Windfall

Here's a dividend check I got this week. Any thoughts on how I should spend it? Any guesses on how much it cost the company to send it to me? I specially enjoyed the word ONLY in the amount.

CEO Bucks the Trend

A Point of View in our local paper talks about executive pay and how, perhaps in some cases, high profile CEOs may actually be worth the big bucks they get.

In executive pay, you get what you pay for

Peter A. Coclanis - CHAPEL HILL, NC


"[N]umerous empirical studies have shown that most executives have earned big bucks in recent decades because the share prices of their companies have risen dramatically. In the vast majority of cases, prices rose not through corporate abuses, cooking of the books or financial chicanery, but at least in part because the possibility of high compensation motivated very talented people at the margin to assume top-management positions at a risky time, and because these people, generally speaking, managed in such a way as to add tremendous value to shareholders, much more value than top managers themselves received in compensation.

"In other words, top execs did good for themselves by doing well for those for whom they worked."

Basically what the article is saying is that sometimes the reason executive compensation seems excessive is because their "pay" is based largely on company stock. The greater the value of the stock, (presumably thanks to their hard work,) the greater the value of their take home pay.

It's the trend to complain about how high some CEO's salaries appear. But let's take a hard look at whether they worked to earn it by helping all shareholders of that company in the process.
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The Customer is NOT Always Right

In a recent article,


Sprint customers get the brush off
McClatchy Newspapers
Sprint Nextel told about 1,000 disgruntled cell-phone customers that they would be better off with someone else. ... Sprint executives decided to break up with a group of malcontents who called frequently with complaints. "While we have worked to resolve your issues and questions to the best of our ability, the number of inquiries you have made to us during this time has led us to determine that we are unable to meet your wireless needs," stated the letter Sprint recently sent to these soon-to-be former customers.


If you were a Sprint Nextel shareholder, how would you feel about how your company treats its customers? At first you may think that's pretty shoddy PR.

Some investors, on the other hand, may applaud Sprint Nextel for their good business sense. Sprint Nextel has the courage to recognize the fallacious statement The Customer Is Always Right and instead say, "We are expending too many resources trying to please a subset of users whose expectations may exceed the capabilities of our products."

We may see more companies becoming more selective in whom they will serve, and whom they will not.

Please see A Consumer Blacklist? for another example.

UPDATE:

Sprint has been asked to pay each of these customers $200 - "the amount the customers would have had to pay if they had prematurely ended their two-year contracts with the company."

What works for the goose ...
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Stock Sale Regrets

Have you ever sold stock, and then later regretted it?

There can be any number of reasons why you might want to sell stock. I think one of the first times I sold was to put a down payment on a house. I sold to help pay for a cruise, sold to invest elsewhere, and most recently sold to help pay for our new kitchen.

In my mind, those are pretty good reasons to sell.

Of course, there are some not so good reasons to sell stock. Well, they might be good reasons, but you don't feel good afterwards because of the need that brought you to have to sell off assets.

Selling to pay off your daughter's credit card abuse. Selling to cover the wife's gambling debts. Selling to recover the costs of your son's wrecking his sports car. Selling to help pay for your lung transplant.

Every time you consider selling stock, there is, (or should be,) a bit of anxiety. After all, how do you KNOW that the stock is at or near a peak? Truth is, you don't. Do I NEED to sell? Is there another way I can come up with cash I feel I need?

Whether or not you sold high, sooner or later you will come to the realization that your portfolio is now that much smaller after the sale. You may have seller's regret after that. Kind of like postpartum depression. (Sorry Brooke Shields.) You may feel that there MUST have been a better or different way to cover expenses than to have had to sell off stock - specially when you see the values start to climb soon after.


The Story of Albert

This reminds me of the story of Albert. Albert was an investor of moderate means. He had a couple hundred grand in investments. Every month, Albert would track his net worth. He really enjoyed seeing how his money would grow over time. With few exceptions, every month would show a gain over the previous. He was in his glory.

One day, his wife suggested the two take a cruise to Alaska. She'd a friend who'd taken the cruise with her husband and they had a marvelous time.

At first, Albert sounded interested. When he asked his wife about how much such a cruise might cost, he nearly collapsed. This particular ten day cruise was twelve thousand dollars. Even though 12 grand only represented a small and containable portion of Albert's and his wife's total portfolio, the thought of seeing that Net Worth figure drop by so much troubled Albert. He just didn't want to accept such a dip in his nest egg for what seemed to him to be a luxury.

(Albert and his wife eventually got a divorce, and his wife went on the cruise with a girlfriend - on Albert.)


Regrets

What can we learn from the story of Albert? Any investment vehicle, be it stocks, a 401(k), an insurance policy, whatever, WILL eventually get spent - by somebody. There is not a dollar sitting around in any nest egg that won't, someday, be spent.

Hopefully you will get the chance to choose how most of your total portfolio will become consumed, and if you have luck on your side, it will get spent in a manner that will make you glad you had put it aside in the first place.

But don't be like Albert. Don't be afraid to sell off a few shares every once in a while to take in some of life's pleasures. Sure, your portfolio will take a hit, but consider why you even have a portfolio. Is it ONLY to provide for your offspring? Is it ONLY to cover exorbitant health care costs? Probably not.

Sell off shares in a reasonable manner, spend the cash wisely, and most important, have no regrets over spending a little cash on yourself every once in a while. And be glad you're in a position to do so.

A Golden Rule - Misdirected

Do you know who Leon Leonwood Bean is? Perhaps you know him better as L. L. Bean, founder of the apparel and outdoor equipment retailer that bears his name.

A while back, I received a catalog in the mail from LL Bean. On the cover, in addition to photos of camping gear and clothing, was L.L.'s "Golden Rule" in large type.

"Sell good merchandise at a reasonable profit, treat your customers like human beings, and they will always come back for more." - Leon Leonwood Bean

Mr Bean penned that nearly a hundred years ago, and I'm sure he intended the Rule to inspire company employees for years to come, and certainly well beyond his own demise, to further his company's growth.

However, I am not as certain that he intended the Rule to be presented to the customer as a reason to shop at LL Bean.

Let's break down the Rule into phrases. "Sell good merchandise at a reasonable profit." Good merchandise speaks for itself, but is a company's profit margin a selling point? Do customers care if a store's profit is reasonable?

"Treat your customers like human beings." Wow. I don't know, maybe it's just me, but I think I'd kind of like to expect that anyway - not to have the founder have to explain it to me. This phrase is patronizing and doesn't make me want to shop there because they state, "Buy LL Bean gear and be treated like a Human Being!"

"and they will always come back for more." I think this phrase tops all for reasons why I should shop at LL Bean. "We make a profit, we patronize you, and yet you keep coming back for more."

LL Bean's Golden Rule has merit. Every employee should understand the history and importance of his Rule. But whichever advertising exec had the brainstorm to put the Golden Rule on customer-bound advertising material was misguided into thinking that such a move would boost sales given the employee-only nature of the message.

Apparently LL Bean's website agrees. They state his Golden Rule, but it's buried deep in the website under the retailer's background as a historical reference.
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Loyalty Card Madness

So this woman is checking out her groceries and the checker says, "Do you have your loyalty card?"

"Sure!" the woman says cheerfully, and hands him her keys. He rifles through the myriad of teensy cards she has on her keychain till he finds the one for that store, scans the cards and hands the wad back to her.

"I wonder if you can tell me something..." she begins.

"I'll try my best," he offers.

"Can you see if I have updated my address to my new once since I have moved?"

"I cannot access that from here - you'd have to go to the Customer Service Counter and they will be able to help you. Just walk down this aisle and they're on your right."

"Thanks," she waved enthusiastically.

She goes to the counter where a pleasant woman greets her. "May I help you?"

"Yes. How can I tell if my address is current on my loyalty card? I've moved recently and can't remember if I've changed it yet."

"I'll be happy to check for you. May I see your card please?"

The woman hands over the pile of keys and cards and the counter person meanders through the stack until she locates the proper card. She scans the card and looks at the screen.

"We have you at 345 Elm St," she states.

"Oh, good!" the woman sighs, "I did change it. One less thing I need to worry about!"

"Glad to have been a help," says the lady, "and thanks for shopping with us today."

The woman leaves the store, hands the keys that she and her friends found in the parking lot to an accomplice, who then drives to the address the store gave the woman, where they proceed to rob the poor, hapless victim who was unfortunate enough to have lost her keys.

Keys that contained enough information to associate her address with her house key.


I suspect that most establishments have rules that prevent someone from walking into the store and asking what is the address that's connected to a loyalty card.

So perhaps in this case, these criminals needed to visit several of them, (the coffee shop, the ice cream shop, the library, the oil change shop, three gas stations, and three supermarkets,) before they found one who didn't know the rules.
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Interest-free Loans to the Gov't

Have you gotten your tax refund check yet? How much did'ja get? Did you spend it wisely?

How many times have you heard this? "Don't let your tax refund check get too large, otherwise you're providing an interest-free loan to the government."

I understand the logic. Let's say your refund check is regularly about two grand. You paid into the system $2000 more than you owed over a twelve month period, so the IRS gives you your $2000 back at the end of the year, and nothing more - in other words, no interest. So in essence, you've "loaned" the Gov't $2000 - interest-free.

The regurgitators of that tired old cliché would have you believe that you are performing this huge disservice to yourself while benefiting our country's government by providing them with money to use as they see fit, without the compensation that other lenders enjoy, such as interest.

Never mind that when lenders loan the Gov't money, they charge a lot higher interest than the paltry less-than-one percent I get from my savings account. If I sent that two grand to my bank, I'd get what? About twenty bucks? Wheeee. Break out the GOOD beer.

The theory is great, but in practice, it can have the opposite effect. Let's put this scenario to two of my friends, Trudi Frugal and Joe Average.

Trudi and Joe both get about $2000 a year from their income tax. They both regularly use it to pay down their credit card debt. They also both hear, from multiple sources, the diatribe against "loaning the Gov't money without interest." Sounded like a reasonable argument.

So they both change their withholding so that they each get $150 a month in additional spending money, leaving a more reasonable $200 refund at the end of the year.


Trudi's Story

Trudi takes her $150 per month and invests it into her company's 401(k), which has an interesting effect of lowering her taxable income, thus further increasing her spending power. Let's see how that works out for her. At year's end, and after considering her employer's match of a portion of her contribution to her 401(k), her retirement portfolio has increased the value of what would have been her interest-free loan, to a respectable amount. She was pleased with her implementation of the advice she was given regarding her withholding allowance. When Trudi retires, she'll have more spending power thanks to her new strategy.


Joe's Story

Joe, on the other hand, sets a personal goal to apply the $150 a month extra he sees in his paycheck directly towards his credit card balance. Let's see how that works out for him. The first several months, he's right on target. He increased his regular $300 payment to $450, and he's happy seeing his debt balance decrease at a faster rate. But then, as the months go on, glitches in his plan appear. One month the car needed a new battery, so he only sent in $400. Another month, his wife's hospital bill left him with enough to only pay $350, and one month he couldn't pay any extra over the $300 he usually does. In the end, he found that he only used about half the $1800 he'd "saved," (over lending the Gov't interest-free,) to pay down his credit.

Worse, the next March when he and Trudi were used to getting that $2000 check to pay down credit, instead they both got about $200, while the interest on their card balance mounted.

They both couldn't justify changing their withholding allowances to pay more than they owed, so they sucked it up and made it work somehow. But they regretted taking the advice of friends who warned against loaning the Gov't money interest-free.

They also questioned what's so bad about helping our government, but that's another topic.


Summary

One could argue that there are as many ways to justify keeping tax refund checks high as there are taxpayers. Though Trudi will see a significant benefit when she retires, there are probably far more Joe Averages than there are Trudi Frugals. The facts are that in this country, savings rates are at an historic low, and credit card balances are at a significant high. For those whose only practical savings are that refund check, they may certainly feel that the interest they're paying on those cards is a lot higher than the interest they're "losing" by "loaning" the money to the government.

Work, if you must, to convince people that they should create better money management plans. By all means it is certainly a necessity. But please drop that "interest-free loan to the Gov't" spiel as part of your argument. It really has no practical or significant meaning.
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Metrics, or the Art of Measuring Quality

Those of you who are in big corporate business and may be interested in a story of how the boss's request to supply "metrics" (measurable, quantifiable data) to determine quality should visit the following link:

Metrics Anyone?

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Powerball Lump Sum, or Annual Payments?

A woman in my home state of North Carolina won the Powerball recently. Seventy-four and a half million dollars. When given the choice between 29 annual payments totaling $74.5M or a lump sum, which, after taxes would yield about $24M, she said I want it now!!

I'm always amused by the sheer greediness of those who choose to discard two thirds of their winnings in order to have it all to spend right away.

Yeah, I know. Statistics have been run both ways and can prove whatever you want. Some say with proper investing one can turn the lump sum into more than the original total prize would have been. Somehow, though, I don't think that the folks who choose the lump sum are looking to become investors.

Nope. I think they're more interested in becoming consumers. BIG time consumers.

And who gets richer when these suddenly wealthy start spending their new found cash? The average Joe? Of course not. The true "winners" of the Powerball Lottery lump sum windfall are usually those that are already rich. Who owns the massive mansions the lump summers buy? Who owns the luxury European automobiles? Who's name appears on the pink slips of the yachts, the private jets, and the fine Italian sports cars these instant millionaires snap up? Why, the rich, of course.

Now, I'm certain that the newly "minted" could care less if the rich get richer and the poor get poorer after they cash that great big check. (Not the great big check in the publicity photo, the REAL check.) Most of them might say It's about time I got mine. The fact that they cannot hold onto what they "got" for very long just shows how such instant wealth can create short-sightedness.


The annuity

But let's look at the annuity for a bit. With the annuity, instead of getting 24 million in one shot, this "lucky" NC winner of the Powerball would have gotten about two million dollars a year after taxes. The winner quit her job as a corrections officer. Now according to the North Carolina Department of Correction, the salary range for a corrections officer is between about $26K and $40K. As she held this job for about fifteen years, even if she was at the top of her pay scale, a $2,000,000 per year lottery payout still exceeds her salary by a factor of fifty.

Imagine that. Take a look at your most recent paycheck. Now multiply that amount by fifty. Like what you see? Now imagine that this is what you'd get every month for the next twenty nine years. Oh, and by the way, you no longer have to do your current job to get this. You got it because you were lucky. Think of the things you could do with that money. Travel, go hunting, fishing, take up a sport you've always wanted to try. You could still get that mansion, the boat, the cars, the big screen TV, the swimming pool, and make payments just as you always have. You could even help friends and family members by tossing them ten or fifteen hundred per month for twenty-nine years. I'm sure they would appreciate that in the long run more than a $50,000 addition to their house. Really.

Or, you could even contribute to charity. Imagine what several hundred dollars a month to a few select charities would mean to them over that time period.

So picture that. Take the lump sum and the rich get richer. Take the annuity and the poor may find themselves a little better off at the end of the day.

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Jobs created, but for whom?

Some critics defend luxurious spending by claiming that jobs are created to support such purchases. An example is the 1000 jobs needed to produce a $10 million yacht.

That claim may stand up for many extravagances, but not for all.

In some cases, fashion wear and diamonds come to mind, the money that was made can come on the backs of poor workers in foreign countries.

So the next time someone tries to justify their luxuries by telling you that many people make their living because of such purchases, look closely at that which they are buying. Try to determine if the ones who made the most money on the deal did much of the work.

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