Money Listens

The U.S. Dept. of Agriculture spends a lot of time on its publications. And a lot of my tax money. So, I like to see what my tax dollars are buying. Right up there with Real Simple and Sports Illustrated is Amber Waves. Get it? From the song–America, the Beautiful.

But my favorite is the every-other-month Vegetables and Melons Outlook. (I am not making this up.) Don’t you have a favorite section in a magazine you always turn to and read first? For me, it’s the “Commodity of the Month.” In the April, 2008 issue, potato chips were featured.

Even though it’s pretty much common sense, you like to know that the U.S.D.A. is confirming that retail prices for potato chips are considerably higher than other potato products (such as fresh potatoes or frozen french fries). Since 2000, retail prices for potato chips have averaged $3.41 per pound, while fresh and french fried potatoes have averaged $0.45 and $1.05 per pound. This is due to the high cost of the frying oil. Plus, a potato is roughly 80 percent water so it takes about 4 pounds of raw potatoes to manufacture 1 pound of potato chips.

Even with the higher cost, potato chip consumption in the United States has steadily increased over the past five decades from 11.4 pounds per person in 1960 to an estimated 19.3 pounds per person in 2007. An estimated 79 percent of potato chips are consumed at home.

So who’s eating all these chips? Conventional thought is lower income, less educated households are more likely to purchase potato chips. Not so. When breaking down income levels of chip consumers, 50 percent were middle income households (households with incomes between $30,000 and $69,999). Upper income ($70,000 and greater) and lower income (below $30,000) households each consumed 25 percent.

If you can figure out what any of this has to do with personal finance, leave me a comment. Maybe it’s something about how the federal government uses our tax dollars. But, personally, it’s very comforting to know that average Americans are staying at home eating lots of potato chips. It just seems so, — so American.

My daughter read the 1932 Pulitzer Prize winning novel The Good Earth for her world history class. I decided to read it also, since it was one of those books I had always wanted to read. The engaging story is set in rural China in the 1800s. Although there are many cultural differences between East and West, wealth’s influence on human nature transcends time and culture.

Pearl S. Buck paints a vivid picture of two generations. The father is a hard-working farmer who accumulates wealth by his sacrifices and his respect for the land. He attains a high status in his village and uses his wealth to provide for others. He also indulges his sons with material possessions and the education he never had. He doesn’t want them to be farmers, like him, but to have a “better life.” In his old age the farmer sees how his sons have none of the qualities that enabled him to become wealthy, such as a strong work ethic, an ability to delay gratification, and frugality. His sons plot to sell the farmland to keep up their standard of living, unaware they are selling the source of their wealth. The father realizes, too late, that his sons would be better off had they been farmers.

Where do you fit in this generational picture? Are you the father, indulging your children? Or, are you more like the sons? Your parents provided you with material possessions and wanted you to have more than they had as children. You were never taught to delay gratification or how to manage your money.

How are you raising your children? Will they have a strong work ethic and value frugality? Will they be content with what they have? Will they be thankful for what they have?

Quick now, who is the world’s richest person? Bill Gates, right? Wrong. It’s Warren Buffett. This year Forbes magazine named him the world’s richest person. Who? He’s the 77 year old CEO and largest shareholder of Berkshire Hathaway, a wildly successful company. He is arguably the greatest stock market investor of all time. He’s known for his frugality, despite having a net worth of over $60 billion dollars. Yes, you read that right, billion. His annual salary is about $100,000 which is pretty low so far as CEOs go. He still lives in the same house in Omaha, Nebraska that he bought for $31,500 in 1958. (Most of this info is from Wikipedia. )

I’m giving you this background so you’ll sit up and listen to what he says. He knows his stuff. Last weekend he held a question-and-answer session at the annual meeting of Berkshire Hathaway. CNBC dubbed it Buffettstock ‘08.Over 31,000 rabid fans (shareholders) attended the meeting. Hence the wordplay on Woodstock. And you know Omaha isn’t exactly a major tourist destination. You can read a transcript of the meeting at CNBC.com. Here are a few of the answers he gave in that session:

Buffett says any money he’s given to charity hasn’t really affected his life because he’s given from his surplus. He admires those with much less who still give money and time to others.

How would you invest your money if you were just starting out and were not a full-time investor? Buffett’s answer: a low-cost stock index fund with a company like Vanguard.

What advice would you give to children on finances? Buffett says generally children will follow the example of their parents, and will be sensible if the parents are sensible and live within their means with an eye to the future. He says it may sometimes be best to spend money on some things when you’re young, such as a trip to Disney World that can create memories for your family. “I do not advocate extreme frugality.”

If you want to go to the meeting next year, you’ll have to buy at least one share of company stock. It’s on the NYSE, symbol BRK. Last time I checked, one share was trading at $129,990. Or a Berkshire “Class B” Share is a mere $4,500. Start saving your money.

If you’re like most people, you don’t like Mondays. But Monday is the best day for starting a new habit. Especially the first Monday of a month. There’s a branch of psychology that studies how we problem solve and change our behavior. You can use Mondays to change your old behavior and kick-start a new habit.

Isn’t that a coincidence, today is the first Monday in May. Decide to start a new habit. Pick one that will save you some money. What about cooking dinner at home in May? Not only will it save you money, but it probably will be healthier for you.

To break your old habit of eating out you have to overcome the dreaded path of least resistance (POLR). The POLR is to do what you’ve always done. Studies show that when the POLR is taken away, we become more creative in solving problems.

Imagine it’s dinner time. You’re looking in the fridge and muttering “there’s no food in here, only ingredients.” The POLR is to jump in the car and head out to dinner. Or call Pizza Pronto. But you can’t do this, because you’ve decided to cook at home. You may think “there’s nothing here to eat,” but forced to come up with dinner, you pull out some items, and create something to eat. You may think you can’t, but psychology shows that you can and will be creative and figure out how to get by on what you have. Decide not to take the POLR.

I have to comment on an article in Thursday’s The New York Times. Low Spending is Taking Toll on Economy was the headline. The writer called it “ominous” that Americans were cutting back on discretionary purchases to save their money for necessities. Consumer spending for cars, furniture, recreation and Starbucks has fallen, “reflecting a growing inclination toward thrift.” Since home prices have dropped, families are running up against their credit limits without being able to borrow more against their homes, “forcing many to live within their incomes. [T]he basic laws of arithmetic are now impinging on millions of households.”

Since when is thrift a bad thing? Why is living within your income ominous?

The basic law of arithmetic says that if you spend more than you make, you end up with a negative number. And that number is called broke.

Finally, it looks like some Americans are waking up and finding that saving is the new splurging. Why should you buy stuff you can live without with money you don’t have? Just to help the economy?

About those government rebate checks. Economists agree they won’t do much for the economy. So here’s some advice. That check can do a lot for you. Don’t spend your check. Pay off some debt, put some in your retirement fund, and save some for an emergency fund.

This might make you feel better– here’s another article (in the same Business section).

For Europe’s Middle-Class, Stagnant Wages Stunt Lifestyle

I guess the basic laws of arithmetic apply everywhere.

Last night I was on Fidelity’s website researching the Contrafund. Guess what information was presented first? Past performance. 1 year, 3 years, 5 years, 10 years. 13.06% for the life of the fund. Sounds pretty good. Guess what comes next. This statement:

Performance data shown represents past performance and is no guarantee of future results.

Yeah, yeah, yeah. But past performance is important, isn’t it? That’s how you choose mutual funds. Get a fund with a good long-term track record.

Surveys show the most important factors people use to select mutual funds are past performance and level of risk.

Economic theory maintains that the most important criterion is future performance and level of risk.

Doesn’t past performance show which mutual fund managers are the best? And shouldn’t those managers’ funds outperform in the future? Unfortunately, no. There is no formula to identify the best managers. Over periods of 10 years only 3/4ths of all stock funds performed better than the market. Past performance can’t be counted on as an indicator of an above average manager. A few years of good results could be the product of chance.

A 2004 study presented a list of stocks from which brokers and portfolio managers chose which stock would do best each month from a pair of stocks. They were only successful 40% of the time, a performance below what could be expected from chance alone. The professionals reported “knowledge” as their main source followed by “intuition”. Evidently, what they “knew” and “felt” wasn’t very helpful when it came to picking winning stocks.

If the professionals can’t predict which stocks are going to perform well in the future, what chance does the average investor have?

This sounds like a great argument for index funds.

Capon, Fitzsimons, and Weingarten. Affluent Investors and Mutual Fund Purchasers. International Journal of Bank Marketing, Volume 12 Number 3 1994 Torngren and Montgomery. Worse Than Chance? Performance and Confidence Among Professionals and Laypeople in the Stock Market. Journal of Behavioral Finance, Volume 5, Issue 3, September 2004 , pages 148 - 153

Nowadays people know the price of everything and the value of nothing. –Oscar Wilde

This morning I heard a radio commercial for a second-hand clothing store. The tag line at the end was “Value means paying less than you expected to pay.” I started yelling at the radio. No, it’s not. Paying less than you expected to pay is a bargain. Value is much more subjective. Value is paying what something is worth to you. What is a value to you is not necessarily a value to someone else. Don’t confuse price with value.

Tonight Baskin-Robbins® is having a 31 cent scoop night. On Wednesday, April 30th 2008, from 5pm to 10pm, stores will sell small scoops for 31 cents (plus tax). Here’s the reason why (from their website):

A donation of $100,000 will be made by Baskin-Robbins® to the
National Fallen Firefighters Foundation. At select local stores
throughout the country, you may also have a chance to donate to
your local fire station. We encourage you to learn more about the foundation by visiting www.firehero.org.

What’s this got to do with value? Isn’t paying 31 cents for an ice cream cone a good value? Maybe. It’s definitely a good price. But it’s only a value if it’s worth it to you to pay 31 cents for a scoop. Maybe you’re on an eating plan that doesn’t include ice cream. Maybe you’d have to drive several miles to get to a store. Maybe you don’t like ice cream. (I think sorbet is included in the deal). Maybe you’re indecisive and would spend an hour trying to make up your mind what flavor to choose. Just because you know it’s a good price doesn’t automatically make it a good value.

For me, it’s a good value. There’s a store about a mile away. Jamoca Almond Fudge, here I come.

When you’re browsing at a bookstore, don’t you tend to look at the stuff that agrees with you? You already have your mind made up. You know where you stand on an issue. You know that you need to do your part on global warming, so you gravitate toward books such as Good Green Homes and You Can Prevent Global Warming (and Save Money): 51 Easy Ways. If you see a book titled Climate Confusion: How Global Warming Hysteria Leads to Bad Science, you bypass it.

You know that buying a home is a smart idea. So if you see the book Who Says You Can’t Buy a Home!: How to Put Credit Problems, Down Payment Challenges, and Income Issues Behind You, you grab it. You’re not going to read a book that tells you to save up for a down payment first, or wait until your income is higher. Why? Because that’s not what you want to hear.

Psychologists call this tendency to seek information that agrees with us confirmatory bias. When we ask for advice we are biased toward sources that “confirm” what we “know.” Is this the best way to make decisions? Probably not. We should seek out people who have the opposite view, and evaluate their thinking. If you can’t find fault with their position, perhaps you don’t “know” as much as you think.

One of the hardest things to do is to change our minds about what we “know.” Part of this is our reluctance to admit being wrong, and part is the difficulty of breaking habits. I would even say the more certain you are of a position, the more “everyone” agrees with you, the more you need to seek opposing views. If you can understand and refute the opposing view, you can have confidence in your decision.

I enjoy reading about investing in mutual funds, about not using credit cards, and about following a budget. These are all issues I “know.” Next time I’m reading blogs, I’ll pick some that discuss investing in things other than mutual funds, or sites that favor credit cards. (I’ll need to hunt for them, they sure aren’t in my Favorites.) Or maybe I’ll read some books by authors I’m not familiar with. After all, how many times can I read those Ben Stein books. I think I can learn more about myself by listening to people who disagree with me.

Anyone disagree with this? I’m ready to listen.

Money won’t buy happiness, but it will pay the salaries of a large research staff to study the problem. –Bill Vaughan

Maybe Money Does Buy Happiness After All was the article that caught my eye in the New York Times Business section. It compared what’s known as the Easterlin paradox with a new study. The Easterlin paradox says that more money doesn’t make you happier. Two researchers from the Univ. of Pennsylvania disagree. They published a study that says more money does bring happiness, but it’s not guaranteed.

So, who do we believe?

The Times article skirts the question by concluding that “affluence is a pretty good deal.” Money can allow you to visit relatives in far away places, travel, work less, spend more time with friends or on hobbies that you enjoy. Duh!

I’ve said before that everyone needs enough money for life’s necessities. And a little more for a few fun things. But happiness, that overall feeling of positive emotions and leading a purposeful, meaningful life, won’t come from more money. It comes from those experiences that money can’t buy.

But being a poor money manager can lead to stress, anxiety, jealousy, and other decidedly non-happy emotions. For myself (and most Americans), if I am content with what money I have, manage it as well as I can, and spend it on the most meaningful things to me, I’ll be happy.