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Category Archives: Money

ET EXTRA: Investing (Gambling) in Drug-Replacing Natural Supplements

It’s often remarked that the stock market is the world’s biggest casino, but actually it’s worse than a casino. When you walk into a casino you can readily predict the odds of success. For example, a roulette wheel has 38 slots but only pays 35-to-1 for a bet on a given number, so over time you will lose, albeit slowly. When you invest in a stock, however, the odds are not that predictable, although billions of dollars are made by financial “advisers” who have convinced folks otherwise.

As pointed out in The Fortune Sellers, the way to improve your odds in the market is to ignore all those charts and stick to fundamentals: Is the company financially healthy? Does it have proven management? Does it serve a growing or in-favor market segment? Etc. Therefore, if you want to gamble in the stock market, throw away all that charting software and instead invest a lot of time doing fundamental research. Plus, invest in market areas in which you have some deeper knowledge.

Although the intent of this blog is not (and will never be) to offer specific investment advice, an example of a stock gamble that this conservative and science-minded engineer will make is ChromaDex, a small company that’s at the forefront of providing natural-food-based alternatives to standard drugs that all too often have horrible side effects. I’ve followed the natural foods/supplements industry for decades, and believe that the ChromaDex business model makes good sense.

(If you’re curious, please see “Near-Term Catalyst Could Drive ChromaDex Shares Higher.“)

p.s. I’m prepared to lose all of my “investment” on my educated gamble.

-Ed Walker

 

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An Antidote For The Folly Of Government “Investment”

As we’ve discussed previously, efficient systems require feedback. Without the feedback of the pain that comes from making an incorrect decision, bureaucrats have no incentive to be good shepherds of taxpayer dollars.

For example, the federal government “invested” $527 million in the solar energy company Solyndra. These dollars have been (according to various accounts) diverted to the pockets of Solyndra corporate officers, squandered, kicked-back to corrupt Obama administration officials, or (at best) lost in a noble effort to put Americans back to work. In any event, taxpayers have seen $527 million of their money go down the drain.

The reason why this sort of outrage happens when the feds “invest” is simple: it’s not their money. As we all know, it’s easy to invest/gamble/have parties with other people’s money. Therefore one could reasonably ask, why not make it a requirement for every government official to have a stake in the outcome of every “investment”? (This is just for argument’s sake. Since there is no apparent Constitutional authority for the federal government to funnel taxpayer money into private enterprises, Solyndra-type expenditures should not even be taking place.)

In other words, if the investment is a bust, as was Solyndra, then the loss comes out of the bureaucrats’ pay checks. Let’s see, $527 million divided by approximately 16,000 direct Department of Energy employees equals about $33,000 per employee. Wow, no bonus this Christmas!

What if the investment is a success? Based on the government’s track record that would be highly unlikely, but if it should ever occur, we the people can work out an appropriate bonus.

-Ed Walker

 

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More Thoughts On Forcing The Rich To Pay “Their Fair Share”

As mentioned previously, the quality of our decisions is largely dependent upon their underlying assumptions (see “Why Can’t We All Just Get Along“). If our assumptions are wrong, then any subsequent analysis will very likely be incorrect. This post examines assumptions about wealth, and suggests how popular notions based on incorrect assumptions can yield grossly incorrect conclusions.

A lot of folks today (based on sensational news reporting of the Occupy Wall Street “movement”) seem to think that it is morally wrong and unjust for some of our fellow citizens to have more income (or more wealth) than we average folks do. So let’s apply some engineering thinking and see just how upset we should be at the rich, and whether or not we should make them our slaves. You can do your own analysis, but here are some things for the Wall Street Occupiers to consider:

1. Do you understand the difference between income and wealth? Income is the flow of money to an individual based on their work (or from investments, which flow from prior work effort, or perhaps due to inheritance or luck). Income does not stay resident in a rich person’s home (assuming they don’t burn their money or stuff it under a mattress), it largely flows through them to other folks who provide goods and services. This is why average folks like to be located near wealthier folks; so they can be closer to the flow of money.

Income, if not squandered, can also accumulate through savings and investment in wealth (real estate, money in the bank, autos, jewelry, etc.). Wealth can also be inherited, or obtained by luck (Wow! I won the lottery!), but wealth is much more likely to be obtained by many years of sacrifice and hard work.

Okay, so if you want life to be “fair,” what would be a fair way of taking the extra wealth or income from those folks who have more than you or me? How do you account for the effort and risks they have applied to their lives? What if they were just lucky? (If you won the lottery, would you like the government to redistribute it to everyone else who was not as lucky as you?) If you have a student loan, should wealthy folks who paid for their loans also pay for yours?

2. Do you understand that rich and poor people, for the majority of cases, are not stuck in those positions? Rich people frequently lose their wealth through bad business decisions or bad luck, while poor people frequently obtain great wealth due to hard work or luck. The important point is that “rich” and “poor” are typically not static; they change dramatically with time. Someone rich (or poor ) today is often poor (or rich) tomorrow. So how do you define “rich”? Is it someone who today has more than you or me, or should we take into consideration how long they’ve had their wealth? After all, we should be careful to be completely fair before we make someone our slave.

3. With regard to forcibly taking money from the rich to give to ourselves (via the federal government), how do we justify this? As described previously (“Why PIzzanomics Is Immoral“), government services are no different than any other service. But if we decide that rich people should pay more than you and me, then why shouldn’t they always pay more? When a wealthy person hires a plumber, shouldn’t they pay two or three or more times as much for having their leak fixed? But if so, who should determine the added amount, and how much should it be?

The decision to make someone our slave should be carefully considered, because — at least for now — they aren’t completely our slave, because they can leave. And (although the government doesn’t publicize it) this is happening: millions of Americans are leaving, fed up with being slaves, and they’re taking their money, talent, and job-creating abilities with them.

So who do we get to make our slaves, once they have all gone?

-Ed Walker

 

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PolitiFact’s Analysis of Cain’s 9-9-9 Plan is Fatally Flawed


PolitiFact, as we’ve mentioned before (“PolitiFact Earns ‘Pants On Fire’ Rating“), has the annoying habit of claiming to impartially fact-check various statements made by public officials. Unfortunately, PolitiFact does not really analyze (using the accepted science definition of the term), it simply offers two-cent opinions masquerading under the haughty label of “analysis.”

Case in point: PolitiFact claims to have analyzed Herman Cain’s statement that his 9-9-9 plan will result in lower taxes for someone making less than $50,000 a year, and rates the claim “Mostly False.” (“Cain’s ‘9-9-9’ plan no pal of working poor,” headlines the edited version in the 17 Oct 2011 edition of the St. Petersburg Times; the full online version is here).

1. The first major problem with PolitiFact’s analysis is that it was not shown to be objective. PolitiFact selected three tax accountants to provide an opinion, but since Cain’s 9-9-9 plan — if implemented — will substantially reduce the need for tax accountants, they are the last folks that should be asked for an assessment.

(Oddly, after touting the three accountants, Politifact barely mentions them. The newspaper version of the article only cites the comments of one of the three, who happened to be very critical of Cain’s plan. The online version quotes a second accountant who had a positive comment. There is no mention whatever of the mysterious third accountant.)

2. Politifact states in the online version, “For this fact-check, we’ll only be talking about the personal income tax and the sales tax since the business tax directly affects only business owners and corporations.” This assertion is nonsense, however, since everyone’s effective income is directly impacted by the prices that business owners and corporations charge their customers, and those prices are greatly affected by federal corporate and payroll taxes.

PolitiFact completely ignores such taxes, which are often hidden taxes that the Cain plan eliminates. For example, when most folks purchase a loaf of bread, they are aware of the state sales tax that’s added at the checkout counter, but they may not be aware that a portion of the price tag on the bread contains hidden federal taxes; i.e. the basic price is not only what the baker charges to bake the bread, it also includes an extra amount to cover some or all of what the baker has to pay the federal government in taxes.

Bottom line: PolitiFact’s analysis is fatally flawed. Its analysis of Mr. Cain’s 9-9-9 plan does not prove anything, one way or the other.

-Ed Walker

 

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ET EXTRA: Is Social Security A Ponzi Scheme?

fire Engineering Thinking Extra Is A Short Review Of A Current Hot Topic
 
 
 
Analysis: Using the generally-accepted definition of a Ponzi Scheme from this article…

The Williams plan to avert Social Security disaster” by Walter Williams, 10/03/11, washingtonexaminer.com

…and considering the following data from the article…

According to a 2002 Congressional Research Service report titled “Social Security Reform” by Geoffrey Kollmann and Dawn Nuschler, workers who retired in 1980 at age 65 got back all they put into Social Security, plus interest, in 2.8 years.

Workers who retired at age 65 in 2002 will have to wait a total of 16.9 years to break even. For those retiring in 2020, it will take 20.9 years. Workers entering the labor force today won’t live long enough to get back even half of what they will put into Social Security.

…then yes, it is reasonable to refer to Social Security as a Ponzi Scheme.

-Ed Walker

 

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A Practical Alternative to Government Regulations

An Engineering Thinking Solution For Protecting The Public

Let’s challenge the assumption that we need the government to protect us, by regulating commerce at all levels.

Why Regulations Are Not Effective (proof by counterexamples):

a. The Food & Drug Administration is supposed to protect us from tainted foods and harmful drugs. It does neither, by its own admission (“FDA Science and Mission at Risk“).

b. The Security and Exchange Commission is supposed to protect us from financial crooks. It doesn’t (remember Bernie Madoff?).

c. Restaurant inspections are supposed to protect us from food poisoning. They don’t (you’ve seen the newspaper reports of folks getting ill at restaurants, all of which are regularly inspected).

Here’s the basic underlying reason why regulations are ineffective: Although the government is never shy about dipping into the pockets of the taxpayer, there will never be enough money to pay for enough inspectors to inspect businesses often enough to eliminate the problems that the inspectors are supposed to find and stop. Why? Because there is no financial incentive built into this open-ended regulatory system. Regulators are not able to make a profit at regulating, unless they are corrupt and take bribes. Unfortunately, such corruption is not uncommon.

A second reason is that the public says, “Yeah, but we have to at least try to stop the problems or they would get completely out of hand. So even though regulations are not completely effective, we’re still better off having the regulations.” This reasoning, however, will not stand up to analysis.

One, it assumes that other factors, such as loss of business and potential lawsuits, are not significant. To the contrary, these free market incentives are very powerful motives for keeping businesses honest, even in the absence of regulations. In fact, for the great majority of honest and competent businesses, government regulations amount to a useless added burden that drives up costs. And these costs are ultimately paid by you, the consumer.

Second, it assumes that there is no better alternative. To answer this, Engineering Thinking offers the following plan:

The ET Plan For Eliminating Costly Regulations

Replace them with the following single requirement:

Each business shall be required to prominently post an easily readable  certificate at the entry to their place of business (or on their web portal, or on their products, etc.)

-A red certificate if they have no liability insurance

-A green certificate if they have liability insurance (as certified by the applicable government accounting agency, with the insurance carrier and amount of coverage noted on the certificate).

Failure to post a certificate, or posting a false green certificate, will be punishable by a minimum jail term and fine.

That’s it. You buy products or services from a “red certificate” business, you’re largely on your own. Its prices might be lower because they carry no insurance, but your risk will be higher if you have a problem. If so, you will still be able to sue, but you will have had fair notice that the business will likely not have enough assets to cover any damages.

The red certificate also allows small start-up entrepreneurs such as taxi drivers or hair stylists to get a foot in the door with clients who are willing to accept lower prices at increased risk. Presently, licensing and regulations often amount to a corrupt system where established wealthier businesses, through contributions to public officials who pass restrictive licensing/regulation laws, effectively block competition by making it too expensive for potential competitors to start a business. This limits consumer choice and drives up costs.

On the other hand, you may prefer to buy products or services from a “green” business. The prices might be somewhat higher, but you will have financial recourse if something goes wrong. Plus, you will be assured of obtaining safer products or services. Why? Because insurance companies do not like to pay for losses. An insurance company will not provide liability insurance to an unqualified person, so if someone claims to be, for example, a medical doctor, they will need to convince the insurance company that they are qualified to practice medicine. Plus, the insurance companies will provide their own ongoing inspections and monitoring to ensure that their clients maintain safety standards.

The new role of the government? To certify/monitor the financial health of insurance companies, to decertify/prosecute those companies that exhibit unethical behavior regarding claims, and to prosecute businesses who operate without an appropriate certificate. All of the licensing and regulatory nonsense simply drops away, because it is no longer relevant. Insurance companies will now provide the regulatory function in a cost-effective fashion.

The advantages of the above red/green plan are numerous: Lowers the cost to the consumer; eliminates the governmental regulatory bureaucracy and related inept  micromanagement; increases consumer choice; offers entrepreneurs a chance to get a business started; eliminates corrupt artificial barriers to competition; and last but not least, enhances consumer safety.

-Ed Walker

 

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Investing: Don’t Be Bamboozled By Leveraged Funds

Many folks today manage their own retirement accounts. It’s not a bad idea; who’s going to spend more time researching, evaluating, and monitoring investments for your nest egg than you? Of course, there are some caveats; e.g. you have to be disciplined, careful not to confuse a nest egg with a block of chips at a casino.

But assuming you are diligent and careful, you may be tempted to purchase a “leveraged” fund (you can see a list here; there are also some pseudo-leveraged funds such as VXX). These popular funds typically provide double or triple the price movement compared to the underlying share price.

When you purchase a leveraged fund, you would think that if its price increases to a higher value, and if nothing happens to the underlying components of the fund, then the higher price should remain locked in place. Unfortunately, this assumption is wrong. Leveraged funds, in essence, respond to the time derivative of the price of the underlying equity; i.e. you can’t buy and hold because prior gains will leak away. Therefore leveraged funds are generally suitable (at best) only for short term traders (those who buy and sell the funds within days or weeks).

For the average long-term investor, ET recommends: stay away from leveraged funds.

 

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