Tuesday, January 16, 2018

Surveillance Nation

Russians are necessarily worse drivers than anyone else, they just have more cameras. 

People today like to whine about how their freedoms are being taken away.   But oddly enough, we live in an era of greater freedom than anytime before in the history of mankind.

Consider this:   When I was a kid, pornography was illegal.  Other than "soft core" porn like Playboy, X-rated magazines and videos could be seized if sent though the mail, and you could be charged with possession of porn - depending on which State or County you lived in.  Today, of course, it is all over the Internet and freely available to anyone, just about anywhere.  So long as everyone depicted is over the age of 18, it is perfectly legal to possess and view, and indeed, the courts have held this is your right.

Again, this was not the case, when I was a kid.   You could go to jail!

And speaking of sex, most of it was illegal.  Not only were homosexual acts outlawed, but many sexual acts even between consenting adults outside of marriage (or even inside!) was considered not only immoral, but illegal as well.  Even adultery was punishable by law.

Gambling was prohibited in 49 States.  You had to go to Nevada to gamble legally.  Today, you can gamble anywhere, and even the government is in on the game, selling lottery tickets.

Oh, and you can legally smoke pot in several states now, until Jeff Sessions lowers the boom.

So take that, Libertarians!   You live in an era of more freedom than ever.   The 55-mph speed limit was abolished, stores are open on Sundays (well, except liquor stores in part of the South) and "dirty dancing" is no longer forbidden.  What more do you want?

Of course, we have seen some retrenchment.   The voting age was lowered to 18, while the drinking age was raised to 21.   Despite all our new-found freedoms, we seem more namby-pamby than ever before.  George Carlin might have made waves with his "seven dirty words" back in 1972, but today, the FCC just doesn't give a damn about swearing.   Nevertheless, the media deems it necessary to censor out words like "s***hole" with little stars so our feelies won't be offended.   They are more afraid of conservative Christians starting a boycott than legal action from the government.   As I noted before, the media lives in a bizarre parallel universe where everything is Mayberry, RFD, and no one has sex or dirty thoughts.  Meanwhile, the rest of the country has discovered the Internet.  And we wonder why cable disconnects are up.

But that was not the point of this blog entry.  What was it?  I started writing it years ago, and only finished it today.   Oh, yes, surveillance.   It is interesting that today, people are more paranoid than ever about "privacy" and whine and complain long and loud about how security cameras and speed cameras are an assault on their Constitutional right to privacy.   People cite the fifth amendment as creating a "right to privacy" under the "penumbra" of the Constitution.   A "penumbra" is apparently some kind of umbrella.

But the fifth amendment doesn't really say anything about a right to privacy - at least with regard to your actions in public spaces.
No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.
Where is "privacy" mentioned here?  The idea that you cannot be compelled to testify against oneself has been bootstrapped (along with the 9th amendment, which is a catch-all) to include this new right. Certainly, no one in the 18th Century would have thought that the act of you walking down the street was somehow a protected right - and that no one had the right to record or make note of you doing so.

Today, well, we think otherwise.   Uncle Fred parks his Cadilliac with vanity tags "SEXYFRED" in front of the strip club.   A news truck, a security camera, or Google "street view" capture this piece of data, and Fred gets all bent out of shape - his privacy has been invaded!  Never mind that Uncle Fred has posted nude pictures of himself to a dozen dating and hookup sites - not to mention Craigslist.  He also has all sorts of intimate information about himself on Facebook and other social media sites.  We are obsessed with privacy, but at the same time, bare our souls to the world.

This "privacy penumbra" is one reason we don't have speed cameras in the United States.   Oh, sure, we have cameras that tell you your speed and admonish you for speeding.  But they don't take photos and send you tickets.   Red light cameras, for some reason are exempt from this privacy concern.   Apparently the "right" not to be killed in a T-bone collision trumps your right to keep secret from the world your shitty driving habits.

I for one, just don't get it.  It is not like the government is putting cameras on our bedroom, but rather on city streets.  And these tend to make me feel safer, even if they are a little creepy sometimes.  People claim that don't like "the government spying on me!" but in fact, the government really doesn't care that last Tuesday, you want to Wal-Mart at 2.45 PM and bought a box of waffle mix.  These are hardly State secrets.

If you are ashamed of something you are doing in your life, ask yourself why.   Uncle Fred certainly doesn't mind people knowing he goes to the strip club - that's why he proudly parks his Caddy out front.   It is only when someone snaps a photo of it - even as part of a background scene - that he gets upset.  Why is this?

Others say that if we allow this sort of surveillance, it will only get worse over time, and the government will be able to track our behaviors and stamp out political dissent.   They can see you walking into the building where the anti-surveillance society is meeting!   But then again, not really.   If you were really doing something illegal, then they can monitor your activities already - with or without a search warrant, depending on what they are looking at.   And if someone is planning on planting a bomb or gunning down concert-goers, well, I for one would be happy if the government was keeping an eye on them.

Hotels today are getting rid of the "do not disturb" signs in hotel rooms, and informing guests that housekeeping will need to enter the room at least once a day, whether you want them to or not.   This way, people cannot assemble an arsenal of guns or set up a meth lab or traffic humans - or whatever.  The hotel's rights trump your right to "privacy."

Of course, that is the whole damn point, isn't it?   "Privacy advocates" usually are a front for people doing illegal things.   For example, a young man is driving his girlfriend's rented car, with a trunk loaded up bricks of heroin.   He's a bad guy and should go to jail.   The question before the Supreme Court is, does a non-designated driver in a rental car have an expectation of privacy in the contents of the trunk?

It is an interesting question, as if someone stole my car and was pulled over before I could report it, could the Police be barred from searching the trunk and finding me there bound and gagged? (Good thing we own a hatchback!).   Or does the fact that the car is clearly not his negate his "right to privacy" in someone else's car?  How would the police know that the person had permission to use the car?   The idea that the Police will start "pulling over every rented car" as Justice Sotomayor stated, is a little far-fetched.  You still need "probable cause" under Ohio v. Terry to pull a car over.

But it illustrates the mental gymnastics that some Judges will resort to, to find new rights in the Constitution.   Rights that really don't provide any real benefit to the population, but provide relief to criminals and make the job of the Police that much harder.

No, I am not worried about being pulled over and searched as an unauthorized driver of a rental car.   Why?  Well, first of all, when I rent a car, I make sure I am an authorized driver - and don't let someone who isn't, drive the car.  Why?  Because if they wreck the car, I may not be covered, and now I have to buy the rental car company a new car.

But even if they searched my car, I am not upset or worried.  Why?  Because I don't have 98 bricks of heroin in my trunk and never will.   The "right to privacy" doesn't provide me with any additional rights, unless I am a criminal.  Why are we creating rights that affect only one class of people - the criminal class?

Like most people who have a presence on the Internet, my life is an open book.  I gain nothing from a "right to privacy" other than the knowledge that it will help some criminal who has victimized me, get away with his crime.

In a way, it is like this whole Bitcoin or crypto-currency nonsense.   There is no legitimate use for many of these currencies, but the criminal underworld does make use of them to traffic in drugs, weapons, and children.   What's not to like?   And people get bent out of shape when the government steps in to regulate these wild-West "exchanges" - as if some personal right of theirs is at risk.   And perhaps it is, if they are doing illegal things over the Internet.  But your right to buy a coffee drink with Bitcoin?   That isn't at risk here - it is just impractical as all get out.

Maybe we won't be able to "get away" with things in an era of security cameras on every lamppost.  But then again, what are you trying to get away with?   As I noted in the beginning of this post (aha! it does tie in!) we have more freedom today than ever before in the history of mankind.   You can do what you want, in this country, provided you are not victimizing someone else (except perhaps in the commercial sense).

I don't see how security cameras take away from that freedom, unless you are a criminal.

It's Economics, Stupid!

People from Norway aren't flocking to America, because they have a sound economy in their country.  People from "shithole" countries flock to countries where there is more economic opportunity.   Even and idiot should be able to figure this out.

The press is at it again - saying that Trump is a racist for calling African countries and Haiti "shithole" countries.   And the sad things is, many of them are - and the people who live there will be the first to tell you this.   Haiti shares an island with the Dominican Republic.  Halfway across the island is an imaginary line - the border.   If you are on one side, you are in a tropical paradise and tourist destination.   On the other side - abject poverty, corruption, disease, unsafe water, lack of hope, lack of opportunity - the working definition of a shithole country.

And many of the shithole countries of the world are in the shitter not because of external influences, but internal ones - corrupt governments that sock away the majority of the nation's wealth into numbered Swiss bank accounts, while their leaders send their children to British or Swiss boarding schools.   Meanwhile, the average annual income is measured in the hundreds of dollars

Some on the Left want to make it out that this is our fault - the fault of the United States.  But as Robert McNamara once remarked, we may have messed up governments in Central and South America, but "at least Africa, that's not our fault."

When you have governments run by religious extremists (or being attacked in civil wars by religious extremists) or run by petty dictators or even cannibals such as Idi Amin, it has little to do with the US - or at least our influence isn't as great as some make it out to be.

But getting back to the point, what amazes me is that the press misses the larger point.  Trump acting racist isn't "news" at all, but his inability to understand immigration and migration is - particularly when he is making immigration the keystone issue of his administration.

Folks from Norway are just pining to live like this...

His comment would seem to indicate that people want to come to the USA because it is such a keen and swell place to live - what with our freedom of religion, freedom of speech, and random mass-shootings (all guaranteed by the Constitution!).   Or maybe people just want to live here because of the Rock 'n Roll music, or a McDonald's and Starbucks on every corner.   I mean, of course, who wouldn't want to live here, right?

The reality is, no one tears up their roots and moves themselves and their families to a foreign country where they don't speak the language - often risking their lives in the process - just for the hell of it.  Economic conditions are what drives migration - and have since we fell out of trees.  Mankind has migrated across the globe in search of better food, shelter, and conditions.

People are coming here from "shithole" countries precisely because they were shitholes.  My ancestors didn't come over here from Ireland - steerage class - for funsies.   The potato famine meant starvation and death.   Suddenly, the "Emerald Isle" had lost its luster - and America seemed like a better alternative than starving.

So this is what irks me.  The media harps on this comment as being racist, as if that was some sort of revelation.   The real revelation is that Trump is far more ignorant than he appears to be - and that's saying a lot.   Thinking that people from Norway want to migrate here in droves is just delusional - or indeed any other Western country or country that has a vibrant economy or just, well, isn't a shithole.

The people knocking on the door aren't folks who are well-off, but those who are desperate.  Even and idiot could figure that out - Donald Trump apparently can't.

Monday, January 15, 2018

Laundry Room Makeover (The Wet Wall)

If you have one of these washing machine "drain boxes" in your wall, I would suggest you not use it as a drain for your washer.

I am in the middle of a laundry room makeover - and not by choice, either.   However, the plumbing in our house is nearly 50 years old, which is about its design life.   And over the years, people have modified the house, sometimes properly, sometimes not, with some mixed results.  And by the way, this is typical of any house that is more than a decade or two old.  Having owned nine houses and condos (!) over the years, I have seen this sort of nonsense again and again.   Even new construction has its share of hidden nightmares behind sheetrocked walls.  It is probably better you don't know.

Welcome to the mildew nightmare.  No wonder they call it a "wet wall"!

The laundry room was initially on the inside of the house, from what I can divine from my architecture archaeology.   In 1970 when the house was built, they had a laundry room off the kitchen, wallpapered in a kicky 1970's pattern with large yellow and orange daises on a white background.   It was the style at the time.

Then, sometime in the late 1970's or early 1980's, someone decided to move the laundry room into the garage and make a bar where the laundry room was.  They covered over the wallpaper with cheap press-board paneling in an eye-searing chartreuse/green.  Whoever did the work was none too careful.  The sheetrock was slapped on where the faucets were moved and the "drain box" for the washer was reversed to face the other side of the wall in the garage.   Since the washing machine and dryer were now on the other side of the wall (in the garage now) it wasn't too hard to move the plumbing and electrical.

The house went into the rental market for a couple of decades, and about 15 years ago was purchased and remodeled and sold to us.  The lime-green paneling was painted over in an oatmeal color (which was popular at the time - today they would have used grey, which is trendy) and the icemaker installed.  Fast-forward a dozen years and all these "remodeling" efforts are showing the wear and tear of a decade.  The appliances, once all-new, are now more than 2/3 the way through their design life - if not at the end.   I already had to replace the icemaker and the disposal.   The washer and dryer and dishwasher will be next.   I hope the A/C unit holds on for as long as possible.

Houses - what's not to like?  They are just a collection of expensive things that wear out and break over time - and the more complicated and expensive you make them, the more expensive it is to maintain them.  All you renters out there, consider that.   Your monthly housing expenses are a very finite number - and predictable.

Anyway, like any 50-year-old house, it has its share of issues.   Houses in the South generally don't have basements (particularly on a barrier island where you are 12 feet above sea level).   Everything is on a slab and the water and sewer lines are poured into the slab when it was built.   This can be a nightmare, as these lines can eventually corrode through and leak thousands of gallons of water - as happened to a friend of mine when he got a $1500 water bill one month.   The solution is to either jackhammer up the floor (no, thank you) or run pipes through the attic, where they probably should have gone in the first place.  So far, that hasn't happened to us, but we are about due for it.

About half the houses on the island have had their pipes replaced, so it is a conundrum as to whether to continue with our existing piping or use this as an excuse to overhaul that as well.   Like any other project, once you start "digging" into it, it can mushroom into a complete teardown and rebuild.

The big problem is the drain.  While most of the drain pipes are new PVC which run underground in a trench dug next to the house during the remodel, the drain pipe in the laundry room is old cast iron pipe, which tends to rust and form rough surfaces which catch lint from the washer and thus clog up.  These washer drain socks help somewhat in capturing the lint before it goes down the drain.  We have been using these for a decade now, and the drain, while slow, does drain.

Of course, it doesn't help if you let a non-woven spun fiber cloth go down the drain!   I was able to snake this out with my RIGID power-snake, but the drain is still slow.   And speaking of slow drains, one mistake we made when we first moved in was to use the stupid drain in the wall box like the one shown at the top of the page.   Washing machines, when they drain, dump an enormous amount of water at once - more than most drains can handle, much less a partially-clogged slow drain.   So the water overflowed and since the box was not properly sealed, water went down inside the wall, creating a mildew nightmare.

Again, houses, what's not to like?

Even if the "drain box" was properly sealed, it would have backed up and overflowed down the wall.  A far better choice, I think, is to have the washing machine drain into a laundry tub, where it can act as a buffer for the drain and prevent messy overflows.   And that's what we've been doing for the last decade or so.

But after the latest clogging incident, I felt I should finally break down and clean up the plumbing, eliminate the drain box, and get rid of the mildew and mold forming on the wall.  I had previously removed the sheetrock behind the washer and dryer to let the area air out - and sprayed it with chlorine bleach to kill the mold.

So, I have been tearing out the old sheetrock, and also removing layers of old lime-green paneling and daisy wallpaper.   I am going to run a new drain, I think, using PVC pipe, although this may mean jack-hammering up the sidewalk behind the house.   I am tired of living with slow drains that clog like clockwork.   The water lines, I will leave for now - we'll wait to see if they leak before replacing them.   I am going to hire the roto-rooter man to scope the line, now that it is all exposed, and also determine where it goes - under the slab or out back.

I drew a little plan on re-arranging the laundry room

And we are going to use this opportunity to do a "makeover" for the laundry room.  When the washer and dryer were moved to the garage, they moved the hot water heater from the corner to the middle of the wall - running CPVC pipe along the baseboard.  It is a real "pipe sampler" out there, with cast iron, PVC, CPVC, copper, galvanized steel and so on.  And all the shutoff valves are 50 years old and if you try to use them, they leak.  So we need to replace them.

And that's not even addressing the electrical issues.   The outlets were haphazardly wired (emphasis on "hazard" here) and one wire was just wrapped with electrical tape on one end and stuffed in the wall (!!).   The dryer outlet was blackened from arc-ing with the plug.  I have already replaced both.   We got our work cut out for us here.

My thinking is to move the washer, dryer, and beverage fridge along the back wall, move the hot water heater back to the corner, and install some wall cabinets for storage.  Since the washer and dryer are 12 years old, I am thinking of replacing them.   But what with?

I like the old top-loader washers - they were cheap ($250 or so) and reliable and easy to repair - and rarely needed repair.  But a funny thing has happened in the washing machine business.   The top-loaders are getting harder to come by, and the ones that remain are getting really pricey - like $450 or more.   And in the meantime, the front-loaders are coming down in price, to about $550 - which is a lot better than $1000 or so.   We had the front-loader type in New York, where we were on a well, and they do use less water.

But most require you use a special "High Efficiency" detergent, which means I can no longer use my favorite cheap Mexican detergent from Walmart.  If you don't use the special detergent (and in the amount specified) your clothes may have a soapy "mildew" smell, as the washer may have it as well - something that people have complained about long and loudly about front-loaders.   On the plus side, with front-loaders, you can put a countertop over the machines and have a space for folding laundry.   Or you can buy those stupid "drawers" that go underneath the machine - that cost as much as an old top loader once did!   And I am talking just a steel drawer, not one of these fancy "mini-washers" that goes underneath your washer (why did we need this?).

Oh, well, people are idiots and soon separated from their money.   Speaking of idiots and high efficiency detergent, the latest "fad" the kids are into - beside bitcoin, and it makes about as much sense - is to put detergent pods in their mouths.   It is idiotic, of course, but it does deftly illustrate that people, in the aggregate, are blithering idiots and will do anything for attention or because their peers are doing it.   This does no mean you should do it too.   Act rationally in an irrational world - and that means not eating soap.   Well, detergent, anyway - excuse me!

I may end up just putting the old appliances back and running them until they die - that would be the most cost-effective solution.  We could then make a decision on top- versus front-loaders, when the time comes - if ever.   Probably by then, the decision will be made for us - the only machines available will be front-loaders in red (?!?) or stainless steel.   The world is changing, I guess.  No country for old men with their top-loading washers.

So anyway, I have a lot of work to do.   In addition to the plumbing and sheetrock work and the new drain, I have to paint the floor.  Do I use that fancy epoxy paint with the little flecks in it, or just buy some grey basement paint which I have done in the past (it is cheap, easy to apply, and you can "freshen" it up with a new gallon rolled around in a matter of minutes, every few years)?  Or do I put in some sort of flooring material, like I did in the camper?  And the ceiling - the folks who "remodeled" sprayed the ceiling in the garage and either didn't prep it well or used an incompatible paint.  The net result is that the paint is coming off in sheets, all over the garage, and I have to figure out how to scape or sand the rest off, and paint over it, or just put another layer of sheetrock over it and start over.  Nothing is easy.

And lighting.  We want to get rid of the buzzing and flickering fluorescent lights and replace them with LED lighting which is not only more efficient, but brighter.

And to think, some reader thought I would have "nothing to do" in retirement!

Sunday, January 14, 2018

Living In The Past

It isn't hard to understand why people want to live in the past.   The past is safe and comforting.  The future is scary and unknown.

I was thinking the other night - a dangerous preoccupation - that as human beings, we tend to obsess about the past, but rarely give much thought to the future.   Or more precisely, those of us who succeed in life think more about the future than the past, while those of us who don't succeed (or the depressed) tend to dwell on the past.

In Normal Mailer's The Naked and the Dead, he mentions this effect - the desire in all of us to re-live the past and wonder, "If only I had done things differently, how would my life be now?" kind of thing.   And he points out, there is no profit in it.

You can learn from the past and apply those lessons to the future, or you can wallow in misery and berate yourself for not having a crystal ball or time machine.   We are flawed beings, as humans, live with it and move on, and think about the future, not what could have been.

The future, of course, is scary and unknown.   Well, part of it is known for certain.   Eventually, this party we call life has to end, and you have to make the most of what you got left, rather than weeping over something you said to a friend in 7th grade that hurt their feelings (I am sure they are over it by now, by the way, and probably don't even remember you).   But that is human nature, to regret.

And it is how our brains are constructed.  We have lots of room for memory, but we don't have so much brain cells devoted to predicting the future.   Indeed, most folks can't predict what will happen when they sign a payday loan, even after you explain it to them.  "But I get all this money now!" they say, thinking of the lady with the fan of $20 bills on the sign.

My Dad, when he started down the road to dementia, told me that vivid memories from his childhood were flashing back in his mind.   "It is all so detailed!" he said, "Things I haven't remembered for decades are coming back to me!"   And that illustrates how the brain has a capacity to store a lot of data.  And no doubt, the neuons or synapses storing these memories flashed up on his internal screen in one last gasp of energy.  "We're going to erase this now, want to watch it one last time?"

Or course, our brains have no way to accurately predict the future as we are not clairvoyant (sorry, take that ESP bullshit elsewhere Mr. Geller!).   In fact, we are not very good at remembering the past even if we do it a lot.  We tend to filter and distort memories, often to make things come out in our favor.   That wasn't a pyramid scheme we invested in!  No, no!  And it would have worked if only my lousy brother-in-law was able to obtain top notch distributors of his own.   He screwed it all up for me!

That's the way we think.

The past is instructive if we learn from it, but in order to learn from it - and thus predict the future more accurately, we have to honestly confront our past.   If you want your car insurance rates to go down in the future, you have to first accurately remember the past.   You were speeding and driving recklessly - that is the reality, not "the asshole cop gave me a ticket just to make money for the County!"   So long as you believe the distorted view of the past, you will not change your behavior and alter the future.

And so on down the line.   If you want to predict the future to the best of your ability, you need to accurately view the past and your past actions and learn from them, figure out what went right and what went wrong and then apply these lessons to the data of today and extrapolate a result.  And in viewing the past, you not only have to view your own actions, but that of others - and be able to extrapolate as well.  The better you can do this, the better your predictions will be.  The more you delude yourself, the further off the mark your prognostications will end up.

Today, we have a whole generation who thinks that Hitler was merely misunderstood, that market bubbles simply don't exist, and that it is possible to vote everyone a raise, if we merely choose to do so.   And a whole lot of these folks actually believe that Oprah Winfrey would make a good President or that disgraced former Private Bradly Manning is qualified to be a Senator.

Talk about delusional thinking.   If you cannot perceive the past - or indeed even the present - how can we accurately predict the future?

And that in a nutshell is what worries me about the future.   People today think the market and the economy will expand forever, ignoring the warning signs of the present and the patterns of the past.

The Bitcoin Recession

Could the crash of Bitcoin crash the overall economy?

Bitcoin will crash, that much is certain.  Nobody takes it as currency anymore, but rather it has become a virtual investment - basically investing in nothing.  Game site Steam and now Microsoft no longer accept Bitcoin for payments because the currency is too unstable it, it takes too long to process transactions, and the cost of transactions is now staggeringly high.  In other words, it is no longer useful as a currency.  Even the Miami Bitcoin conference will not accept Bitcoin as payment from attendees  When Bitcoin no longer accepts Bitcoin, what does that say?

The Bank of Israel no longer recognizes it as a "currency" but as an investment - one that is not regulated or guaranteed in any manner by any agency.  In other words it's an investment in an idea that has absolutely no practical use whatsoever.  Some Bitcoin proponents are calling it "virtual gold" - which is an interesting analogy as investing in gold has proven to be a bad idea time and time again.

It is clear that once the euphoria wears off, Bitcoin will drop in price, perhaps staggeringly so.  It is a phenomena driven entirely by the laws of supply and demand.  As the news media hypes Bitcoin, small investors bid up the price. The same small investors will go running for the hills as soon as the price decreases by any significant amount.

And these are mostly young people, mostly young men, in their 20's, who have little investment experience, want to get in "on the Next Big Thing!" and want to become fabulously wealthy with no work involved.  These folks weren't even born during the dot-com bust of the 1990's or the real estate market meltdown of 1989.  They were still in Junior High School during the recession of 2008.   To them, the market has always gone up, up, up - a whole generation raised on a bull market.   What could possibly go wrong with Bitcoin?  Like I said, these bubbles seem to pop about every 20 years or so, perhaps as each new generation discovers that the marketplace is no place for patty-cake.

I fell out of my chair the other day when a young man posted online that he wanted to "sell his place in line" for the mythical "Elio Car" and "invest" it in Bitcoin.   Fellow Elio "depositers" had to let him down gently and explain to him that there will never be an Elio car, and likely there was never a real plan to make one.   Again, these are young people, who are full of energy and enthusiasm and naivete. One of the Elio "faithful" admitted he put all his summer job money into an "all-in" deposit on the car.  This is the same sort of braintrust that is investing in "Crypto" - but again, you can't tell in an online forum if you are talking to a 14-year-old or a 40-year-old.

Of course of course to the Bitcoin faithful, nothing can ever possibly go wrong with Bitcoin.  And from their point of view Bitcoin is not that it is unstable, but the U.S. Dollar is.  It is interesting that when we talk about the value of Bitcoin, we compare it to the value of the US Dollar.  Bitcoin is never talked about in the abstract is having a value by itself, but always as compared to the U.S. Dollar or other so-called "fiat currency."

And if you draw a graph plotting the value of Bitcoin in terms of the U.S. Dollar, it shows it to be a very unstable currency, investment, or whatever the hell you want to call it.  But you could flip this graph on its end and plot the value of the US dollar versus Bitcoin instead.  Such a chart would illustrate that Bitcoin has a stable value and the U.S. Dollar is varying widely compared to the value of Bitcoin.  And I am sure that on some Bitcoin Discussion Group some idiot his advancing this argument - that Bitcoin a stable in value but the U.S. Dollar is swinging wildly up and down compared to Bitcoin.

If they haven't thought up this rubric already, I hope I don't give them any ideas.

Of course, to actually buy anything, you need to convert Bitcoin (or any other crypto-currency) to local currency on an "exchange" - and we've heard all the horror stories about exchanges crashing, going bankrupt, or "coins" going missing.  So the value of Bitcoin compared to the dollar is important - you can't spend Bitcoin anywhere.

The problem is, all currencies are sort of based on faithAs I noted before, money is just an idea about the value of things.  And once you assault that idea, you can undermine the value of money. This is why counterfeiters in ages gone by were punished by death.  When you started messing with the currency, you were messing with the King.  And it's not a good idea to mess with the King.

And that's the problem with Bitcoin right there.  It is in nonsensical currency or investment or whatever the hell you want to call it - it's based on the ability of computers to solve meaningless puzzles.  It's basically investing in nothing.  But then again, the Bitcoin faithful will point out that the U.S. Dollar is also supported by . . . nothing.  Well not exactly nothing, it actually is a function of the debt of the US government, as well as the supply of money.

It is a funny thing, however, that in terms of actual physical dollars, more of them exist outside the United States than inside.  Many people have talked about abolishing the $100 bill as it is just mostly used in drugs, weapons, and other illegal transactions overseas.  Very few Americans carry $100 bills and indeed if you try to spend one in America you'll be viewed with suspicion, and many stores outright will refuse to accept them.

(Let me pause here to note that any business has the right to accept payment in whatever form they want.   They can say no to $100 bills.  They can say no to pennies and nickels.   They can say no to cash at all - requiring payment by credit card - or even bitcoin!.    The "good for all debts, public and private" notation on our money does not obligate people to accept cash or certain denominations by law.)

More and more, Americans have gone cashless and use credit cards and debit cards for everyday transactions - even for buying a hamburger at McDonalds.  Micro-transactions are the new thing - even vending machines accept credit cards.  It is possible, in America, to travel across the entire United States without having to pay cash for anything.  In fact it's easier to do that, than to drive an electric car from coast to coast.  Visa and MasterCard terminals are far more plentiful than Tesla recharging stations.

Money in America is thus becoming more of a series of numbers stored on computers than actual physical banknotes that represent anything.  As such, money becomes more and more abstract, and the idea of money is more at risk.  Idiotic things like crypto-currencies and Bitcoin tend to point out to people that money is just an idea - and the idea that people know that money is just an idea is a very scary idea.

A note in the news today that because of the new tax law, most of America's major banks will show enormous losses in the next few weeks for the fourth quarter of 2017.  Apparently by lowering the corporate tax rate, the value of tax deductions for losses incurred during the recession will be decreased to the point where some banks will be posting losses in the tens of millions of dollars.

And while some banks will recoup these losses as early as 2019 - such as Bank of America - other Banks such as Citibank main never recoup these losses. The Trump tax law turns out to have some negative consequences, ironically by lowering tax rates.

Donald Trump recently addressed the Farm Bureau today he will touted his tax law as benefiting American farmers by eliminating the so-called "quote death."  But I'm sure American farmers were smart enough to know that there enough loopholes in the gift and estate tax that they would never have to pay this tax to leave their farms to their children.  In the meantime, the if Trump obliterates NAFTA, could be very hard for America to export food to Mexico and Canada or to other countries overseas.  Trump is poised to start a trade war and that could affect American farmers who are biggest exporters.

And since most of us aren't farmers we don't notice the fact that most farmers are struggling today -seeing a 50% decrease in their income over the last few years.  This is a shocking turn of events but it is rarely reported in the Press, much as it was not reported in the Press prior to 1929 - the last time farm income dropped so precipitously.   The drop in farm income during the 1920s proceeded to 1929 market crash by several years.  But a few people notice because the Roaring Twenties were roaring and everyone was having a good time while the farmers went broke.

You start to put this all together and connect the dots and you see that we may be headed for a recession in the near future.  And the collapse of Bitcoin could be the triggering event that sets off this recession.  Just as folks in the cities were celebrating the stock market (and shoeshine boys and grocery clerks were giving Joe Kennedy stock tips) while the Joads were forced off the family farm, today we see young 20-somethings all agog about "The Next Big Thing!" and crypto-currencies, while ignoring the greater problems in the economy, because they aren't farmers.  Heck, today, there are hardly any farmers - so their plight is even easier to gloss over.

Now, some have noted that other "cryptos" have appeared to solve the problems of Bitcoin - their transaction fees are lower and they process faster.   But still, few outlets are accepting these "coins" as they are volatile and it is generally a hassle to set up payment systems for so few users.   Also, the idea of a payment system being based on a limited currency seems to be a fundamental flaw.   The problem, as Bitcoin has illustrated, is that the currency, being limited, is not stable in value.   No one can control "Big M" or the Money Supply of Bitcoin, to control inflation - or deflation.   The actions of the Fed may be imprecise and dead wrong sometimes, but at least there is a switch for someone to be asleep at.

But even if we assume that this argument is correct, the problem is, if Bitcoin fails, it takes down the other cryptos with it, at least temporarily - much as we saw the market crash of 2008 take town nearly every sector.   When people start losing money, they are often forced to sell other investments, causing a market-wide drop in prices.   We are already seeing the opposite of this effect - where any company that mentions "Blockchain" is seeing its stock soar irrationally - for example, Kodak.

Now, throw into this heady mix a dash of real-estate bubble, particularly in selected markets.   For spice, add the inevitable bankruptcy of Sears/K-Mart and a few other "brick and mortar" store chains that are slowly collapsing under the weight of their massive debt-loads.   For extra zest, add a spike in oil prices and a sag in consumer confidence.  Fold in record levels of corporate debt and personal debt - along with increasing default rates.   Place in a 9 x 12 greased pan.  Bake in a preheated over at 350 for 25 minutes.

You see where this is going.   No one thing will cause the next recession, but a lot of little things just might.   But the spectacular blowup of Bitcoin will be blamed - or at least be used to label the next meltdown.

UPDATE:  Bitcoin and the Tide Pod Challenge.  Has the world lost its collective fucking mind?  I guess people will do anything for a thrill these days.  This will not end well, let me tell you!

Saturday, January 13, 2018

The Feedback Loop and Why It is Dangerous

When a system is nearly 100% feedback, it is dynamically unstable.

Feedback.   We've heard it on amplifiers at rock concerts or church receptions - at least back in the old days, before electronic circuitry filtered it out.   The sound from the speaker goes into the microphone and an ear-splitting squeal results.  Ouch!

Feedback works in the financial sector as well - in both "legitimate" and con-game investments.  Take the penny-stock swindle, for example.   A few years ago (decades now, I guess) a teenager in New Jersey figured out that he could buy an e-mail address list for a few dollars.   He found some penny stock with a name that sounded technical (or similar to another stock that was in the news) and sent out a SPAM e-mail to the address list, saying that this stock was "going places".

Of course, I am missing a step here.  Before he sent the e-mail, he bought some of the stock or better yet, a stock option on the penny stock, at a very, very low price.   The e-mail he sent goes to thousands, tens of thousands, or even millions of mailboxes.   And of those, even if only a few people act on it, the stock price goes up.   Thinly traded penny stocks are very susceptible to even small deviations in supply and demand.

Actually, just about any commodity changes prices dramatically in response to supply and demand.  A 1% increase in the supply or decrease in demand can cause a 10% swing in prices - easily.  And the thinner the item is traded (smaller volume) the more pronounced this swing is.  So even a few people buying a penny stock Over-The-Counter (OTC) can cause a price swing of 10-20% or more - maybe far more.  After all a stock that costs a few cents can easily double in price, and people don't really care much.

And here is where the trouble begins.  Say you are an unsophisticated investor (no shame there - welcome to the club!) and you get this penny-stock e-mail.   You go online and look at the stock price, and sure enough, the price has been going up as of late!  Maybe this teenager in Secaucus, NJ is on to something (of course, you don't know he is only 15, but that's the beauty of the Internet - all of our opinions are of equal weight!).

So you figure, "Hey, I can afford to gamble a few hundred bucks on this!" And that is a warning sign right there - anytime you say, I can afford to gamble, you should step back, think about it, and then hit yourself with a stick, hard, several times.   You can't afford to gamble, period.   So stop gambling.

And you throw $500 at WillGrowCo penny stock and figure, "Why not?  Maybe my ship will come in!"   You might as well buy lottery tickets.

And this is where it gets weird.   Your very purchase of the stock causes the price of the stock to rise.  In a way, it is like a law of physics - you cannot measure something without affecting the measurement.  The very act of buying a thinly-traded penny stock affects the price itself!

Heisenberg and Schrödinger get pulled over for speeding. 
The cop asks Heisenberg "Do you know how fast you were going?" 
Heisenberg replies, "No, but we know exactly where we are!" 
The officer looks at him confused and says "you were going 108 miles per hour!" 
Heisenberg throws his arms up and cries, "Great! Now we're lost!" 
The officer looks over the car and asks Schrödinger if the two men have anything in the trunk.
"A cat," Schrödinger replies. 
The cop opens the trunk and yells "Hey! This cat is dead."
Schrödinger angrily replies, "Well he is now."

And so it goes in real life.   What's worse, is that other people respond to the e-mail and buy the stock, and the price goes up even further.   Your opinion that the stock was a good buy is immediately validated.   Meanwhile, the teenager in New Jersey has sold out - likely to you, as he was the only one with stock that was being offered for sale, and he set a fairly high price on it.   For a few hours work, he made a few thousand - or tens of thousands - of dollars.   Meanwhile, you are out $500, which you shrug off as "bad luck" and move on to the next scheme.

We saw the same thing happen - again an again - in more "legitimate" markets.   In 1989, the Real Estate market crashed.  Why?  Well, in the 1980's, interest rates started to drop and housing prices went up.   People started investing in Real Estate - nothing like the bubble of 2008, of course, but a bubble nevertheless.   Prices went up because more people started buying.  And more people started buying because prices went up.   A perfect feedback loop situation.

But eventually, feeback loops blow up.   If the amplifier at the church supper is left in feedback mode, everyone will be deafened by the squeal and eventually the amplifier will overload and burn out.  Usually someone intervenes before that happens, or you hope a fuse blows before the amp catches fire.  And that is what happened in 1989 - the market blew up, prices overnight collapsed, and people lost a lot of money - well, a lot of little people lost a little money each.   For example, a friend of mine lost $10,000 on his condo - he had to borrow ten grand from his 401(k) to sell the place in 1992.  That's a real loss, painful, but not bankrupting.   Now multiply this times a million people and you see it can be a lot of dough.

The dot-com thing was similar.   Some companies started to soar in price as we embraced this new "online" world.   And some companies were actually making money.   But as with today, folks threw money at anything with "dot com" in the title - much as people are throwing money at Kodak (really?  Kodak?) today, as there is some sort of tangential rumor they are getting into "crypto".   Here's a clue for Sears and Radio Shack - put the words "block chain" in your next quarterly report or mention them in a conference call.  I can just see Eddie Lampert in a call with investors, saying, "Show Your Way will now be enabled with block chain!" and the share price doubling the next day.  Good idea, Eddie - feel free to use it.  Buy me lunch sometime.

The price of dot-com stocks went nuts as everyone was buying.  And this validated their purchase as being a wise decision, and moreover made them reluctant to sell off a "winner" while "everyone was making money."

By the way, here's a "rule of thumb" I use with a stock shoots up.   I sell half of it right away.   Or at the very least, I sell what I have invested in it.   This way, I get my money back and still can speculate on the remainder - sort of best of both worlds.   When my friend started a bank, I invested $10,000 in it.  When the stock doubled in value, I sold $10,000 of it and got my money back.   I went and did this five more times and did very well, thank you.   Yes, I could have left all my money in and made far more.   Pigs get fat, hogs get slaughtered.   I am content to have quintupled my money and cashed out.   We should all be so content.

Eventually, though, the feedback loop on dot-com overloaded and burned out.   And what burned it out was the realization - which can be very sudden - that many of these companies weren't making money.   Overnight, companies went out of business, and then this started a panic sell-off mode which took down even some profit-making companies, at least in terms of stock price.   If you buy with the herd, you sell with the herd, and herds can be spooked and run wild.   And the grass in the center of the herd is generally matted down and pooped on.

But of course, to anyone who has studied catastrophe theory this is old news.   For example, I was watching this Netflix series on toys, which is pretty interesting, and they had an episode on "He-Man" which was a slightly homoerotic toy for young boys in the 1980's.   The toy took off like a rocket, once they created a cartoon to go with it (today, they do this in reverse order - the cartoon is just an ad for the toy).   It sold well over $100 million a year in action figures and accessories and then..... dropped to seven million.   Mattel almost went bust.

What the heck happened?  Teenage Mutant Ninja Turtles is what.   The episode did not address this, but I suspect what happened is that elementary school fashions changed overnight.   Suddenly, it wasn't "cool" to be playing with "He-Man" who, let's face it, was pretty gay.   My nephew had the whole collection - and Castle Grey Skull, complete with "Jaw Bridge" and played with it for hours.  And then one day - it went into the closet (or maybe back into the closet) and was never played with again.

His younger brother dug it out and used the castle (but not the action figures!) with his Ninja Turtle collection.  It was interesting to me to watch, as the figures were really about the same, if you think about it, the only difference being that the names and characteristics of the characters.   The fact that he had no trouble turning Castle Grey Skull into a Ninja Turtle hideout was telling.  It was the same damn thing, with a different name.   And yes, the Ninja Turtles were the hot toy to have for a while and just as suddenly, they vanished (but of course, have been the subject of several reboot attempts).

These fads come and go, and really, investing in a fad is no different than buying He-Man or Ninja Turtles, or whatever toy is "hot this season".   People are sheep - they are cows.  The travel in herds and look to one another for validation.  It is a human thing.

And so it is today - after two real estate meltdowns, at least two dot-com meltdowns (including one in progress - how's that Groupon stock doing, fellas?) and the gold bubble bursting (or at least deflating) we are now seeing the exact same hysteria and feedback loop with crypto-currencies.   And everyone is saying its a bubble, and no one is listening.  This will not end well.

Combine this with an overheated stock market, a slightly unhinged President, and, well, things could get really ugly in a real hurry.

Unload those He-Man figurines, before it's too late!

A Few Win A Lot, A Lot Win Few

Most scams and cons are based on one basic principle - take a little bit from everyone, which amounts to a huge pile for the con-artist.

There are over 300 million people in the United States today.   If you could somehow get a dollar from each one of them, well, you'd have a third of a billion dollars.   Nice idea - now you just need to figure out how to get that dollar.

People don't miss small amounts of money, so it is easy to con them out of small amounts and they don't notice.   But you, as the con-man, reap huge rewards, as multiplied times the population of the USA, it adds up to a lot of money.

A reader writes that they bought some "ripple" (not the wine) as a means of "investing" in the crypto-currency craze.  "I can afford to gamble on it!" he says, "I might lose it all, but it might go up 500%!"

This are not the thoughts of an investor, but a gambler.   I only hope it does go up in value and he sells out before it crashes - because as we have seen, these crypto-currencies, having no real inherent value, tend to crash in a matter of hours or minutes, and then it is too late then to get out.  And all it takes is for one currency to crash to take down the greater crypto-currency market.

Regulation of these currencies seems in the cards - China and South Korea are already reining in the wild-west of Crypto-currencies.   The IRS will surely be next.  No government is going to allow a shadow financial system to exist whose only purpose is to consummate illegal transactions and avoid taxes.   And there are no legitimate uses for crypto-currencies these days.  No one accepts them, and for the most part, the transaction fees are staggering, particularly for Bitcoin.

In order to succeed, a crypto-currency would have to be easier and cheaper to use than Visa and Mastercard, and it should be traceable and trackable by government entities, if criminal activity is involved.   Until that happens, it is just a fad, not an "investment."   Oh, and Visa and Mastercard are not going to sit idly by and see their business plan destroyed.  Either they will lower their rates or come up with some competing block-chain solution.

But pardon me if I ask a relevant question:  If the purpose of these "currencies" is to move money across borders, why do they need to be currencies at all?    Seems to me the main idea of using block-chain for monetary transactions does not require some limited and unregulated currency to be created.  But that's just me asking the "dumb question" that will be readily dismissed by the crypto-faithful (but probably gets right to the point).

Getting back to our gambler, this attitude ("I can afford to gamble") is the key as to why these "currencies" have taken off like a rocket.   And yes, in the past, I used the same "logic" to "invest" (gamble) in the market.  As I noted before, "Market Cap" is a mythical number representing only what the last man in paid in terms of share price.   The financial press loves it (taking the share price x number of shares) as it comes up with impossibly big numbers.   But it means nothing.

It does illustrate that the last man in paid way too much for his investment, though.  And we've seen this time and time again.   One reason I was able to retire relatively early (so long as health insurance is affordable!) is that I sold out of the Real Estate Market before it crashed.   Sure, I could have doubled my money further if I had stayed in another year or so - or lost it all, if my timing was off.  That right there is the problem with bubbles - timing them.   And crypto is a bubble - and the question is, when do you get out?

It is hard to fathom, as you might make a profit and think, "I should get out while the getting is good!" but another part of you says, "Why bail now?  We made money at this, we'll make more!" and that is why people stay in and ride bubbles all the way down.

Again, the little people lose their "small" investment of only a few thousand dollars, which to them was probably a lot of money.   The guy who was the founder of the IPO company or who mined bitcoins five years ago, he's got nothing in the game.   Even at pennies-on-the-dollar he's still ahead.  And likely he sold some of his stock/coin/gold/whatever to the small chump investor along the way to pay for his new house and Ferrari.

That's all you are doing, as a small Johnny-come-lately investor in an IPO or other hyped investment - you are making someone else fabulously rich, and making yourself a little poorer.

Could you "win" at these kind of "investments"?  Sure, on occasion, they let some little chump win, to keep the other chumps investing.   I was lucky I got out of the Real Estate nightmare when I did.  I didn't get out of stocks when they crashed (but fortunately, being invested in profit-making and dividend-paying companies, most of my investments recovered quickly).

I noted before that back in 1989, all my friends were "investing" in Real Estate.  When the market crashed, they lost their shirts.  In 1995, when prices were down and I was buying, they were "investing" in dot-com stocks.   They lost their shirts again and bought real estate - exactly the same time I was selling it.  "You should stay in!" they said, "it can go nowhere but up!"   But frankly, when I saw properties selling for 2-3 times what I paid for them, I got out, and it was smart to do.

Where are those friends today?   They got caught up in the IPO frenzy of the 2000's - and then lost their shirts again.   Then they bought gold - another sure thing that I was an "idiot" for not getting into.   I am sure now, they are in bitcoin - and will lose their shirts again.   They certainly have a lot of shirts in their closet.   The reality is, most lose a little (except for the real estate thing, when they went bankrupt).   Some of these folks have been to bankruptcy court more than once.   Most are heavily in debt, which is why they play these long-shots - convinced their "ship will come in" and they will be able to pay off their debts that way.

And the one thing I have learned over the decades - you can't tell them squat.   And I have no desire to, either.  They are going to keep driving their car off a cliff.   I just make sure I am not in the back seat when they do.

In The Mind of A Day Trader

Why do we invest as we do?  As it turns out, it is basic psychology - the less we have, the more risk-averse we are, and ironically, we thus take the most risks!

A reader sends me this interesting e-mail:
I guess you're right about mutual funds and index funds being the best option for average investors. It's just that the market seems so high right now that I feel more confident to buy stocks that appear undervalued. After the next major correction I plan to increase my position in index funds. 
Funny you mention day trading. I tried that for a while in my early 20s (31 now). It was very exciting, but I hated it. I was checking my phone all the time, even in the middle of the night. I felt almost relieved when my account hit zero, lost about 4k there. The price for being a sucker. 
For the next few years I didn't invest at all, I just worked and saved. Only two years ago I began to invest again. It's fascinating reading blogs on early retirement and on living below your means. It feels great to know my wife and I are making progress towards our financial freedom. 
You're right on the cryptos. Although I'm holding it feels a bit like day trading again, checking the rates multiple times a day and feeling excited or agitated because of the numbers. And it's so stupid. Suddenly, in the last two months or so, so many people have begun talking about it. Friends I meet, people at work, conversations I overhear. It's insane. These are people who have never showed any interest in investing.
What struck me as interesting about this, is it reflected the way I felt when I first started investing.  When I first started out, as I noted in earlier blogs, I was chagrined to discover that my net worth was negative.  I had never thought about net worth until law school, and when I sat down and totaled up my "assets" (hardly anything) and "obligations" (mountains of debt) I was in the hole - pretty far, too.

This is embarrassing to admit, but I decided I was going to "invest" my way out of that hole.  I had a very clever plan - a scheme, if you will.   I would only buy stocks that were going up, and before they went down, I would sell them and buy another stock going up!   I would make nothing but profits!   What a great idea, eh?

I would watch the financial channels, buy the stocks they said were "going places" (and they were, like the dumpster) and then profit!   What could possibly go wrong?

Yes, this is the "thinking" from someone with a college education (in Engineering, no less) who was also in Law School.   I'm afraid I was terribly naive at the time.   The market gave me a first-rate education in very short order, and I realized quickly that expecting nothing but gains in a portfolio was naive.

What was worse than this cockamamie "scheme" was that I was throwing away the best piece of leverage I had in my toolkit.  And that is the weapon of time.   When you are young, you have time on your hand.  Rather than try to "trade your way to success!" the smart thing to do is put money away in a number of things and then forget about it and let time do its thing.

It is funny, but the people selling the hyped investments always look to time to sell their product.   "If only you had bought gold/bitcoin/apple/whatever several years ago, you'd be a millionaire today!" which is a great argument for buying things several years ago before they went up in value.   They are arguing you should "buy and hold" but at the same time, selling a "churn" system of investment.   The irony is lost on most.

What changed is that I realized my 401(k) plans were chugging along and making money and I was not intervening in their operation in any way.  I realized also that you have to expect to lose money on occasion - even a lot of money and that's OK - there ain't much you can do about it.   Trying to "time" the market is often the worst thing to do, particularly if you are trying to "spot the winners!" as I was.  I stopped trying so hard and instead started saving money, paying down debt, and making a plan to be debt-free and accumulate wealth, rather than trying to "make money" by sharp investment.

And it worked, too.   Granted, about half of what I have in savings is capital gains, dividends, and interest on initial investments.   But I would not have those gains without the investment.   The more you invest, the more you gain.   The day-trader approach is the opposite - put a little in, and make it grow by hundreds, if not thousands of percentage points.   This is not to say this never happens, it just isn't that likely to happen to you and me.   Basing your retirement and financial well-being on a long-shot probability is, well, like buying lottery tickets in place of your 401(k) plan.

You have to be prepared to lose money.   Every day, it seems, I gain or lose enough to buy a fairly nice car - because by now, I have accumulated wealth.   It is scary when the market goes down and you realize that you just "lost" $30,000 in 24 hours - particularly when that is enough money to live on for a year, when you are debt-free.  In February of 2009, I lost a lot of money in the market - perhaps close to a half-million dollars.   But within a year, I had made it all back.   A friend of mine panicked and sold all his stocks at that point - locking in his losses - and then put it all into gold.   Gold went up - and then down.   And by that time, his stocks he had discarded were worth far more than the gold he had bought.

I am not picking on gold or bitcoin or tech stocks or real estate in particular - they are not different things, they are all the same thing.   They can sometimes be good investments.   But when they are hyped by the media and then the market over-values them, and then the small investor says, "Gee, I should get into this!" it all goes horribly wrong in short order.

Our reader tried this with day trading - and day-traded his account all the way down to zero.  Now, you'd think he would have learned a lesson here, and realized the siren song of Bitcoin was the same song as the day-trading schemes of yesteryear.   But the human mind works the opposite way.  Licking our wounds, we don't vow "never to do that again!" but instead double-down our bet, trying to earn our way out of the hole.

Note also how peer pressure and today, social media play an important role.  My day-trading friends were in an "investment club" which was some sort of scheme they bought into.   It is like buying timeshares - they use peer pressure in the sales meeting to get everyone to group-think.   Today, on Facebook or other online sites, you can have your opinions about crypto-currency validated by others in the group.  And the funny thing is, too, we all know now, after the last election, how the internet becomes an echo chamber with regard to belief.   You go to a crypto-currency discussion forum, and you are not going to hear any dissenting views about this "new paradigm" banking system.

So many people end up lurching from one bad "investment" to another.   As I noted in my previous posting, the people burned by real estate in 1989 got into "dot com" stocks in the 1990's (when I was making money in real estate - through rational investing in profit-making properties).   They got burned on dot-com and saw me making money in rentals and thought they'd get back into that (without even bothering to rent out the properties!  Duh!).   They lost their shirts in that, and started day-trading.  When that money was gone, they jumped on the gold bandwagon.   Today, they are into bitcoin.   They are not big-time investors - throwing a few thousand dollars at most at these "investments" - but over time, that same money, invested in more rational things, would easily accumulate to over a million bucks by retirement, in an almost guaranteed fashion.

It is a sad, predictable pattern.
Bullwinkle:  "Hey Rocky!  Watch me pull a rabbit out of a hat!" 
Rocky:  "But that trick never works!" 
Bullwinkle:  "This time for sure!"
Listen to Rocket J. Squirrel.   That trick never works!

Friday, January 12, 2018

Stock Price Versus P/E and Dividend Ratios

Buying individual stocks and stock-picking are two different things.

A reader writes in response to my previous posting that buying individual stocks is not necessarily a bad thing.   And he is right about this, to some extent - but that is different than "stock picking" as the term is ordinary understood.   I own some stocks directly (maybe 10% of my portfolio) and a whole lot more of them in mutual funds, index funds, and the like.

"Stock Picking" in my book, is the act of buying and selling a stock based on what the media hypes, and looking only at share price and share price history as indicia of whether to buy or sell.  Stock pickers do not hang onto stocks, but buy and sell them, often on the same day, convinced that the only thing important is the share price, and that you can make money by timing your purchases and sales.  "BUY!  SELL!" the shouting guy screams at the camera.   It is not investing, but gambling.

This is what the financial channels tout as the end-all to investing - looking at the share price and its direction of travel.   And this has gone on for a long time.   In the old days, you'd get the newspaper and they'd have stock prices on several pages in the "business section" of the paper.   My Dad would look at this every morning to see how his stocks were doing (he owned like maybe five of them, worth maybe $20,000 or so, he was a playa).   And most people "investing" back then did the same thing.  Mutual funds were still a fairly new thing.

Before that, there was the "ticker" that you see in old movies - a device under a glass dome, usually, that spit out stock symbols and their prices in real-time.   If you were really rich, you had one of these in your home - sort of an early version of the Internet, I guess.   On Wall Street, all the offices had them, and "ticker tape" piled up rapidly.   Whenever there was a parade, they tossed it all out the window in a snowstorm of ticker-tape, hence the ticker-tape parade.   Today, we hardly use paper, and people have to buy confetti to throw - if they even do that anymore.

When I was a kid, they still had ticker-tape parades with real ticker-tape.   Today, it is just a name for a parade where they throw confetti.

The point is, this obsession about stock price goes way back.   And in fact, Joe Blow small investor has a long history of obsessing about stock price and not thinking too much about profits, losses, dividends, or the underlying health of the company.   It is akin to horse racing.   You can go to the track and look a the horses, research their history, talk to the jockeys, and whatnot and figure out which horse is actually the best horse.  Or you can pick the name of a horse that sounds "lucky" or pick a horse based on numerology.   You'd be surprised, a lot of people do just that.

And in stock buying, a lot of people do just that.  They look at the share price, which is the least valuable piece of information available, and then look at the share price chart and think either, "Well, this stock has gone up, so it must be poised to go higher!" or "This stock has gone down, so it must be time for it to go up!"   It is also akin to how some people play the slots.  They follow you around and watch to see if the machine you played paid off.  If not, after you leave, they jump in, convinced that the machine is "due" for a win, not realizing that probability doesn't necessarily work that way.

So when the Shouting Guy says that "Stock picking isn't dead!" what he means is not researching companies and figuring out what to invest in, but instead, him shouting "BUY!" and "SELL!" at the TeeVee screen, based on share price trends and other unimportant indicia.   As I noted in the previous posting - and as many people have investigated - his track record of stock tips really, really sucks and he should not be trusted to interpret a bus schedule, much less the stock market.   But he has a "persona" and that's what TeeVee and TeeVee watchers like - so he's on the air.

Don't confuse entertainment with facts.   And television is all entertainment.   Even Fox News admits this, in their Trademark Registration for "Fair and Balanced" - Entertainment in the form of News Services.   Television is designed to titillate and entertain - not inform.   Don't confuse the two!

For the average small investor, mutual funds are the primary means of investment.   And this is mostly because your 401(k) plan at work offers investment in one or more mutual funds.   There is usually an index-type fund, a bond fund, a growth fund, and an income fund, maybe a few more.  And most investors, like myself, are mystified, so they pretty much divvy it up their 401(k) contributions between the funds offered.   You could do a lot worse in life.

The main thing about investing is investing - taking money out of your paycheck and putting it into your 401(k) or IRA or whatever, instead of leasing a new car.    Most of the money you end up with in retirement will be money you set aside.  The "gains" you get from investing will be proportional to this amount, so it pays to set aside as much as you can afford to do, if you want to achieve the largest amount of gains.   The idea you can invest a dollar in a long-shot deal and win big, is flawed, however.

A lot of people who claim to have no savings whatsoever and are lurching toward retirement, also have all the cable channels, a new leased car, and a new iPhone X or whatever - and snicker at you for not having all these things.  You must be "poor" - right?   And when they find out they squandered their wealth, they petition the government to take away your money and give it to them, because you were fortunate and they were unlucky.   But I digress....

Getting back to mutual funds, the advantage of them is that they diversify your portfolio without a lot of work on your part.   You pick a fund, and someone else manages it, and they buy a panoply of different stocks and bonds.   No one stock can sink your portfolio, or indeed no one sector - for the most part.   If you are invested in a number of different mutual funds with different objectives, you are very well diversified.

There are downsides, to be sure.  You are never quite sure what you are invested in, for starters.  And some funds have large "load" fees or management (expense ratio) fees, and it is difficult for the average investor to find out what these fees are.  I have fallen victim to load fees from financial advisers (including my own father!) who told me to my face the mutual funds had "no loads" but in fact had fees as high as 5%!

Since most of us use a 401(k) as our primary vehicle for investment, buying individual stocks is tricky.   There are a number of ways to go about buying stocks, as I have noted before.   But putting all your eggs into a stock portfolio is a really bad idea, in  my opinion, as our ability to divine what is and isn't a good investment is pretty limited.

As I noted in an early posting, one way to get started in stock investing is through dividend reinvestment programs, or DRiP investing, which is sort of obsolete today.  These are programs run by the company you are investing in (and managed by companies like Computershare) that allow you, as a shareholder, to buy additional stock in the company, as well as reinvest your dividends.  As the name implies, these programs work mostly for old-line "blue chip" companies that make profits (most of the time) and pay dividends.  I have bought stock in companies like Boeing, Ford, GM, Harley-Davidson, Sears, Exxon-Mobil, Stanley Black & Decker, and even a bank my friend started.

I am glad I got out of Harley-Davidson when I did, as well as Sears, of course.   Harley is struggling to re-invent itself for a new generation that doesn't have $20,000 to spend on a toyAnd Sears... well, you know the story there.    You see the problem with choosing individual stocks, though.   I thought Sears would be bankrupt long before today.  Maybe this year - maybe next.  But I am glad I got out with some of my money intact, anyway.  Timing the market is nearly impossible to do.

I ended up closing my Compushare account, not because I was unhappy with it, but because they charged a $1 transaction fee whenever you re-invested dividends, and also a transaction fee when you bought stock through the system.   But, back in the day, when a single trade could cost you $20 or more through a broker, it was a "cheap" way of getting into stocks without going through a brokerage.  I set up my account to debit my checking account every month for $50 to $100 for each stock (making sure I cut my expenses by a corresponding amount first!) and over time, accumulated a lot of after-tax investments.

Of course today, I use a brokerage account with Merrill Edge, as the trades are free.  And I no longer re-invest dividends, but rather let them accumulate as cash and then use that cash to buy a different stock - thus diversifying my portfolio of stocks this way.   It is, in a way, like a self-directed mutual fund, with over sixty different stocks in it.   Since trades are free, there is no overhead involved, and you can buy even a few hundred dollars worth of stock cost-effectively.

I also rolled over an IRA from Fidelity that was in mutual funds and put it into an e*Trade self-directed IRA - buying and selling stocks for $7.99 a trade.   I did OK with this - again having dozens of stocks in the portfolio.   But I have since rolled this over to Merrill Edge as well - free trades are free trades.  Sorry, e*Trade!

But again, the amount I have in individual stocks is about 10% of my portfolio.  I don't think it is worthwhile to gamble my future on my ability to out-think and out-predict people a whole lot smarter than I am.   And my stocks are pretty tame, compared to what is hyped on the television.  These are things with rational P/E ratios (well under 100, most around 20 or so) that make profits, sell products, and pay dividends.   I don't own any speculative stocks in tech companies promising "The Next Big Thing!" which turns out to be a Ferrari in the founder's garage.

Oh, sure, when I started out, I got sucked into that sort of nonsense.  I bought stock in Syntroleum which was a synthetic fuel maker.   Seemed like a good idea at the time, and the guy on television (this is before I ditched cable) told me it was a sure thing.  Then the price of oil plummeted (this was back in the 1990's) and suddenly the whole process was uneconomical.  I also bought stock in "Martha Stewart Omnimedia" which turned out to be a cookbook.   And apparently she was cooking the books as well, as she ended up going to jail.   Lesson learned, I stopped watching the financial channels for "hot stock tips!" shared with only 300 million other people.

And yes, I realized later on that many of these hyped stocks were hyped for a reason - it was the old pump-and-dump, and many of the commentators were paid to hype a particular stock as it made money for someone.

I also learned, firsthand while working at a "tech" law firm, that the hyped IPOs were just vehicles for insiders to cash out.  They are NOT a means of raising capital!  But it is a complicated con, so most people can't figure it out.  It is a scandal, really, but each generation comes to the table not realizing the hard lessons the previous generation learned.   So the cycle repeats itself, again and again - which is maybe why these boom/bust cycles in the economy are about 20 years apart.

The 20-something today "investing" in Bitcoin is saying it is a "new paradigm" and a new era - the same siren song I heard in 1995 during the dot-com boom.   But they weren't even born yet in 1995, and were still in elementary school when the economy melted down a decade ago.   Sadly, they will learn hard lessons as I did - well some of them will.   A lot of people never learn and keep being "raging true believers" for life.

And the reason they remain raging true believers is the same reason people buy lottery tickets.   As one hapless chap chirped at me, "Well, someone has to win, right?  Might as well be me!"   And they think that, even as they tear up ticket after unwinning ticket, for their entire lives.   People feel the same way about IPOs, Bitcoin, Gold, and other hyped investments.   Just enough of them turn out to be winners to keep people buying the losers.

So yea, you can make money on hyped investments, but it is based on luck, not skill.   You can also lose your shirt - it is a predictable outcome - and one way to avoid losing  your shirt is to just walk away from all hyped investments.   You may not "win big" but you won't lose it all, either.

And we can't afford to lose it all.  Not Mr. and Mrs. Middle-Class, struggling to hang on to what little they got.

And yes, I have "picked" stocks on occasion that have done spectacularly well - 7000% gains makes even Bitcoin look tame.   But the lesson I learned from that was not to pick stocks, but rather than I got lucky on what was essentially a drunken gamble.

What the financial media touts and the Shouting Guy shouts is that you can become a millionaire or even a billionaire, not by putting money aside into rational investments, but by putting down small bets of a few thousand dollars or so into "Next Big Thing!" gambles - and this is what they call stock picking - the buying and selling of stocks based on anything other than the underlying health of the company.

Stock picking is a sure way to go broke.   The only thing worse is day-trading!