Monday, September 3, 2018

Life is Not Fair, Part 3 - the Pump and Dump

The August 6, 2018 print edition of the Wall Street Journal had an article, Crypto 'Pump and Dumps' Distort Trading by Paul Vigna and Shane Shifflett on page B1.  The article described how groups of people on the internet drive up the price of various cryptocurrencies in order to sell quickly for quick profit.  The authors described the operation of an internet group called Big Pump Signal.  The article printed charts showing the price over a day of four cryptocurrencies.  You could see the price spike up and then drop.  Occasionally the profitable time for selling is very short.  A person who is lucky in timing trades during a pump and dump can make money if he gets out before the price crashes.

This was an informative and valuable article, but the WSJ did not put it into its electronic edition.  You really must get the paper edition to understand what is happening in the economy because valuable information is cut from the digital version.  Remember that this paper is in many libraries.

You can google Big Pump Signal to find more information.  I found a video on YouTube:
"Big Pump Signal" Crypto Group Review - WARNING: VERY RISKY!

Variations of "pump and dump" happen outside of cryptocurrencies, so this is an investment pitfall your children should know about. You can google "pump and dump" to learn more.


Sunday, August 19, 2018

Calculating Inflation with a Practical Example

Everyone needs to know how to calculate inflation.  Here is how, with a practical example.  I have an old copy of Glory Road by Robert Heinlein from 1963 priced at $1.75.  Wow!  Today that book sells for $16.99.  To calculate the inflation that drives a book from $1.75 to $17 dollars we set up this equation after calculating (2018 - 1963) = 55:
1.75 ( 1 + x)**55 = 17.0
To solve with python, you first do "import math" into the IDLE GUI.

>>> import math
Here is the solution to the equation.  We all remember algebra, right?
>>> 10.0 ** ( math.log10(17.0 / 1.75) / 55.0)
So 1.0422 is 1 + x, meaning the inflation rate for this book is 4.22% over 55 years.
The average inflation rate is presumed to be 3% as I stated in "Teaching Our Children About Investments" (July 29, 2018), but it is 4% for this book.

Going from $1.75 to $17 is about a 10 fold increase.  I saw this in my lifetime.  I was buying stuff in 1963.  You have to tell your kids that everything they buy today will cost at least ten times more when they are older.  You have to tell them that inflation is a threat to them and their future.  Think about it.  If you have a big basket of groceries and you pay $200.00, like I have done, that same basket of groceries will cost your children $2,000.00 in their lifetime.  It might be 50 years later, but  it is coming like the sunrise if we cannot cannot drop inflation back to about one percent.

Inflation is a hidden tax imposed on us by our own government.  Milton Friedman said in "Money Mischief: Episodes in Monetary History," that, “Inflation is always and everywhere a monetary phenomenon.”  That is a fancy way of saying the government does it to us because it sets monetary policy and controls the money supply.

We all should be getting after our elected officials about inflation and deficit spending.  The mass media, like television news, distracts us away from what is important to us with what I would call "circus sideshows."  They have been running an anti-Trump circus sideshow for about two years now.  They have lost their minds.  Our TV news media are much like Emperor Nero fiddling while Rome burned.

We need to stay focused on what is important to our families and our future.  Inflation is one of the important items we do not talk enough about.
Look at the huge difference between 4% and 2% inflation over our adult life time, which I will call 60 years, which is age 25 to age 85.  (Cut and paste the following from Python IDLE GUI)
>>> 1.04 ** 60
>>> 1.02 ** 60
Prices going up by a factor of 10 is nuts, but it is what we have at 4% inflation.  Going up by a factor of 3 is more manageable, which is with a 2% inflation rate.  I think I will write my congressman!


Tuesday, August 7, 2018

Life is Not Fair, Part 2 - Salesmen Get Swindled

How Salesmen Get Swindled

Selling is a talent; selling is a skill.  Selling is vital to companies because not every product sells itself.  Some people might think that the sales profession is inherently dishonest, which is untrue.  Sales is a hard job and a difficult job, but there is nothing inherently dishonest about it.  What people might not realize is that salesmen are frequently swindled by their management.

Territory Reduction

One of the ways a salesperson gets swindled is by having the sales territory reduced.  If a salesman makes more money than his manager, the manager can get jealous and take business away from a successful salesman in order to cut his pay.  Consider the unfairness of this action.  As a salesman you develop a territory and cultivate regular customers.  Then the fruits of your labor are taken away and given to someone else.  One of my neighbors once told me this happened to him.  This is pretty common.

Ewing Marion Kauffman was one of the wealthiest men in Missouri.  He started Marion Laboratories, a pharmaceutical company.  Marion Labs merged with Merrell Dow in 1989, which was then bought out by Marion Roussel Hoechst for $7.1 billion in 1995.

The reason Ewing Kauffman started his business was that he was a successful salesman with a pharmaceutical company, but got swindled.  His company cut his sales territory because Kauffman was so successful that he was making more money than the president of the company. He decided not to look for another job. Instead, he made his own mark on the pharmaceutical industry by starting his own company and doing things his way.

In the book Father, Son & Thomas J. Watson, Jr., Watson Junior describes how he started his career at IBM by becoming salesman of the year.  His father, Watson Senior, who ran the company, knew of a salesman who had scored a big sale.  The father took the sales territory away from the salesman who worked that territory and gave the territory to his son.  So Watson Junior became salesman of the year without lifting a finger.  Indeed, life is not fair.

Commission Reduction

I remember a story about Circuit City, the bankrupt and defunct consumer electronics store.  At one store a salesman called in for a special meeting before the store opened could see all the top salesmen were called in for the same meeting.  He thought they were going to get some special reward.  The reward they got for their hard was to get fired.  The company decided to cut their commissions, thought the best salesmen would be unhappy about reduced commissions, so Circuit City fired them -- their best salesmen.  The expression, "cut your nose off to spite your face," comes to mind.  Greed and stupidity are boundless.  This story was printed many years ago in the Wall Street Journal.

One former salesman told me directly that after a banner year of sales where he hit all his targets he expected a huge bonus and instead was fired because the owner of the company could not bare to part with the bonus he had promised the salesman.  That is a commission reduction down to zero!

It is incredible to imagine that a salesman would be punished for being a good salesman, but that is greed at work -- the greed of a business owner or a sales manager. 

If your child goes into sales, your child must understand that salesmen do get cheated.  I have only scratched the surface of the unfairness salespeople face.


PS:  Everyone should know that Ewing Kauffman started the Ewing Marion Kauffman Foundation to promote entrepreneurship.  Also, the book Father, Son & Co. is an excellent book.  I recommend it.

Sunday, July 29, 2018

Teaching Our Children About Investments

Average Rate of Return

I think the first thing a child should learn is what is a reasonable investment return.  Once your child has an investment, say a Roth IRA after starting to work and make money, then your child might be surprised that the investment does not skyrocket out of sight.  The article The Market Isn’t Going to Save You From Saving Too Little by James Mackintosh, July 26, 2018, Wall Street Journal, says, "Since 1900, U.S. stocks have returned 6.5% a year after inflation, including dividends, according to academics Elroy Dimson, Paul Marsh and Mike Staunton."


Explain to your child that inflation steals his money.  So if the investment fund says the investment returned 9% last year, and the Federal Reserve claims 2% inflation, then assume the real inflation was at least 3% because the Fed lies about inflation.  Thus a 9% rate of return, minus 3% inflation produces 6% real return, which is like the historical average.

It so happens that the long term average inflation rate in America has been 3.22% per this article:  Long Term U.S. Inflation by Tim McMahon (April 2014).

The Rule of 72

I suggested you teach your children about the Rule of 72 back in April 2015:  Teaching Our Kids About Interest and Inflation.  Now you can point out that 72 / 6% = 12 years for the investment to double.  The investment will grow, but patience is required.  Some other time we might talk about dollar cost averaging.

Safeguarding Savings

I suggest you teach your children to guard their money against losses.  Here is an example I use:  You start with $20,000 in an investment.  It is a risky and volatile investment, so one year you lose 50%.  Now your investment has dropped to $10,000.  The next year your investment bounces back with a 50% gain.  Have you gotten your money back?  Fifty percent down and then fifty percent up, so are you good?  The math says that a 50% gain on $10,000 gives you $15,000, so you are still down $5,000.  It is easier to lose money than to make money in investments.  Investments are a long game. Taking risk for high gains is gambling, it is speculation, but it is not investment.

Hot Shots Like to Crow

I also tell my children that when people they know make a lot of money with an investment, then they might crow about it.  But when they lose a lot of money in the market, they rarely confess their failures.  They will hear plenty about success and little about failures.  Most hot-shot investors profiled in the news eventually run out of luck and hit a stretch of bad luck.  I have steered my children towards mutual funds.  If you do not want to read the book A Random Walk Down Wall Street by Burton Malkiel, you can read the summary of it in Wikipedia.

It is up to us to teach our children!


Sunday, July 22, 2018

Life is Not Fair - Bad Bosses and Swindles

Bad Bosses

I have decided to explain to my son how life is not fair, and I also decided to share this with other Plano parents.  Our children need to understand the unfairness of life because living in a nice middle-class town -- living in a bubble -- they might not fully appreciate how good a life they have and how tough it can be outside the bubble.

Here are a few examples of how people can lose their jobs unfairly.  John Lasseter, famous for his work at Pixar (Toy Story, Bugs Life, etc.), was fired from Disney for pushing computer animation.  He was fired for being right.  Francis Ford Coppola wrote the script for Patton, and he was fired for writing the iconic scene where George C. Scott stands in front of a large flag and speaks.  Lee Iacocca was manager of the famous Mustang and was eventually fired by Henry Ford II.  Iacocca claims Henry Ford II said: "Well, sometimes, you just don't like somebody."

A common scenario is where you are hired by a manager who likes you and values you.  Then something happens and your manager is replaced by a new manager who hates you.  You might get fired.  You might get treated badly until you leave.  This happens very often.  When a manager who is good to you is replaced by another manager, it might just be a matter of time before you are forced to leave.  It is important to be aware of this, to not be surprised that you go from being valued to being disparaged.  Some people will like you.  Some people will dislike you.  You have not changed, and you have not done anything wrong, but circumstances change and you must leave.  Maybe this seems unfair, but that is life.  This happens so often that someone today at church just told me a similar story:  (1) she was a manager, then (2) her boss quit, then (3) her new boss did not like her, and (4) now she is working elsewhere.


It is important to realize a lot of cheating happens in business.  I remember reading about a medical doctor who had a contract with an insurance company that the doctor did not understand.  He naively thought that the insurance company would not offer him a contract that would be bad for him.  After signing the contract he discovered he lost money on every patient.  The doctor went bankrupt because believed in the goodness of people.  But when people work for a company they are sometimes not allowed to be good, they are sometimes required to be ruthless and deceitful.  I read this story about the doctor in a newspaper, either the New York Times or the Wall Street Journal.

Rolls Royce went bankrupt when it signed a contract with Lockheed.  Rolls Royce was losing money on every engine it sold for the Lockheed Tristar jet.  Lockheed held Rolls Royce to the contract and Rolls Royce went bankrupt.  A swindle is legal if you signed the contract and contract turns out to be bad for you.  Sometimes you do not understand that the contract allows you to be cheated.  You can be cheated and it is still legal because you signed the contract.

Here is a recent article: How Regulators Averted a Debacle in Credit-Default Swaps by Gabriel Rubin and Andrew Scurria, Wall Street Journal, July 8, 2018.  Here, Blackstone Group had a credit default swap on a loan made to Hovnanian Enterprises.  Blackstone asked Hovnanian to make a late payment so Blackstone could cash in on some credit default swaps.  Solus Alternative Asset Management felt that was fraud and sued.  A judge said no, it was not illegal.  If conspiring is not prohibited by the contract, then is is legal.

Cheating in business is as old as business.  In the book On Duties by Cicero, Book III within the book is a catalog of swindles.  The ancient Romans were not just conquerors, they were businessmen and well versed in swindling.  On page 122 of On Duties we see Cicero give a definition of "malicious fraud," then he gives some examples.


I should mention how salesmen get cheated.  Cicero gives examples of how people cheat when selling a property.  But when salesmen are employees, then they too get cheated.  But since this article is getting long, I will save the details of this topic for another day.


In the same vein as "life is not fair," is "Why ‘Can I Sue My Employer?’ Is Often the Wrong Question" in The Workologist column by Rob Walker, New York Times online August 3, 2018.
Here is the question asked by a reader:  "I have a new boss who is very unfair and abrasive to everyone. Hypothetically, would he be allowed to fire me just because he doesn’t like me? And if he did, what could I do procedurally and legally to fight back? "
Here is the answer:  "As a legal matter, unless you have an employment contract that says otherwise, he could absolutely fire you because he doesn’t like you."
The underlining is mine, added to highlight the point made in this blog entry.

Saturday, May 12, 2018

Business Bio by Alexis Ohanian

I think our children can benefit from the biographies of businessmen.  Alexis Ohanian is an internet millionaire who wrote a book describing how he got rich:  Without Their Permission.  I read it and shared the highlights with my son, which I share now with you so you can share them with your children.

He chose to go to school out of state, going to the University of Virginia instead of going to school in Maryland.  He started a business, Reddit, with his room mate Steve.

Here are the key points: (1)  His room mate Steve had the technical skills to code the website and Ohanian did not have those skills.  (2) Steve did not throw Ohanian over-board like Mark Zuckerberg disposed of so many people.  (3)  Ohanian made the contributions he could, like drawing the spaceman logo for Reddit. (4) Ohanian's biggest contributions were in sales.  He pitched the business to a company called Y Combinator, which provided funding.  (5) Eventually Ohanian pitched the business to the Condé Nast publishing company, making Steve and Alexis Ohanian rich.

And if you are a technical wizard, like Steve Wozniak of Apple, you still need a salesman to make money from your invention.  Sales is a challenging business.  Inventions only make money with sales.  No sales, no money.  You can take that to the bank, or the poor house as circumstances dictate.

Finally, I like to describe to my son the stories of businessmen when their lives appear in the Wall Street Journal Obituaries.

Here is an example from today's newspaper:  Robert Klein Set Up Firm to Help Lenders Protect Homes Going Through Foreclosure by James R. Hagerty, Wall Street Journal, May 11, 2018 (May 12 in the hard copy edition).  The online article has much more detail than the hard copy.

Here are highlights from the obit:

Robert Klein’s father once told him: “God blessed you with a brain and cursed you with a mouth.” Working for a boss would be difficult.

So Mr. Klein, a high-school dropout, was always his own boss, starting as a New York taxi driver and later running his own fruit-and-vegetable wholesaling business in Cleveland. In 1990, he founded Safeguard Properties in the obscure business of mortgage field services. Such firms do foreclosure-related chores for lenders, including changing locks on abandoned homes, sealing broken windows and handling basic repairs so houses can be resold

He started with one employee and grew to around 1,000 as Safeguard expanded nationwide and became one of the largest companies of its type.

Notice he was a high school drop out, yet he provided jobs for thousands of people.  There are more details in the article, such as the business becoming a legacy for the family.


Sunday, March 25, 2018

Protect Your Children from Income Share Agreements

Loans are Understood and Predictable

Many children have been hurt by large student loans.  I remember an article about a medical doctor who borrowed so much money to become a doctor that she would be paying on her loans to the day she died and would never be able to own a home.

Many young people do not understand loans.  Their parents need to guide them through the process of borrowing money for college.  There have been many night-mare stories of huge debt and meager incomes.  But there are formulas and on-line calculators that allow you to calculate the monthly bill for a loan given the loan amount, interest, and the length of the loan payoff.  With a tool like this you can analyze your potential debt before you commit to the debt. If you google "Loan Repayment Calculator, " then you can see something like this:
(Click on the image to see it expanded.)  You can see that a 6% loan of $20,000 will take $491.05 monthly to pay off, meaning you pay back $29,463, which is $9,463 more than you borrowed.  Many kids graduate with more than $20,000 of debt and many young people will find paying 4491.05 a steep cost.

A $40,000 yearly income, and 28% taxes means a young person will have (40000 * (1 - 0.28))/12 = $2400 per month income and $491.05 is 20% of the monthly income.  Try living in an urban area for less than $1200/month for rent and utilities.  Now you can picture $491.05 as 41% of the remaining $1200 a month after rent and utilities.  A student loan is a serious commitment, but mathematics and planning can lead one to project the economic consequences, including the total cost of the loan.

Income Share Agreements are New and Poorly Understood

Some universities started debt instrument called a Income Share Agreement (ISA)as an alternative to student loans.  Investors wanting to make money off of your children have turned to Congress to pass laws making it easier and safer for them to loan money to your children.

After reading the details of these bills, here are my concerns.
  1. The congressional bills strip away state laws that protect your children from excessive interest rates or claims against their income.
  2. Your children cannot escape a bad ISA through bankruptcy.
  3. These ISAs have an equivalent interest rate and the interest your children pay on ISAs is not tax deductible like a regular loan.
  4. Senate bill S.268 amends the Investment Company Act of 1940 to strip away protections we might have from this law. 
Details from the bills (and web links to them) are at the bottom of this blog posting.

Banks can already loan money to our children, but banks are regulated.  Now a new batch of investors want to own our children's debt without the regulations currently in place to protect our children.  No one can imagine at this time how bad this could be for our children.  We can write our congressmen to protest these bills, but we must surely warn our children to avoid these debt instruments until the dangers are understood.

Your friend and neighbor,

Senate Bill S.268 — 115th Congress (2017-2018)

Introduced in Senate (02/01/2017)

Investing in Student Success Act of 2017

This bill authorizes an individual (i.e., a student) and another person (i.e., an investor) to enter an income-share agreement (ISA) in which the student agrees to pay a percentage of future income, for a specified period of time, in exchange for funds to pay for postsecondary education, workforce development, or other purposes.

An ISA that complies with specified terms and conditions and meets certain disclosure requirements is a valid, binding, and enforceable contract and is not subject to state laws that limit interest rates or regulate assignments of future income.

The bill amends the Internal Revenue Code to include an ISA as a qualified education loan (a qualified education loan is not dischargeable in bankruptcy), but it prohibits a tax deduction for interest paid on an ISA (interest paid on a qualified education loan is tax deductible).

The bill amends the Investment Company Act of 1940 to exclude as an investment company any person whose business substantially consists of making ISAs.

House Bill H.R.3145 — 115th Congress (2017-2018)

SECTION 1. Short title; table of contents.

(a) Short title.—This Act may be cited as the “Investing in Student Achievement Act of 2017” or the “ISA Act of 2017”.

SEC. 201. Lawfulness of contracts; preemption of State law.

Any income-share agreement that complies with the requirements of section 102 shall be a valid, binding, and enforceable contract notwithstanding any State law limiting or otherwise regulating assignments of future wages or other income.

SEC. 202. Preemption of State law with respect to usury.

A Qualified ISA shall not be subject to State law with respect to usury, unless such State law was issued after the date of the enactment of this Act and such State law expressly states that it is intended to apply to income-share agreements.

SEC. 203. Preemption pre-existing State laws with respect to ability-to-repay and licensing laws.

A Qualified ISA shall not be subject to a State law with respect to “ability-to-repay” requirements, and an ISA funder issuing a Qualified ISA shall not be subject to any State law with respect to licensing or registration, unless such State law was issued after the date of the enactment of this Act and such State law expressly states that it is intended to apply to income-share agreements.