Why I’m Not a Fan of “Free” Stuff


!SpiderThis election you have a lot of people talking about “free” things.  Free healthcare.  Free college.  Surely free food and clothing should be coming soon since they are basic human needs.

Really, however, it isn’t a matter of getting things for free versus needing to pay for them.  It is a matter of control over the acquisition process.

You see, the government isn’t some huge pool of money that can magically acquire and distribute things.  It is just a bunch of offices and buildings that direct the flow of things – mostly money.  They do not actually make anything.  They don’t provide healthcare.  They don’t teach classes.  They don’t grow food or make clothing.

They do have the ability to force people to give them a portion of their money, which they can then distribute to others so that they can buy things.  The people who have money that they can take, however, are generally the same people who are making the things that people want.  They could take money from a college professor, for example, that he was paid for his efforts in producing a class and a set of lecture notes.  If they then take that money and give it to students who took his class, they have essentially made the professor give his class for free to those students.  Because the professor needs to eat and have a roof over his head, if the money he makes is taken away too often, he’ll find other things to do rather than teach classes.  He may even just decide to grow food for himself and spend his time building and maintaining his own shelter if taxes are too high.  If you try to provide free stuff through high taxes, which is the same thing as requiring people to provide things for free or at least at a lower price than they are worth, all but the most noble people will stop providing the services.

So really what happens when you ask the government to provide something for you is that 1) you create the wealth needed for the things they are providing (by using your time producing useful things for others so that they are willing to provide the goods and services you are asking the government for), 2)you give the wealth you created to the government through your taxes, and 3) then the government decides how to acquire the thing for you, buys it (or hires a contractor to buy it), and then decides how to provide it to you (generally through you needing to fill out forms and jump through hoops).  You do this rather than just buying the thing yourself.

The reason that I don’t like to have the government provide most things for me, particularly basic needs like food and healthcare, is threefold: 1)I lose the ability to choose what is provided, 2)it costs more, 3) there tends to be corruption.

1.Loss of Choice

If you go out and buy your own food or pay for your own college, you have the ability to choose what you want.  If someone else buys these things for you, you rely upon them to listen to you to provide what you want. Because people in the government are far removed from the citizens (do you even know who to talk to about which college you would like to attend), it is very difficult to get them to hear and understand your needs, even if they have a desire to do so.  Often people in such positions decide that since they have the power to do so, they’ll make the decisions on what you’ll get without any input.  You’re probably seen as an annoyance to many of them.  Even if you have input, because they need to provide things for so many different people, they can’t possibly customize for your particular needs.  You therefore generally get “one-size-fits-all” solutions unless you have some special connections.

If you don’t like the choice provided, you need to find the money to pay for something else yourself.  Because you’ve already paid the government to provide for the need, you end up paying twice.  For example, most people will say that they can’t afford to send their children to private schools, but would if they had the choice.  The amount they pay for public schools per child, however, is more than the tuition for many private schools.  This means that many people send their children to public schools not because that is their choice but because the government is providing the schools “for free.”  If the government were not providing the free school but provided the money instead, they would have more choices in schools.

2. Higher Costs

If you just go out and buy things, you only need to pay the person who created the goods and maybe a couple of middle-men who brought the item to market and placed it in a place where you could find it.  If you add the government, you now add a whole layer of people who are not needed.  It would be different if they actually produced the goods or at least brought them to market, but what they generally do is just hire a contractor to bring things to you and monitor and pay the contractor (with your money).  These extra people and offices cost lots of money, which adds to the cost of things.  Plus, because you are forced to pay their salaries and have no other choice, they have no need to be efficient, so they often are not.  Ever go to the DMV and felt like your experience doing business with them was their primary concern?  Ever go down to the DMV just for fun?  Probably not, because they know you have no other choice.

These extra people and offices cost lots of money, which adds to the cost of things.  Plus, because you are forced to pay their salaries and have no other choice, they have no need to be efficient, so they often are not.  They have no reason to be efficient since they won’t lose their job if things cost more – they just ask for more tax money.  In fact, they often spend a lot of time trying to protect themselves in case things go wrong, which adds to the cost.  I would rather just buy from people directly and avoid these costs.

3. There is always corruption

Whenever you bring a lot of money into one place – for example, the money that people spend on healthcare – you’ll attract corrupt people.  Creating power by forcing people to ask for things they need from a few people also attracts corrupt people.  Having inefficient systems where you need to wait a long time to get things you really need also creates corruption as people bribe officials and use connections to get to the front of the line.  I prefer to avoid central control  since it always creates corruption  It also provides incentives to make things less efficient since that leads to more bribes.

There are some things like national defense that you need to government to provide.  There will be inefficiencies (as anyone who has ever been in the military will tell you), higher costs, and corruption, but in some cases you have little choice.  Minimizing the amount of things that the government provides, however, is always the better choice, even if that means you’ll get less “free” stuff.

Got an investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

What do you think?  Please leave a comment!

Contact me at vtsioriginal@yahoo.com

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

A Financial Checklist for your New Job


 

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Congratulations on getting your first job.   I know that college was a lot of late hours, then the whole job search was exhausting.  You probably thought sometimes that you would never land a job – yet here you are.

You’re probably interested in finding out things like where the cafeteria is and where you can get office supplies, but there are a few other things that you should add to your checklist from the personal finance realm.  Do these things now and your life will be so much better in the future:

  1.  Start a savings account and build it up to $9,000 as quickly as you can.  Having this savings account will make sure that you have the money needed to take care of things like car breakdowns and your portion of medical emergencies.  If you don’t have some cash sitting around, you’ll need to go into debt, which is not a good thing because you’ll be spending money on interest.
  2. Open a 401k and put enough of your paycheck in to get the full company match.  Retirement may seem like a long way off, but it also requires a lot of money (like millions of dollars).  While it’s hard to save up that much money in a few years, if you put money into stocks now you’ll only need to actually save up a small portion.  Money you put away between now and age 35 will make a much bigger difference than money you put away between 45 and 65.  Plus, if you don’t get the full company match, you’re leaving money on the table.
  3. Open a Roth IRA and start putting in $250 per paycheck.  You’ll have more control over money you put in an IRA than you will in a 401k since the investment options will be almost limitless.  Your 401k investment options are chosen by your company, which may include high fee mutual funds and even worse, company stock.  You’ll want to put away about 15% of your paycheck anyway, so contribute as much as you can (currently $5500 per year) to a Roth IRA.  If you still aren’t saving 15%, increase your 401k contribution.
  4. Get term life insurance.  If you have anyone depending on your paycheck, you’ll need term insurance to provide for them should something happen to you.  For about $300 per year you can get a half million dollars or more in 15-year fixed term insurance.  That is about how long you’ll need before you’ve saved up enough if you follow the advice in this post.
  5. Pay off your student loans.  Before you go shopping for a new car or a home, get those student loans out fo the way.  Just keep living like you are still a student for a couple of years and you’ll probably knock them out of the way.  You can then save for a home without the constant burden.
  6. Get a good used car.  For about $5,000 you can get a vehicle that will reliably take you to work and back, or wherever else you want to go, for the next five years.  You may pay $1,000 per year for repairs and maintenance, but that beats paying $4,000 per year or more for depreciation, plus another $500 per year in interest.  One of the best moves you can make is to buy used.  Move up in car, getting a little newer model every four or five years if you wish.
  7. Save up 20% for a home.  If you put down less than 20% on your home, you’ll end up paying mortgage insurance.  This is extra money you pay out that protects the loan company in the event that you default but does nothing for you.  Plus, putting more down means hundreds of thousands of dollars saved in interest over the life of the loan.  It may take longer to get into a home, but some things are worth the wait.
  8. Get health insurance.  A major cause of bankruptcy is unexpected medical bills.  Be sure to sign up for health insurance for you and your family.
  9. Open a mutual fund account and start sending in money regularly.  You’ll want to gain financial freedom, which means that you have enough money invested, generating income, that you won’t need to rely on your job to pay the bills.  The way you get there is to invest regularly.  It will take 15-20 years, but if you put away a couple of hundred dollars per month into stock mutual funds, you’ll get there.

Your investing questions are wanted. Please leave a comment and let me know what you think.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

To Sell or Not to Sell


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About two years ago, my broker called me up to do a portfolio analysis.  At the conclusion, he decided that I was doing well, but was concentrated in the area of Consumer Discretionary too much.  (This makes sense since I look for companies with steady growth.  Restaurants and retail stores, which are within the Consumer Discretionary sector, and that have a good product line and management team, can create steady earnings growth by just adding more locations.  Other business areas cannot.)  He suggested I add to my holdings in the energy sector, e.g., oil.

I was actually buying some oil stocks in another account.  I was looking for a hedge against inflation (if inflation takes off, oil prices and other things you dig up out of the ground would probably increase in price as well), plus I wanted to diversify into more sectors, just as my broker was advising.  I continued buying more shares in different types of companies linked to the oil boom.  The ones I bought were Ensco Plc (ESV), Greenbriar (GBX), and Oasis Petroleum (OAS).

Of course as you probably know, this was right near the peak of the oil market.  As oil prices fell into the twenties, all three of the stocks fell by at least 75%.  Ensco went from $60 down to $8, Greenbriar went from $75 down to $22, and Oasis went from about $54 down to $4.  Of those three, I sold completely out of one, cut one position back, and bought more of the third one.  Here’s why:

I sold completely out of Oasis Petroleum.  The reason isn’t that they lost more than 90% of their value.  It is because their business had fundamentally changed.  Oasis uses fracking to get oil out of hard-to-reach places in North Dakota.  They were doing great when oil was more than $100 per barrel, but when oil prices dropped they were forced to shut down wells because it cost more for them to get oil out of the ground than they could sell it for on the markets.  I also feel like the OPEC nations have learned that they need to keep oil prices below a certain mark – maybe $50 to $80 per barrel – or frackers will reopen and start to move the US towards oil independence.  Without people buying oil from them, the OPEC nations have no other real industry to keep the rulers dressed in gold and pay for the lavish palaces, so they are not likely to make the same mistake again.  Maybe they’ll let prices rise for a while, get all of the North Dakota wells running again, and then drop the price of oil again to cause a lot more people to lose their money and swear off the oil business.  In any case, I don’t expect Oasis’ business model to be profitable anytime soon.

I cut back on shares of Ensco.  Ensco rents deep-water drilling rigs used in the Gulf and elsewhere.  As the oil prices dropped, so did demand for their rentals, but I expect that business to recover and be profitable again in the future, so I wanted to maintain some shares.  I sold a few shares to take the loss to offset some gains I’d made, but still hold a position, waiting for the recovery.  To simply sell out would have been “locking the barn doors after the horses had been stolen,” so to speak.  There is room for recovery at some point in the future.

I actually bought more shares of Greenbriar.  Greenbriar makes railcars, including tanker cars of a new design needed to meet regulatory requirements.  Because their business extends beyond oil transportation, I expect the company to do just fine even with the lower oil prices.  They’ll just sell more of other types of rail cars if oil prices remain low since lower oil prices will lead to higher economic activity, which means that more businesses  will be shipping more things.

So when a stock drops, focus on the business rather than the stock price movements.  Some of the best opportunities come right after a big drop.  Also, if you add to the number of shares you have, you’ll be ahead when the stock recovers rather than just breaking even.  Don’t expect to buy at the bottom, however – that is really difficult to do – but just know that you are getting more shares at a better price than you could in the past.

Sometimes, however, the business has changed and you just need to sell out and lick your wounds.  Not every pick you make will pan out.  You just need to know when to give up and go on, rather than waiting for a recovery that may never come.  This does provide an opportunity, however, to cut back on some of your big winners that have grown to the point where it would be devastating to your portfolio if something were to happen.  Maybe you’re thinking of selling, but don’t want to pay the large tax burden that would result if you did.  You can deduct and losses you have against capital gains that you make, so it is a good tax strategy to pair losses with capital gains and reduce your risk if a stock has grown to become too large a portion of your portfolio.

Your investing questions are wanted. Please leave a comment and let me know what you think.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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