Wall Street Bonus Outrage!

There’s been rather a lot of self-righteous indignation lately about the bonuses paid out for 2008 by Wall Street. The hullabaloo started off with the New York State Comptroller announcing that bonuses were down 44% year-on-year. This was meant as a dire warning that the economy of New York City was going to hell in a hand basket. Somehow, what got picked up was that bonuses still weighed in at $18.4 billion, which some people still consider to be a lot of money.

Very surprisingly to me, some of those people turn out to be the folks in Washington who are planning to spend $887 Billion with a straight face. (How much money is that? See this brilliant post.) Last Thursday our President called the bonuses “shameful” and that unleashed an avalanche of outrage. The ever-level-headed Maureen Dowd called for a “a special prosecutor or three” in her New York Times column. Even personal finance blog The Digerati Life joined in on the fun.

If you have no idea how Wall Street works, don’t understand how many people work there, and are just generally the jealous type, it is easy to be sucked into this. Heck, it’s kinda fun. But the mundane truth is that the term “bonus” is confusing you. Wall Street bonuses are not extra money passed out at year end on top of regular compensation. They are the primary way people get paid for their labor.

Wall Street firms are very decentralized affairs, really more like vast collections of tiny independent operations that share office space and brand names. Strange as it may seem, the great majority of Wall Street workers made money for their firms last year and rightfully expect something like their usual cut. True, a very small number of employees managed to lose spectacularly large sums of money, enough to outweigh all that the profitable ones brought in. And it is also true that in most cases the firms were not contractually obligated to pay all that they did.

But you can only stiff your employees once, and only then in the process of bankruptcy. Nobody would ever work for you again. Vaporizing the big Wall Street firms is certainly a conceivable option, but I think there is general consensus that we should keep them alive.

And then there is the fact that bonuses are down 44% from 2007, which was down some from 2006. Are the car makers cutting pay 44%? Is anybody ready to suggest that to the UAW and then hint that even at that level it is “shameful”? (I know I’m not. Seriously, fellas, it’s just a blog.)

The financial crisis seems to be clouding all thinking as regards money and Wall Street. For example, my hero John Thain has been getting a lot of grief lately. David Brooks’ column in the Times today jokes that Thain got in trouble because “it is no longer acceptable to spend $35,000 on a commode for a Merrill Lynch washroom.” Which is really funny as long as you think that “commode” means a toilet and not the antique sideboard that he actually bought. (Geez, David, don’t you watch The Daily Show? Jon Stewart showed a picture of the thing last week.)

John Thain took over a brain-dead company in 2007 that, we know now, was circling the drain. He kept a good poker face, even spending lavishly to outfit his new office. He then hoodwinked one of the largest banks in the world into paying $50 billion for the company, which was at least $50 billion more than it was worth. That has got to be one of the greatest feats of salesmanship of all time. I’m not sure I would want to work for Thain, but he can work for me anytime.

A lot of the anger and frustration about Wall Street bonuses and office furnishings stems from the fact that these Wall Street types, who are at least partially responsible for getting us into this mess, are now the beneficiaries of government largess. That’s understandable. Why should these irresponsible pinheads get any of our money? It would be like enacting a subsidy for low-end home buyers or creating another wave of cheap mortgages or even passing a law to stop all foreclosures. All of those things would be just a transfer of wealth from the taxpayers to reward the fools that started this fiasco. Can you imagine the outrage something like that would cause?

I know I can’t.

Phil Town’s Rule #1, Part #1

As cynical as I am, there are still forms of human gullibility that surprise me. For example, I am forced to conclude that those Nigerian emails promising tens of millions of dollars must somehow snare a few people, otherwise they wouldn’t get sent. And don’t get me started on Bernie Madoff. I guess it is my dim view of my fellow man that has me scratching my head. I just can’t believe anybody is really that optimistic.

So you will understand how stupefied I am at the sales of the many books that claim to contain a sure-fire way to get rich in the stock market. Individual titles come and go, but there always seems to be a few members of this sub-genre haunting the bestseller lists. (Although at the moment they are relatively less popular. Go figure.)

Hundreds of thousands of people spend hard earned money on these books. Difficult as it is for me to contemplate, it seems inevitable that some of those people read this blog. So with uncharacteristic patience, I am going to review one of the more popular of these tomes, Phil Town’s Rule #1, The Simple Strategy for Successful Investing in Only 15 Minutes a Week. I will do this in several installments, and, just to make it clear now, I will not have anything nice to say.

Hard sales figures for books are hard to come by, but it is clear that Mr. Town has done very well by this, his first book. He can safely be put into the growing club of those who have become rich by selling advice to others on how to become rich. Somebody should tell the Nigerian scammers about this. If only they charged money for their emails.

You do not need to open Rule #1 to know that it most certainly does not contain a recipe for wealth. None of these books do. They can’t. If this is not immediately obvious to you, consider the following.

Suppose you stumbled on a “simple strategy for successful investing” that allowed you to consistently make money in the stock market. Of course, you wish to profit from your discovery, and two possible ways to do that occur to you. You could a) make millions by writing a book that explains your method or b) make billions keeping your mouth shut and running a hedge fund. Which would you choose? Hint: a billion is a thousand millions.

Put another way, suppose you developed a way to play golf especially well. Would you teach it to others at the local country club or join the PGA Tour?

The bottom line is that everybody who can really beat the market does that for a living. They do not write books. And they rarely give interviews. In fact, people with effective schemes for making money in the stock market are generally very secretive about how they do what they do. If everybody knew and used the trick(s) they wouldn’t work so well. Indeed, Madoff could get away with what he did because it is common for hedge funds to disclose very little about what they do, even to their own investors.

Investing may be the ultimate “those that can, do, those that can’t, teach” subject. Because doing just pays so darn well. I know I am being a wet blanket. I just can’t help myself.

Still, I am sure that there is an optimistic fool or two reading this that hopes that maybe Rule #1 will be the exception. Town’s picture on the cover just looks so trustworthy. So in the rest of this series of posts I will methodically examine his simple strategy and I will show how Phil Town is the only person who will ever make a dime from it.

[Links to parts of this review: Part 1, Part 2, Part 3, Part 4, and Part 5]

On Investing Ethically

Two recent posts, one on Christian Personal Finance, the other on Consumerism Commentary, discuss ethical, or as it is known in the trade, socially responsible investing. For those of you blissfully unaware, this is the notion that when investing your money you avoid companies that do things you think are morally reprehensible.

Back when I was just starting out in the investment world I had some involvement in socially responsible investing. I worked for a large institutional money manager. Our clients were pension funds, endowments, and the like and each one had its own account, sort of like a mutual fund with only one shareholder. We had hundreds of them and almost all were perfectly identical, holding the same stocks in exactly the same proportions.

The non-identical ones had “client restrictions.” Most of those were prohibitions against investing in certain industries to which the client, often on religious grounds, objected. I remember we had several accounts associated with the Catholic Church. They prohibited investments in any company even vaguely involved in abortion and in, for reasons I cannot recall, for-profit hospitals. We also had a few accounts associated with the Lutherans, who prohibited us from putting their money in companies that made alcoholic beverages or were involved in gambling. They were fine with abortion and hospitals, just as the Catholics were indifferent to booze and gambling. Another set of accounts prohibited arms makers and we had several different levels of prohibitions against tobacco.

It was an administrative mess and my job (well, a small part of my job) was to simplify and automate things so that the portfolio managers would not have to spend time adjusting each account to accommodate the restrictions. I built a clever system that boiled down to finding a second-choice stock in a similarish business to substitute for a forbidden stock. So, to cite the only example I can remember, when most of the accounts bought cigarette maker Phillip Morris, the no-tobacco accounts got McDonald’s instead.

This was working well for some time when some genius in the marketing department discovered that not only did the restricted accounts have somewhat different returns than the normal account, but that on average they consistently did worse. He called me in a huff and I very patiently explained to him that of course they underperformed. They were supposed to. The normal accounts had the portfolio managers best picks in them. The restricted accounts not so much. Restrictions can only cost you money.

With utmost respect to the moral values of others, I personally think that ethical investing is bogus. To begin with, I have a lot of problems with the idea that one degree of separation from evil is evil but that two degrees of separation is okay. Investing in a company that pollutes is bad, but investing in companies that make money with the electricity made by the polluter is okay? And if it is, why isn’t investing in a mutual fund that then invests in a polluter okay? Wherever the line gets drawn it is arbitrary. We have one big global economy and cleanly excising out the dirty money is not an option.

I am also very uncomfortable with the idea that by investing in a company I am necessarily endorsing everything the company does. I own some Treasury bonds. Does that mean that I endorse everything the Federal Government does? I really hope not.

That said, if you want to invest ethically, as you personally define it, go right ahead. It’s your money and what makes capitalism work is that only you get to decide where it goes. But keep in mind that you are making a sacrifice. Your moral high ground will, over time, cost you money as you pass up unethical but profitable opportunities.

Frugal Friday 1/30

Ah, Friday again. Instead of coming up with my own content, today I pass along the very best of the many frugality tips from the past week or so in the blogosphere.

Free Money Finance has a follow-up on their controversial post from last week, Can You Pay for a Costco Membership by Eating Free Samples? This one has tips on maximizing the free samples you get on each visit. Oddly, the author says that he “debated whether or not to publish this post or not.” Apparently, he worries that “it’s a bit over-the-line” because, according to him, “there should be a limit to what we’re willing to do to save money.” I guess it takes all kinds.

And as if the frugal world needed more controversy, Living Almost Large asks if it is more frugal to take home half your restaurant meal to eat the next day, or to split that meal between two people at the restaurant. I’m not sure that this sort of debate can ever have a resolution, but it is important to provide a forum for a free and open discussion of these issues.

There is an insightful post on How I Save Money. It is #8 in a series on ways to save money on your wedding. I haven’t read the others, but this one suggests not feeding your guests so much food. The author makes clear that although she has no plans to get married, she does read bridal magazines, looking for ways to save money on a wedding. And that is not weird at all.

The group blog Queercents (The subtitle really is “We’re here, we’re queer, and we’re not going shopping without coupons.” I could never make that up.) has a post on making homemade deodorant. The results are mixed, and at $6 a stick not really a money saver, but it is more than worthwhile because of the stereotypes it shatters. I thought gay people were much more particular about personal grooming.

Real Life gives a whole list of ways to save money on groceries. The one that you haven’t seen before is to save money on beef by getting together with a few other families and buying a whole cow from a farmer. Another list of tips comes from Debt Reduction Formula. He suggests saving on toiletries by shaving only once a week and ceasing to clean your ears altogether.

But this week’s winner for the best new way to save money is from Money and Values, which provides a link where you can download a printer font that is designed to use up to 20% less ink. I am such an idiot for not thinking of this myself. But why stop there? The truly frugal could save money by using shorter words. Also, why not avoid letters with big “ink footprints” such as w, e, and k, and favor eco-friendly ones like i, c, and l?

And in these times of economic and ecological stress, I think we should all do our bit by saving ink that otherwise would have gone to non-essential printing. In the UK, Birmingham City Council has voted to drop apostrophes from traffic signs. Even that small step, supported by a grassroots anti-apostrophe movement, was bitterly opposed by pro-ink pressure groups such as The Apostrophe Protection Society. Of course, in a nation where they spell color as “colour” change will come slowly. Here at home, with the new beginning of hope and change in Washington, isn’t it time that our nation’s leaders stepped up and endorsed spelling simplification and the widespread adoption of texting abbreviations in standard written English?

b/c if u cn rd ths, u cn sav $.

How Much is $887 Billion, Really?

Several blogs (Such as this one, this one, and this one) have attempted recently to put the orgy of pork-barrel spending known as the stimulus package into perspective by explaining just how much $887,000,000,000 is in practical terms. The consensus winner seems to be that it’s about $3000 per American. That’s not bad as illustrations go, and does have some practical merit, as each American will owe that much more as their personal share of the national debt, but I think that as bloggers we need to do better.

How much is $887 Billion? It’s $12,770 per Obama voter. It’s every American’s mobile phone bill for the next five years. It’s 4.2 million new houses at last month’s average selling price. (That’s enough to give one to every family in Arizona, which, come to think of it, is awfully similar to how we got into this mess to begin with.) It’s more than the total value of all US currency in circulation.

Those things are all true, but they lack a certain visual element. Try this one. If it were printed in one dollar bills, $887 Billion would be enough to cover the total land area of Rhode Island, Delaware, and New York City combined. Or, if you prefer, it could cover New York in tens. Or Manhattan in hundreds.

Unfortunately, dollar bills don’t make a very practical floor/land covering, and at $9.60 a square foot for the ones, it’s kinda steep. Lowe’s has some decent looking vinyl tile at $1.08 each. It’s much more durable, and at that price for $887 Billion we can cover South Carolina.

If covering up states doesn’t help you feel how much money we are talking about, let me try and put it in terms of something you might buy. 8GB iPod Nanos go for $134 at Amazon. So the stimulus package is equivalent to ordering 6,619,402,985 of them. (Don’t forget to click on free super-saver shipping.) At a shipping weight of 1 lb. each, and assuming an average weight of 177 lbs per person, that’s more than enough to give every resident of California their weight in iPods.

Of course, iPods are relatively durable items. What about in terms of something that gets consumed by you, the average American? My local on-line grocery delivery service will sell me a 24 oz. jar of Chi-Chi’s Fiesta Salsa Thick and Chunky Medium for $4.19. So the stimulus package is equivalent to 39.7 billion gallons of the stuff. And what could we do with it? Well, this is only a suggestion, but to stem the tide of illegal immigration from Mexico, we could dig a trench 4 meters deep and 10 meters wide along the entire 1,969 mile US-Mexico border and fill it with salsa. Because there is nothing that would repel an actual Mexican more than Chi-Chi’s Fiesta Thick and Chunky Medium salsa.

But maybe this is all too impractical for you. How about something useful? For example, a 2009 Mercedes SLK55 AMG convertible? It’s got a 355hp V-8 that will take it 0-60 in 4.9 seconds. We could buy one for every one of the 14.3 million college and grad students in the US. Or all the men divorced in the last ten years.

So now you know.