Business & Economics: July 2007 Archives
Stephen Moore at the WSJ has a great interview with Charles Schwab -- I didn't know much about the man, but my respect for him has grown immensely.
Creating wealth is what Mr. Schwab has come to regard as his "life's pursuit." He's accomplished that not just for himself--his stake in the company is estimated at $4 billion--but also for the millions of small investors who first came to be owner-capitalists by opening a Schwab account. So who better to discuss the future of financial markets and investing than the man who revolutionized the brokerage business? ...I ask him what he means by his favorite term, "democratic capitalism." He replies that the stock market today is "an open tent for anybody to come into." Ever the salesman, he adds: "For as little as a thousand dollars, you can open an account at Schwab. I mean, it's not a big barrier to entry."
Mr. Schwab pioneered the use of the Internet and helped create the concept of the online brokerage firm. This innovation has enabled investors to behave like informed consumers by leisurely shopping around online for mutual funds tailored to their particular financial circumstances.
It wasn't always like this. When Mr. Schwab started his firm after working in insurance, banking and financial consulting, the mutual fund industry was just getting off the ground. "There were a few high-load mutual funds that charged a 9% sales load" (or fee) he recalls, shaking his head. "The investor had a huge cost to get in and out and faced a big spread between the bid and the ask [price]. There were big commissions on the top of that, to boot. There was all kinds of friction in the system to prevent small guys from investing."
Mr. Schwab sweat those transaction costs out of the process so that even small traders could have a go at it. Brokers have become "commoditized" agents, he likes to say. Schwab's fees on its money-market funds are as low as 0.4% and they keep shrinking.
Mr. Schwab and others like him have done more to improve the quality of life around the world than the United Nations could ever dream of. Perhaps only Norman Borlaug stands taller than the financial wizards who make modern prosperity possible.
Farecast attempts to forecast airline ticket prices for various routes and suggests when you should buy and when you should wait.
What we really need, though, is for tickets to be fully transferable between passengers so that a secondary market can develop and smooth out prices for consumers.
Via reader JV, another cool engineering project in the Emirates -- this time plans for a futuristic mountain resort. I'd imagine most of these plans, as neat as they are, never get off the drawing board. Still, it would be fun to have a few billion dollars and dream these projects up....
I give President Bush and the Congress a hard time for their mistakes, but no one can dispute that they've managed -- on purpose or through neglect -- to stimulate a booming economy the likes of which we haven't seen for decades. Tax cuts and reduced regulations have been instrumental, and I hope our next president knows enough not to mess with success.
Smarter people tend to earn more money but also tend to spend more than less smart people.
Zagorsky's subjects earned an average of $234 to $616 more per year for each added IQ point, meaning someone with an IQ of 120 (top 10%) made $4,680 to $12,320 more than those crowded in the middle of the bell curve with an IQ of about 100. ...Zagorsky adjusted for outside factors that affect wealth, such as education, divorce, inheritance, smoking and psychological well-being (yes, people with high self-esteem and a sense of control earn more) and, to his surprise, found:
* While those with above-average IQs were three times more likely to have a high income as those with below-average IQs, they were only 1.2 times more likely to have a high net worth. "Simply put, there are few individuals with below-average IQ scores who have high income, but there are relatively large numbers (of those with below-average IQs) who are wealthy," he wrote.
* No IQ group had built up "a significant financial cushion." The median baby boomer's wealth equaled 18.6 months of income, while the highest-scoring group, those with an IQ of 125 or above, had little more than two years of income saved.
* Subjects with a 105 IQ had the same median income as those with a 110 IQ but had a greater net worth: $83,918 compared with $71,445.
It seems likely to me that whatever mental threshold people set that determines how much they spend is independent of intelligence. If a person's brain says "stop spending, we've only got $x left" it doesn't really matter how fast the cash comes in, it goes out just as fast. Cash-flow is high, but net wealth hovers around $x.
Additionally, smart people might believe that their intelligence is an inexhaustible asset and that they can spend more money than an average person -- they're so smart, it will be easy to earn more!
My Money Blog has a great analysis of the subprime mortgage meltdown that puts most of the blame squarely where it belongs: on the borrowers, not the lenders. (It's based on this WSJ letter about a family losing their home.)
Take Ms. April Williams, who is the main character interviewed for this story and also featured in the box to the right.“This has stripped us of our whole pride,†says April Williams, 47 years old, who has until August to pay off her mortgage or vacate the two-story Colonial at 5170, where she and her husband have lived for 11 years. “There’s going to be no people left in Detroit if they keep doing this to them.â€They did this to them? Let’s see here - they have an unstable job, but still decide to purchase stainless-steel appliances, custom tile, a new bay window, central air-conditioning, a backyard koi pond… and is that a $50,000 Lincoln Navigator luxury SUV parked in her driveway??
For this specific situation, I feel like both sides are in many ways getting their just desserts. Borrowers like Ms. Williams were greedy, bought more toys than they could afford, and now have to deal with the penalties. Their lenders were also greedy in extending them so much undeserved credit, and I’m sure will be losing money in the event of a foreclosure.
The power to borrow can be used for good or for evil. Our modern economy would be impossible without it, but many people either never learn to borrow responsibly or just aren't mentally capable of the feat. Our monetized society is far more complicated than the average hunter-gatherer brain can comprehend, so it's no surprise than some people can't handle it.
Ever wonder when the best time is to buy a cordless phone or a shrub? Check out Consumer Report's sale calendar to see what items tend to be on sale in which months. It's only a rough guide, but I plan to keep it in mind when I'm going to make a major purchase.
They also add:
Some other tips that don’t fit neatly into the calendar:* Airline tickets tend to be least expensive on Wednesday mornings because that’s when airlines try to fill unsold seats on flights for the following week to 10 days.
* CDs and DVDs generally come out on Tuesdays and might be on sale for the first one to three weeks.
* Jewelry sales are common, except around Valentine’s Day and the DecÂember holidays. So plan to buy early or hope that your beloved will agree to settle for an IOU.
(HT: Sound Mind Investing Blog.)
