturdays, there’s only a choice about how it will feel.  One of my main arguments for starting your own business is that it feels different.

And now for some less important, but still relevant, arguments in favor of entrepreneurship.

Taxes

The tax code was written by and for business owners,[1] not by or for salaried employees.  So if you’re ever curious why taxes for salaried employees seem unfair, whereas businesses seem to pay less in taxes, that’s why.

Retirement

Did you know you can save about 3 times more per year in tax-advantaged retirement accounts if you’re a business owner than you can as a white-collar employee earning a salary, with a 401K plan?  It’s true.  But don’t just trust me, look it up on The Google.  The Google never lies.

More importantly, many successful business people want to control the timing and conditions of their own retirement, on their own terms. 

When you do someone else’s TPS reports, the company gets to ‘retire’ you when they choose.  When you do your own, you choose. 

Not everyone wants to work forever, but for those people who do, business ownership gives you the control and options.

 tps reports mug

Please see previous post on Entrepreneurship Part I – The difference between equity and fixed income

And Entrepreneurship Part II – Lessons from finance

 


[1] With help from Max Baucus’s former Senatorial staffers, of course.

Post read (13378) times.