Common Cents # 43 - Price Bubbles

 

Common Cents – Bubbles

 

The bubble in the stock of GameStop and a few other stocks, reminded me of other “bubbles” down through the years. The first famous one was the “Tulip Bubble” in 17th century Holland. As tulips began to get popular, people believed them to be rare and the price of tulip bulbs went through the roof. People invested their life savings in tulip bulbs only to be wiped out when the market crashed. Of course, now there are plenty of tulip bulbs.

The first bubble that I was personally involved with was Jim Beam Whiskey bottles. I was working in a pawn shop when overnight the price of Jim Beam decanters exploded. Bottles that were selling for $10 one month were selling for $500 the next month. And then just as quickly, the price dropped, leaving thousands of people with over-priced Jim Beam bottles on their shelves.

Shortly after that, the same thing happened to Avon bottles. There were people buying everything Avon made and stashing the bottles away, sure that their value would increase. Now we can buy Avon bottles that sold for $50 each forty-five years ago in any flea market for fifty cents.

Other famous bubbles in recent years have been Beany Babies, Cabbage Patch Kids, and vintage guitars. Gold top Gibson Les Paul guitars that sold new in 1955 for $200, were selling for $100,000 in 2008. They are still worth about $20,000. But a lot of people lost a lot of money speculating on those guitars.

The bubble more related to today’s bubble in individual stocks was the silver bubble of 1980. The Hunt brothers decided to corner the market in silver. They bought up all the silver that was available and all of the futures as well. We were in the photofinishing business at the time and we reclaimed the silver from processed film. We were getting about $25 per month for scrap silver, when all of a sudden, the checks jumped to $500 per month as the price of silver went from $6 per once to $50 per ounce. March 27, 1980 is known as “Silver Thursday.” That is the day the price of silver went from $50.42 to $10.80. Brother Lamar Hunt did a lot better with The Kansas City Chiefs than his two brothers did with silver, for sure. To this day, people are trying figure out what they were thinking.

The point is, there have been price bubbles for all kinds of things for at least 500 years. Learn to spot a bubble and then run, unless you happen to own something you can sell to take advantage of the bubble. Otherwise, just sit back and watch the show. Price bubbles are not investing. Keep your hands in your pocket, your financial goals firm, and your future secure.

 

 

Common Cents # 42 - Green, Blue & Black

 

Green, Blue, & Black

 

In downhill skiing, the ski runs are color-coded according to level of difficulty. Green is easiest, blue is intermediate, and black is most difficult. Some places have double-blacks for experts only. When we get off of the lift at the top of the mountain, there are often three trails available: green, blue, and black. Sometimes the green slope sign will include the phrase “Easiest route down.”

So, why would anyone not take the green trail? Because, unless it is a race, getting down the hill fast and easy is not the objective. The blue and black trails will be more challenging, and for most skiers, more fun.

When we punch in a destination into a GPS app, it gives us the fastest and usually, the safest route. In other words, GPS recommends the green route. I like to think of the green routes as the Interstates, the blues as two-lane highways, and the blacks as country roads that may not even be well-marked on GPS. If we just want to get there, the green Interstate route may be the way to go. If we want to see the scenery and have more fun, we may want to avoid the green trails. We will want to drive what author, William Least Heat Moon called “Blue Highways.”

This analogy is true in other areas of life as well. If our financial goal is to make as much money as we can, as quickly as possible, we will make decisions accordingly. If that is our goal, we might choose a college major that offers the highest starting salary and take the route that looks like it will offer the fastest career advancements.

If we want to live a full healthy life, build long-term relationships, or see lots of interesting things we will want to get off of the fastest route and explore the more difficult trails. We will avoid the Interstates and four-lane highways of life and check out the country roads where life is happening. Skiers who ski the “Black” ski trails and slopes see more amazing things and have more stories to tell than the skiers who never get off of the “Greens.”

If someone wants to start a business, become a professional athlete, or go to Hollywood to become a movie actor, those can be the double-black slopes, the highest risk with the possibility of amazing results. Expert skiers know that they are more likely to get hurt on the black trails, but they are willing to take the risk, because they have prepared for it and the rewards are worth it.

To some degree, whether we want to shoot for the “Blacks” or are content to ski the “Green” hills, is a personality trait. In ski country, the easiest green slopes are called the “Bunny Slopes.” The term is used intentionally to get beginners to want to gain skill as quickly as possible, so they won’t have to tell their friends that they never got off of these easiest runs.

Some people are content to live life on the bunny slopes, but others want to take a harder route, have a bigger goal, or see the larger picture. Don’t get stuck on the “Bunny Hills” of life.  If you are struggling in various areas of life, that may just mean that you have turned on to a new path and are now skiing the “Blue” trails. Take more lessons from instructors if needed to gain skill and confidence, enjoy the ride and hang on. You will be headed for the “Blacks” before you know it!

 

Common Cents # 41 - Tax Time

 

Tax Time

 

Between now and April 15, the vast majority of Americans will be filing their tax returns. All US income is subject to tax whether the earner is a citizen or not.

Not long ago we had two choices, we could get out a pencil and paper or we could go to a tax professional. Today there are a variety of choices in between. We can buy software in a box or download software that will walk us through the steps, or we can do the whole thing online. We can get as much help as we need by having a tax professional check the return before it is filed or doing it virtually with a real person at the other end of the computer.

The amount of help we need depends on our willingness to read and understand the updates and nuances in the tax code and the time we want to spend. Sitting down with an experienced tax professional is certainly the easiest and quickest way to insure an accurate return.

For many years I did my own taxes with a pencil, paper, and calculator. After I became a tax pro, I reviewed the previous three years, discovered changes that were needed based on my new knowledge, and received a $5,000 refund. Doing my own taxes may have cost me $25,000 to $50,000 or more over forty years, and this was after I had taken income tax and accounting in college.

Computers have made life simpler for Do-it-Yourselfers by asking appropriate questions and doing the math. Still, there can be significant complexities that only a professional could sort out. As a general rule, if a person is tech savvy and all of their income is reported on W-2’s, they should be able to do their own returns online. Complexities that might require a professional are self-employment or contract work, rental income, unusual stock trades, disposal of business assets, income from more than one state, farm income, and so forth. Farming is the most complicated businesses imaginable when it comes to taxes. If we received a 1099-NEC or a K-1, we might want to consult a pro unless we know exactly what we are doing.

Every year there are changes in the forms and the tax code in general. Some years there are major changes and some years the changes are small. An odd one was last year when, under pressure from AARP, Congress mandated a simpler 1040 form for people over 65. After considering that seniors often have the most complicated tax returns because of pensions, Social Security, medical expenses, selling a home and host of other issues that occur after retirement, the only thing the IRS really could do was make the type larger on the form. Considering that about 90% of filers e-file online or with a tax pro, the size of the type on a paper form did not solve anything. We now have a special form for people over 65 with bigger type and less white space.  The late night TV hosts certainly had some fun with that “improvement”!

Common Cents # 40 - Can Money Buy Happiness?

 

Can money buy happiness?

 

When I recently heard that a person won one billion dollars in a lottery, I wondered “How long will that person be happy?”   Does the overwhelming reality of how to manage their new life cause happiness or a weight of responsibility and profound change?  Generally, people with few financial resources think that money can bring happiness and people with plenty of money might have some easier parts in their lives, but know that more happiness does not always follow an increasing bank balance.  If we have a low income or not much money in the bank, a little more money might make us a little happier for a while. Up to a point.

Surveys show that once the basic necessities of life are covered, the magic number where happiness peaks for an individual is $75,000 a year income. Below that income level, a little bit more will relieve stress and give a little more contentment. Income levels above $75,000 don’t always increase happiness and in fact, may have an opposite effect.

Buying more stuff, more clothes, bigger houses, or a string of luxury automobiles do not bring happiness and in fact may add to the stress with unwanted responsibility and maintenance costs. In most cases less is indeed more.

What money can buy is choices. We can identify what really brings happiness with the hope of actually obtaining it. Many people find that two of best uses of  money is travel and shared experiences. Taking a vacation, planning a trip, and getting away from the everyday routine can have tremendous effect on our state of mind. Being able to provide opportunities to spend time with the people we love most doing things that make memories that last a lifetime indeed grows happiness.

The single biggest factor to a long and fulfilling life is found in the authentic personal relationships with family and friends. Using our money to get together by going out to eat, shared events such as sporting events or concerts, or shared vacations are some of the ways that money can buy happiness.

Money can also buy time. Using money to buy time by hiring people to do time consuming tasks that we don’t enjoy or don’t do well can bring happiness. For example, having somebody mow the lawn or hiring a lawn service can buy time and therefore increase happiness by allowing people to do things they enjoy more.

So, can money buy happiness? It can, but we must be careful to spend it on the right things. That is why working longer hours, skipping vacation days, or striving to make more money is counter-productive if our resources are not used wisely.

We should spend our money to buy time: time with friends, time to enjoy hobbies, and time to do all the things we really want to do. That is the way that money can buy happiness.