Business & Economics: December 2005 Archives

It was a hard decision in June of 2003, but I'm glad I sold my GM stock for $36.52 per share. Yesterday GM hit its lowest price in 20 years, slipping to $18.33 in the middle of the day. Yuck!

Richard Russell provides a list of twelve characteristics of the "ideal" business, most of which I've considered intuitively but could not have written and encapsulated as consisely as Mr. Russell has. Cutting out all the valuable explanations in the article:

(1) The ideal business sells the world, rather than a single neighborhood or even a single city or state.

(2) The ideal business offers a product which enjoys an "inelastic" demand.

(3) The ideal business sells a product which cannot be easily substituted or copied.

(4) The ideal business has minimal labor requirements (the fewer personnel, the better).

(5) The ideal business enjoys low overhead.

(6) The ideal business does not require big cash outlays or major investments in equipment.

(7) The ideal business enjoys cash billings.

(8) The ideal business is relatively free of all kinds of government and industry regulations and strictures.

(9) The ideal business is portable or easily moveable.

(10) Here's a crucial one that's often overlooked; the ideal business satisfies your intellectual (and often emotional) needs.

(11) The ideal business leaves you with free time.

(12) Super-important: the ideal business is one in which your income is not limited by your personal output (lawyers and doctors have this problem).

(HT: Sound Mind Investing.)

Who? Charlie Munger, Warren Buffett's partner for the past 45 years. Anyway, he has a great perspective on the investment market and knows whereof he speaks.

Charlie Munger has been Warren Buffett's partner and alter ego for more than 45 years. The pair has produced one of the best investing records in history. Shares of Berkshire Hathaway, of which Munger is vice chairman, have gained an annualized 24% over the past 40 years. The conglomerate, which the stock market values at $130 billion, owns and operates more than 65 businesses and invests in many others. Buffett's annual reports are studied by money managers. But Munger, 81, has always been media shy. That changed when Peter Kaufman compiled Munger's writing and speeches in a new book, Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger ($49.00, PCA Publications). Here Munger speaks with Kiplinger's Steven Goldberg. ...

Do you think the stock market will return its long-term annualized 10% in the next decade?
A good figure for rational expectation would be no higher than 6%. I think it's unreasonable to assume that the world is going to try to arrange itself so that the inactive, asset-owning class is going to get a much higher share of the GDP than it normally gets. When you start thinking that way, you get into these modest figures. The reason the return has been so good in the past is that the price-earnings ratio went way up.

Read and learn.

(HT: SMI Weblog.)

Lots of financial-help gurus make a point of advising clients to rid themselves of debt before they worry about investing, and that's generally a good idea. However, there are at least three kinds of good debt that can actually put you in a better financial position if you use them wisely.

Remember, just because you have the cash to pay for something doesn't mean you shouldn't borrow if the rates are right. For instance, if you have $100,000 in cash and want to buy a house that costs $100,000, you could put it all down and have no payments. However, if you can borrow $80,000 at 5% interest you'd be smarter to do so, put $20,000 down in cash, and invest the other $80,000 in a diversified stock portfolio that will probably earn more than 5% interest.

Buying a home: The chance that you can pay for a new home in cash is slim. Carefully consider how much you can afford to put down and how much loan you can carry. The more you put down, the less you'll owe and the less you'll pay in interest over time.

Although it may seem logical to plunk down every available dime to cut your interest payments, it's not always the best move. You need to consider other issues, such as your need for cash reserves and what your investments are earning.

A house is often a family's largest financial asset, but it's also a highly undiversified investment. It's foolish to have such a huge chunk of your net wealth tied up in a single investment, which is one reason why borrowing to buy a house makes good financial sense. Of course, there's a cost to diversifying that value: you pay interest on the loan. But home loans are cheap and tax-deductible for loans of less than $1 million, so the debt is pretty cheap.

Paying for college: When it comes to paying for your children's education, allowing your kids to take loans makes far more sense than liquidating or borrowing against your retirement fund. That's because your kids have plenty of financial sources to draw on for college, but no one is going to give you a scholarship for your retirement. What's more, a big 401(k) balance won't count against you if you apply for financial aid since retirement savings are not counted as available assets.

Like home loans, college loans come with low interest rates and the borrower often won't have ot make any payments till after graduation. Those are incredible terms that you just can't beat, so it's smarter to borrow for college and invest your assets in other areas with higher returns.

Financing a car: Figuring out the best way to finance a car depends on how long you plan to keep it, since a car's value plummets as soon as you drive it off the lot. It also depends on how much cash you have on hand.

This one is more dubious, but since cars are big-ticket items that most people can't live without it's unreasonable to advise people not to buy them without borrowing. Of the three kinds of "good debt" car loans are the worst, so pay them off promptly (but while you're carrying a balance on your credit cards!).

Leftists who are eager to grow the government and extend its control of our private and economic lives should look to Detroit and take note of its failure. Heck, if they really want to live out their dreams they should just move to Detroit.

But another bankruptcy is looming, and this one involves a real welfare state: the city of Detroit. Fiscally challenged communities across the country may find themselves watching Motown with equal fascination.

Kwame Kilpatrick, Detroit's "hip-hop" mayor, insists that the city is "a long way" from insolvency. Recently re-elected (a recount demanded by his opponent is very unlikely to change the outcome), he has pledged to bring to heel a projected deficit of about 10% of the city's $1.4 billion general fund. In his first term, he reduced the city's work force to about 16,000 from 20,000, mainly by allowing vacant posts to go unfilled.

But the near-collapse of General Motors, Ford and their major suppliers is posing a big drag on city finances. This comes atop a long-running failure to adjust to Detroit's decline to less than 900,000 residents from a peak of more than 1.8 million after World War II. With an accumulated deficit of $300 million, union opposition to reform, and a bond rating rapidly approaching junk status, Detroit is in crisis. As Joseph Harris, the city's auditor general until he was term-limited out of office last week, flatly declared: "Insolvency is certain. The only question is the timing of the inevitable." ...

Before Chapter 9 was adopted, judges regularly imposed judgment levies on impecunious communities. But that would only compound the problem in heavily taxed Detroit, where the income tax has already chased away most job creators and property taxes of about $8,500 on a $250,000 house have impoverished most of those who remain.

The most immediate problem is on the cost side. The Citizens Research Council of Michigan, a privately funded watchdog group, found that as of 2002, Detroit was still employing more than twice as many workers per 100,000 residents as Phoenix, San Diego or Portland, Ore. Mr. Harris, the former auditor general, calculates that in order to make ends meet, Detroit still needs to lay off half of the 12,000 workers paid from the city's General Fund--or cut the compensation for civilian workers by $27,000 each.

That level of property tax is nearly four times what we pay in California, and I wouldn't be able to afford my house if our rates were that high. Detroit also has a city income tax of 2.35% (in 2005). There's also a 6% sales tax (lower than California) and a 3.9% state income tax (much lower than California).

CNN Money rates Detroit as one of the best places to live in 2005, but the city has barely one-third the number of colleges that other "best" cities have and more than five times the crime. There's also no mention of Detroit's unemployment rate (October 2005) of 6% -- second worst among metropolionly after New Orleans in the wake of Katrina (which had just struck in August).

Update:
It looks like I misread the graphics on the CNN Money page and that Detroit wasn't actually listed as one of the best places to live. I guess it's just included in the system for comparison purposes.