Monday, January 29, 2007

College students: get good at Excel and Powerpoint

If you're in college and looking to climb your way up the corporate ladder when you graduate, I have one small piece of advice that is yet another way to set yourself apart from the pack: learn MS Excel and PowerPoint inside-out.

When you start your first job, you're not going to be given a ton of responsibility. But, your goal should be to get noticed for how well you can do what you are asked to do. If a manger asks you to put together a spreadsheet or a presentation for them, you don't want it to take you three days and have it come out looking like a piece of junk.

It's easy not to pick these things up in college. I know presentations in school are often done in a group format, and the group will often settle on the Excel or PowerPoint expert to do up the spreadsheet and the presentation. In the short run, that's a nice way to do well on the project, but in the long run, if you are never that expert, you might go through college without learning what are without a doubt two of the biggest skills a new college grad can have.

A student with a business degree will have more opportunities in their first year to impress a boss with a well put-together presentation (deck, slideshow, or whatever else you might call it) than with their knowledge of Michael Porter's 5 Forces.

I admit this is low-level stuff, but this is a piece of advice I wish someone would have given me in college when there were so many learning resources around me.

I'm not saying you fall asleep in your competitive strategy class, but don't expect the CEO to ask your opinion on which markets to enter during your first year working at a Fortune 500 company.

Chances are if you make a name for yourself as someone good with these programs, many of the more senior workers who never learned how to use them properly will come to you to ask for your assistance. You will be seen as smart and competent, and you can get to know people you might otherwise not have come in contact with.

I'm not going to go over all of the things you need to know. You can read about those in a how-to book, or learn about them in any class worth its salt.

A few things I believe would set you apart in excel would be: using the TABLE function, using pivot tables, creating custom charts to standardize the way you show pie/line graphs (if your company does not already have a standard), learning how to get quick with keyboard shortcuts (quick tip on this: go to Wall Street Training's website and download the WST macros as well as the excel shortcuts pdf file), being able to create and format financial statements, mastering print settings (such as rows to repeat at top, set print area etc.) so your work looks good when you show it to someone, and using VLOOKUP/HLOOKUP. This is not an exhaustive list but a place for you to start.

When it comes to powerpoint, I'd say some of the key things are learning formatting, proper spacing for bullets and heights for letters (there's a lot more to this than you would think), standardizing layouts/templates, using the align functions to make sure pictures/shapes are perfectly lined up, getting colors perfect (a neat tool I like here is Color Cop which is free), pasting in tables etc. from excel, and in general just creating simple, pleasing formats. For practice, look for powerpoint presentations that may be posted on company websites and see if you can duplicate them from scratch. If you're going into finance, pay specific attention to the investor relations websites of public companies for good examples.

None of the above applies to anyone in visual/graphic arts. The kinds of presentations you'll create in these areas are likely much different from general business presentations.

If you cant figure out how to do something in MS office products, remember GOOGLE IS YOUR FRIEND. You can just google pretty much anything and find an answer very quickly. For example, google "how to shade every other row Excel 2007" and look at how many answers/tutorials you find.

If you really want to get fancy, you can also check out The Visual Display of Quantitative Information by Tufte. This is an intensive study on how human beings process data, and the best way to present it in a visual format. It is very theoretical, but I highly recommend reading the book and studying it a little because people often create ridiculous charts for no reason when something simpler and more elegant would do a better job of conveying a message. The book is not specific to Excel, but you can definitely use the info in it to help you to create better looking and more informative charts, graphs, and data tables in Excel.

For what I think is a great take on big picture PowerPoint theory, check out Guy Kawasaki's 10/20/30 rule of PowerPoint. Of course, you're often at your boss's whim when putting together a PowerPoint presentation, but I think Guy makes some great points about how to put together a great presentation. I'm getting a bit off-topic here, but he also wrote a post about how to get a standing ovation when you make a presentation. If you have the ambition and the nerve... try for a standing ovation during your next presentation.

Anyway, just my thoughts on a couple of high-value skills college students sometimes overlook.


HYIPS Are Scams

I recently got an innocent-looking comment on one of my posts, and I made the mistake of approving it without checking out the website the person's name linked to. Turns out it was a "how to be a millionaire" blog (yes, another millionaire) and the guy was hyping something I had never heard of before- HYIPs, or high-yield investment programs.

I don't even know where to begin with these. The people who hype stocks all day are at least operating within the bounds of the law. HYIPS are nothing more than fradulent ponzi schemes. There is a great writeup on HYIP scams over at Quatloos, the "cyber museum of scams and frauds."

Basically HYIPs say they will return something like 1% PER DAY on an investment. They tell you that you need to pool your money with other HYIP investors, and your returns will be amazing. Lured in by the promise of easy cash, you send funds to these jokers, they make off with it, and you're left with nothing.

There are so many scams out there, and this one shouldn't be too hard to detect. First of all, any "guaranteed return" above that offered by US Treasury bills (currently around a 5% annual yield) should be looked at with extreme skepticism. Second of all, a simple web search for "HYIP" instantly reveals that they are, in fact, scams. No matter how well people try to dress them up, just remember that these things are just Ponzi schemes.

Take it from someone who has worked for a few Wall Street/financial firms, dealt with very rich people, and lived to tell the tale: there is no "magic bullet." There is no secret investment that rich people have access to that allows them to make a ton of money with no risk. Rich people get rich by having high paying professional jobs, starting their own businesses, inheriting money, buying the right piece of land/stock at the right time, writing best-selling novels, winning the lottery, etc... all of the other ways you already know about. You aren't going to read about the magic solution online. You definitely aren't going to read about the secret on a blog.

Saturday, January 27, 2007

The Investment Banker and the Fisherman

I recently read this story about the investment banker and the fisherman on

I am not worried about copyright violations because this is one of those "author unknown" stories, so I will just reprint it here.

"The American investment banker was at the pier of a small coastal Mexican village when a small boat with just one fisherman docked. Inside the small boat were several large yellow fin tuna. The American complimented the Mexican on the quality of his fish and asked how long it took to catch them.

The Mexican replied, "only a little while."

The American then asked, "Why don't you stay out longer and catch more fish?"

The Mexican replied, "I have enough fish to support my family's immediate needs."

The American then asked, "But what do you do with the rest of your time?"

The Mexican fisherman said, "I sleep late, fish a little, play with my children, take siesta with my wife, Maria, and stroll into the village each evening where I sip wine and play guitar with my amigos. I have a full and busy life."

The American scoffed, "I am a Harvard MBA and could help you. You should spend more time fishing and with the proceeds, buy a bigger boat. With the proceeds from the bigger boat you could buy several boats. Eventually you would have a fleet of fishing boats. Instead of selling your catch to a middleman you would sell directly to the processor, eventually opening your own cannery. You would control the product, processing and distribution. You would need to leave this small coastal fishing village and move to Mexico City, then LA, and eventually NYC where you will run your expanding enterprise."

The Mexican fisherman asked, "But, how long will this all take?"

To which the American replied, "fifteen to twenty years."

"But what then?"

The American laughed and said, "That's the best part. When the time is right, you would announce an IPO and sell your company stock to the public and become very rich. You would make millions."

"Millions . . . then what?"

The American said, "Then you would retire, move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siesta with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos.""

Update on 401(k) Rollover

I received an update on my 401(k) rollover today, and it was not great news. Turns out I forgot to fill out one section of my rollover application. They sent that page back to me highlighting where I was supposed to sign.

I think the problem is with their instructions. They actually sent me a form letter that had "forgot to sign section X even though you said you are married" as one of the possible mistakes I made, and that box was checked. Apparently there are about 5 common errors people typically make when filling out this document, and I made one of the 5. It made me wonder: why don't they make it clear that you need to fill out that section if you are married? I guess they find it easier to just have a form letter ready for when you make that mistake.

Anyway, I filled it in promptly and I have it wedged behind the coathanger inside my door (where I keep all the envelopes I intend to mail because it is right in my face as a reminder when I go out). I will mail it out soon. I hope to hear back in another week or so from them. They aren't exactly quick on the turnaround.

When I receive the check from them (around $15k), I will just put it into my new employer's account using the exact same allocation I currently use, so it doesn't throw my percentages off. Then I can forget about it, and I will officially have one less account to worry about!

Working Long Hours

Due to a number of reasons, I had an extremely long, stressful week last week and will likely be having another one next week and possibly the week after.

This week involved waking up at 6am, getting to work around 7:30, working until 6:30, and getting home around 8 or so. One night I didn't get home until 11:30 due to a dinner I had to attend after work. We went to one of the fanciest restaurants in Manhattan with one of our business partners. The bill came out to over $400 a person (I did not have to pay). Unfortunately, at 2am that night I vomited up about $350 worth of the food, but that was probably a good thing.

And I was busy all day at work. I didn't have a chance to catch my breath, and I actually fell behind on a couple of things.

I don't love my work. I like the field I work in, but my current job is definitely not what I want to be doing for the rest of my life. I spent about 65 hours either working or commuting to work this week.

On the local NYC news last night, they were interviewing guys who worked outside. It has been bitter cold this week, with temperatures falling below 0 degrees farenheit. The reporter asked a construction worker "Are you working outside the whole day today?"

He replied "Yep! All day! I'll be out here seven hours!"

I can't imagine what it would be like to work seven hour days. I know a few people who work construction and they leave at the same time as me in the morning, but they are often home from work at 3:00 or 3:30 in the afternoon. This gives them a good 4 hours of extra free time EVERY DAY compared to what I get. This means they actually see daylight in the winter, when it is always dark before I leave work. It means, assuming they go to bed at 10 or 11 pm like I do, that they have seven or eight hours of free time every day, where I only end up with three or four. And during those three or four hours, I usually have some chores to take care of. So I really only get 2 hours to myself every day.

Of course, I am a lot more physically comfortable in a heated office all day, so that's one of the tradeoffs. I don't mean to say those guys have it easy. I worked in construction for a while. It is a tough job. The hours, though, are fantastic.

I don't plan on doing this my entire life. For one, I hope to move someday and cut down my commute to work. For another, I'm going to try to go someplace that offers a more flexible work schedule. For another, I am going to refuse to work the long hours.

For now though, I have a decent enough plan. I'm young, I can work , and hopefully I will be able to save up enough to put down a decent down payment on a house so my monthly payment isn't a noose around my neck.

Saturday, January 20, 2007

Tim Russert Interviews Jim Cramer

Piggybacking on my last post, I caught another interesting interview with a famous money manager on TV tonight. Tim Russert had Jim Cramer on his show. Cramer was pushing his new book Jim Cramer's Mad Money: Watch TV, Get Rich.

I always like hearing about how successful people got their start doing what they did. Cramer, as it turns out, wanted to be a prosecutor, so he went to Harvard law school. When he got out of school, he was turned down for a job in Rudi Guliani's organization (at the time Guliani was a DA, or some other kind of state or city prosecutor- I don't remember). Feeling dejected, Cramer went to work for Goldman Sachs in sales and trading where he showed a flair for selling stocks to wealthy individuals, and made $750,000 in his first year. He was 28 or 29 years old at the time.

One thing that he said that struck me was he was getting out of a meeting to go to his sister's "prenuptual dinner." I am guessing that meant the rehearsal dinner for her wedding. A senior guy at Goldman pulled him aside as he was leaving and said "Make your decision right here. Are you a Goldman man?"

Cramer was a Goldman man, and he stayed at work, missing his sister's dinner.

I may be in the minority on this one, but I just don't think $750,000 a year is enough to pay me to take me away from my family. I like having dinner with my wife, and spending time with my brothers, sisters, and parents. There are many different ways to be rich. I consider myself a very rich person as far as family goes.

Anyway, Cramer had some other good thoughts on the markets. He said 100 people control $5 trillion dollars, and effectively control the stock market with it. I have mentioned the great concentration of wealth in this country on this blog before, and I have no doubt that Cramer's guess is in the ballpark. In the short run, these guys move stock prices.

In the long run, however, the underlying earnings power of the company is what will eventually show up in its stock market valuation. Even Cramer agreed with that.

Cramer closed the interview by saying that working for a company in most cases will not make you rich, and that he knows of no better legal way to get rich than investing in the stock market.

Before you get pumped up to transfer your savings over into your Schwab brokerage account, let me present the other side of that coin to you, my friends. The stock market is also a great, legal way to get poor if you end up making the wrong bets. When the 100 guys Cramer mentioned go sour on a stock, it drops 50% in a few weeks and you sell, you will feel pain if you have a considerable portion of your net worth invested in that stock.

One more piece of info to think about. Cramer does not make his money from buying and selling stocks. He makes it from advising other people what stocks to buy and sell. He is selling advice, and he is selling it to anyone and everyone who will buy it. Do you really think it gives you an advantage to get Cramer's stock tips?

I don't.

Tuesday, January 16, 2007

CNBC: From Great to Ridiculous - Buffett to Ratigan

I had the day off for Martin Luther King day yesterday and was alone in the house so after doing a few chores and things, I put the TV on to see if anything would catch my interest.

CNBC had a documentary on "the history of video games," which I really enjoyed. I played a ton of video games growing up, starting with the Oddysey system and the Commodore 64 when I was a kid. It was interesting to see the business machinations behind the consoles I spent hours on.

One of the commercials advertised a Liz Claman (the host of CNBC's Morning Call ) interview with Warren Buffett coming up at 7pm. As many of you know, I'm a Buffett fan, so I made a mental note to check out the program at that time.

Seven o'clock rolled around and I parked myself in front of CNBC in time to watch the program. It was a pretty good show. Liz basically hung out with Buffett for a day, he showed her around Omaha, Nebraska, and they talked about his life and his philosophy.

The focus of the show seemed to be more on his lifestyle than on his investment guidelines, which was somewhat disappointing to me. He is a billionaire, but he lives a fairly simple life. He likes to go home after work and watch some Nebraska football. He doesn't attend many social events. He doesn't have huge sprawling estates etc... It was all stuff I had heard about before, but it was interesting to see him talking about it in person.

If you were looking for any insights from the program, you were looking in the wrong place. Buffett basically said he looks for businesses with four characteristics: 1) He understands them 2) The management team is competent and ethical 3) They have a sustainable competitive advantage and 4) They are selling at the right price.

For anyone who's read any of the Buffett books, none of this stuff should come as a surprise. The question I'm waiting for someone to answer is EXACTLY how Buffett puts a price on a stock. I know he uses DCF models, but I don't know what his inputs look like. I don't know what he uses as a discount rate, which cash flows he models etc... I know he doesn't subscribe to modern portfolio theory, so he ignores Beta and the CAPM and all of that stuff, but I would basically like to see him price a business. As far as I know, nobody has ever gotten into that level of detail with him.

Anyway, it was a great show full of good old fashioned investing common sense.

That's why I was so shocked when I saw the piece of crap show they put on after it.

I had never seen this particular program before, but the contrast between the Buffett interview and Fast Money, hosted by the god-awful Dylan Ratigan was incredible. Here's how Fast Money describes itself on the CNBC Web site:

"Faster than a New York minute, Dylan Ratigan and the "Fast Money" traders give you the information normally reserved for the Wall Street trading floor, enabling you to make decisions that can make you money. The "Fast Money" five gives you the news, as only the savviest traders can, with an angle that you won’t see until tomorrow’s papers.

Dylan Ratigan serves as "the Commissioner" of Fast Money, orchestrating the dialogue between the four Wall Street traders:
Guy Adami, Eric Bolling, Jeff Macke and Tim Strazzini."

This is without a doubt the worst show I have ever seen on CNBC. Even worse than John McEnroe's show. There is something inherently unlikeable about Mr. Ratigan, and I couldn't stand him since the first time I saw him on the channel. I forget when he joined, but im going to guess it was within the past 8 years or so. I can't point to anything in specific, but watch him for 5 minutes and you'll see what I mean.

He surrounds himself with four of these masters of the universe type guys and they all try to talk about trading angles in a back and forth, shoot from the hip style with upbeat rock music playing in the background. The music is supposed to pump you up and get you trading, I assume. The style is kind of like Fox's NFL pregame show with Terry Bradshaw and company, but it is extremely cheesey.

The angle of this particular show was something like "how to trade global conflict and fear." Talk about a ridiculous premise! The guys went around talking about stock investments they would make if the US went to war with Iran, or if the Avian flu broke out. Every minute or so "the Commissioner" Ratigan would butt in and say "BUT HOW DO I TRADE THIS?" That was his contribution, as commissioner. "HOW DO I TRADE THIS?"

Investing is not a game. I am sure these guys got plenty of amateur investors fired up to go buy whover makes Tamiflu, or the OIL exchange-traded fund, but they did not help any actual investors. In fact, I think this show probably does more harm than good.

Honestly, a highschool kid could have made the recommendations these guys made.

One of them in particular, Tim Stazzini, reminded me of every single wall street guy I've ever met and hated in my 7 years working in the finance business. He was smug, he was overconfident, and none of what he said would have been any good to anyone.

On the other end of the spectrum, the guy I probably liked the most was Eric Bolling. Despite the fact that he's a market technician (a practice I think should be outlawed), he made some actual sense when he spoke. I disagreed with his use of charts to predict future stock price movements, but apart from that he gave some reasoned arguments.

I really hope CNBC takes this show off of the air. It's an obvious attempt to imitate the success of Jim Cramer's Mad Money program, except it's not nearly as entertaining as Mad Money. For the record I watch Mad Money every now and then for some info and entertainment, but I wouldn't wager a New York nickel on a stock based on Jim Cramer's recommendation alone.

If you want to grow and protect your savings, read an article about Warren Buffett. If you want to give your commissions to your broker, follow the crowd, lose money on your investments, and waste your time, by all means watch "Fast Money" with The Rat- Dylan Ratigan.

Friday, January 12, 2007

My Unofficial Market Barometer

I have long said that I don't try to forecast the near-term direction of the market. However, I do have an unofficial market barometer, and that barometer has been showing signs of activity lately. The needle has begun to move.

This barometer is my brother. The last time we had a market top, he was generally considered the stock picking expert in the family. His picks, the companies he followed, and how much he made last week were all subjects of conversation when we would get together for a family dinner every few weeks or so.

Well, his picks are coming back in vogue. It was tech in 1999, but this time it is smallcap stocks, and he is making a killing.

If history is a guide, I should start hearing stock picks from cab drivers and my barber within the next few weeks, and that, for you traders out there, will be a full-on sell signal.

For you investors (ie smart people), I recommend you keep your ear to the ground, but don't change your course. Continue to sock away your retirement savings, be sure you are staying within your targeted allocations, and you will continue to do fine. If the bottom falls out, by all means, don't panic. Just buy the stocks my barber is frantically selling.

Tuesday, January 9, 2007

Boring Financial Advice

I've been getting sick of a few pieces of advice I keep hearing. This advice has been repeated so often that it is starting to make me physically sick. You don't need to know anything to repeat this advice, yet people act like geniuses when they throw these little nuggets out there. Suze Orman, I'm talking to you. Two bit hack bloggers, I'm talking to you.

The magazines, websites and TV shows are bad, but I think bloggers are the biggest offenders.

Anyway, in no particular order, here are some of the boring pieces of hackneyed financial advice everybody and his mother thinks they are qualified to give out:

1) Be sure to contribute enough to your company's 401(k) plan so your company matches your contribution. If you don't, you're giving away free money.


Please, financial people! For the love of all that is good, stop repeating this sentence!

2) Buy things that are on sale.

You mean... pay less for something than it normally costs?? You, my friend, are a personal finance maven. I will surely become A MILLIONAIRE now.

3) Don't buy X. X being some incredibly cheap thing that makes no difference in your budget, but the blogger multiplies X by some huge number and shows how it ends up costing you $2,000 OVER YOUR LIFETIME if it was invested at some high rate.

I found the perfect illustration of number 4 while looking at some different personal finance blogs last week. I pulled up this one blog at This site’s tagline is “Information for people who want to be millionaires.”

What a great premise for a site. Information for people who want to be millionaires. I figured there would be some great stuff there, but instead, I was met with this post (I kid you not), entitled Say No to Soda. In your quest to become a millionaire, the author suggests that you stop drinking soda because of how much its costs. The following is a direct quote from this post, with no emphasis added. For some reason his apostrophes show up as a bunch of gobbledygook symbols:

“How much is that pop costing you? Let’s say you get one twelve pack a week, plus buy another 4 soda’s from gas stations or vending machines. That’s about $8 a week on pop, or $416 a year, or $4160 every decade. It adds up to be a lot over time. Instead drink nice cold healthy and delicious water.”

I am sure if you could have asked Andrew Carnegie what contributed most to his great wealth, he would probably say it was the fact that he drank water instead of pop.

This is completely useless information! First of all, who buys 16 sodas a week?
Second of all, we already know how much soda costs. The price is often advertised on the shelf, printed on the box, it shows up at the cash register, and you can even see it on your credit card statement if you use your card to pay for it. Where is the information here?

People already know that they buy stuff that costs money. It is no big secret that not buying something lets you avoid paying for it. I can’t count the number of similar blog posts I’ve seen. “Don’t subscribe to magazines you don’t read, because you could save the subscription fees. Don’t buy that expensive new TV because you could save thousands of dollars.”

Are we really that stupid? Do we need to be told that not buying something will save us money?

I looked around the site to find some description of the author… maybe something that would qualify him to give advice to millionaires. A college degree, a million dollars, a successful business, rich parents… anything that would give him some credibility. However, there was nothing. Not even a brief biography. For all I know this could be a 12 year old kid who got pumped up after reading a copy of “The Automatic Millionaire” or something.

4) The budgeting post. Write down what you spend for a month, then make a budget.

You can see a good example of this budgeting advice in this post, entitled staying afloat financially in college. Sorry to pick on that one blogger but man, the stuff he is putting out is just sad.

If anyone out there is tempted to write an article or a blog post about anything in the list above, please do me a favor... don't.

Friday, January 5, 2007

Reader Reactions to My "Get This Man Out of Debt" Post

I received a ton of feedback on my previous post about a New Yorker article that profiled a man with a low paying job and a big chunk of debt, and it was humbling.

This is what I love about the Internet. It is an amazing forum for sharing ideas. A large group thinking about a problem has the potential to come up with so many more ideas than a single person like me ever could by myself. To everyone who responded: thank you.

I couldn't address each comment individually so I figured I would use this post to speak to some of them.

I really liked some of the additional ideas you had that could save that guy money. Someone said he should have a pay-as-you-go cellphone plan instead of a $60 a month plan. This would be a great idea. I got along without a cellphone at all while I was in grad school, so I know it can be done. Someone else suggested he bring cold cut sandwiches to work every day, another great idea. Another said he should get a $76 monthly unlimited metrocard instead of using the pay per ride cards. This would give him significant savings each month.

Others pointed out how expensive it is to live in NYC. I don't disagree with that at all, and it is one of the reasons I might not be here forever. It was something the article also made very clear.

Some people decided to personally attack me. I was very surprised to read about how I am a "rich snob" this morning as I was at work eating the peanut butter and jelly sandwich I brought with me. That's right. I bring my lunch with me to work. I am saving to buy a house to put my children in when I have them one day, so I can go without expensive lunches for the time being. I have been bringing my own lunches in everywhere I have worked and gone to school since the first grade.

Some people suggested I was the lucky recipient of a free ticket, being raised in the suburbs by rich parents and never facing the oppression of ghetto life. They said I could not know what it was like to be raised by immigrant parents.

The last point struck me the most. My parents are both immigrants, and they aren't wealthy immigrants. They were both farmers who came over here in their 20s with high school level education or below. Both got civil service jobs to raise their five kids. Money was tight and if anything, that taught me better financial habits than if I had been raised among free-spending rich folks.

The line of thinking that disturbed the most can be summed up in this comment I received:

"most of his other problems and mistakes seem to be, or have been, out of his control. I'll give two exampels. Firstly yes he got his girlfriend pregnant, but how do you know that he didn't take utmost precautions but the contraception failed? Hardly his fault if that happened, unless you're suggesting he abstain from sex and relationships just because he is poor?"

This really puzzles me. As far as I know, there is only one way for a guy to get a girl pregnant, and that way is always his fault. I could push this argument even further, but it would become wildly off topic.

I didn't talk about my plan to turn around his finances as a way of taking a cheap shot at this guy. I admire the fact that despite all of the poor choices he made and the situation he is in, he hasn't gone off the deep end. I admire the fact that he gets up early every day to make that long trip in to work. I used to ride the subways at that hour to get to a job that started at 6 am. My trip took an hour and a half so I had to leave my house at 4:30. You can encounter some dangerous situations at 4:30 am in different parts of NYC.

But I have to say, I'm not as sympathetic to him as the person who wrote that article seemed to be. The system is not entirely to blame for his situation. The system didn't drop out of high school. The system did not have sex with his girlfriend for him, and the system did not give him that debt. Those were things he chose to do.

What I do hope is that someone in or near his situation reads this and recognizes that they are headed down the wrong path too. In the best of all worlds, that person would read my (admittedly imperfect) plan, the comments from the readers, and use that information to change course.

I don't mean to imply that society should abandon this guy and that it is his sole responsibility to get himself out of poverty. It makes me sick to see the amount of money some people walk around with while others wallow. I have mentioned before how the gap between the rich and poor is getting to be extreme. It is definitely important to make donations to the poor, but it is even better if you can help someone further along the path to self-sufficiency.

Thanks again to everyone who read the post and gave some feedback. I will sign off with my final thought: it is not easy to become rich, but it is very easy to become poor.

Watch your wallet!

Thursday, January 4, 2007

A Plan for Getting a Poor Man Back on His Feet

I recently came across a series of interesting pieces on the cost of living in NYC in New York Magazine. I don't normally read New York Magazine because its target audience is pretentious, holier-than-thou snobs, but it occasionally has some interesting articles.

The one that caught my attention was an article about a 31-year-old guy who lives in NYC and makes $338 a week as a security guard. I suggest you go and read this article before you read further.

OK, keep reading it.

OK, I'm going to assume you've read it now. Do you feel sorry for this guy? I sort of did. I'm not a cold hearted capitalist, so I do feel bad for him. The guy does not have things easy. But in a way, didn't he bring it on himself? I think we can learn a ton from the mistakes he made. What did he do wrong?

1) Dropped out of high school in his senior year, presumably to sell drugs

He tried this for a year or two, then moved out to the sticks and started working on a community college degree. I think this was a fantastic move. Get yourself completely away from the bad situation, live the hermit lifestyle for a while, concentrate on your studies, set yourself up for a good job... But then he made another huge mistake.

2) "Near the end of his freshman year, he learned that his girlfriend in the Bronx was pregnant with his baby. Soon, she and the baby and her two daughters from a previous marriage moved upstate to be with him."

I felt the need to quote that. He LEARNED that his girlfriend in the Bronx was pregnant with his baby. Why didn't they say "he took trips down into the city, and on one of those trips, he got a girl pregnant?" This was a choice he made.

3) He took on $4,500 worth of credit card debt and $6,600 of student loan debt

Another bad choice.

There were some other mistakes he made, but I won't get into them here because they were minor in the grand scheme of things. OK, so giant mistakes aside, how could this guy fix his problems (In theory. I don't know everything about him but I will make some educated guesses)?

The first thing he should do is to drastically cut back on his spending. He blew $20 at a movie that he slept through on payday. He could have bought 20 hot dogs with that kind of money. He needs to take a year or two and live like a monk. There is simply no other way. He has had his fun, but now its monk time. This means going to work, spending as little as humanly possible, and coming home to read a book from the library and go to sleep. No spoiling his kids (when he gets out of debt they will thank him for this), no movies, no extras, just the ascetic lifestyle.

By doing this, he should be able to save $50 every two weeks, conservatively, and pay that towards his credit card bill. He's not paying rent. He can probably knock the balance down by about $1,250 in a year that way.

Second, he needs to look for a higher paying job. I know for a fact that there are union doorman jobs in Manhattan that will pay him quite a bit more than he makes right now. Those jobs will give him benefits, vacation, tips around the holidays, and a pension. If not, he can take other civil service tests such as those for becoming a court officer, possibly a policeman, or some other similar kind of city job.

Third, he should open up a new credit card with a zero interest balance transfer option, assuming they will let him do this. He should transfer the balance over, but immediately cut up the card.

If he can't get a new credit card, he needs to call his credit card companies and ask for a break, whether it be in the interest rate he is being charged, the amount he owes, forgiving past fees/interest etc... He needs to be persistent, but not antagonistic when he does this. He needs to explain that he intends to pay it off. This $4,500 in credit card debt could really spiral out of control if he doesn't focus on containing it.

Fourth, he should try to get a second job, part time. No offense to this guy, but he only works 8 hours a day, and he can easily be doing 11 hour days like most professionals put in. He could get a job stocking shelves, bagging groceries, painting houses, or something similar for 8 hours on Saturdays (if that's his day off). This could bring him an additional $50 or more per week, or about $2,500 in a year. He should put it all towards his credit card debt as he makes it, or the temptation to spend it will be too great.

In a year and a half, if he focuses, he can pay off the credit card debt. By that time, assuming he has gotten a new job, he will be making enough to pay off the student loan in another 1-2 years. Three years from now, he could conceivably be debt free. If he does everything right, gets a real second job, and works even more than I assumed, he could be out of debt even faster.

I know you're thinking a life like that takes its toll. Speaking as someone who works 55-60 hours a week (which is more than the 48 hours a week he would be working under my plan), I can assure you it does take its toll. But you know what? When you're working for something, when you're making progress, and when your situation is improving, you feel like it is worth it.

So when he pays off his debt, what does he do then? He can do one of two things . Note I am assuming it takes him 5 years to get out of debt and he will be 36 years old at that point. This is the longest I think it should take him. I think he could do it in 3.5 years if he really applied himself.

The first thing he could do is to continue working at the "better" job that he has found, assuming it is stable and will provide for him and his kids.

If that job isn't enough, he can start taking night classes and get his degree, or learn a trade.

I know you might think my projections are overly optimistic, but this guy needs a plan, and this is the best plan I can think of, knowing what I know from having read the article.

I do not know if he has a drug problem that would impede his job performance. I do not know if he drinks. I do not know if he does anything else that would get in the way, but I hope he doesn't.

He actually has a lot more hope of escaping poverty than most poor people.

I would love to hear if anyone else has more thoughts on this plan, so please, I invite you to comment. Have you been in his situation? What would you have him do?

Wednesday, January 3, 2007

Credit Default Swaps

One interesting development in the financial markets that has really gathered steam over the past few years is the use of credit default swaps (Wikipedia), or CDS for short.

CDS are basically a form of insurance against a company defaulting on its bonds. Say you lend $1,000 to a company and it agrees to pay you $5 a year for 10 years in exchange for the use of your $1,000. At the end of year 10, the company agrees to pay you your original $1,000 back. This is the way a typical bond works.

However, what if you are unsure as to the ability of this company to pay you the $1,000 back? What if the company is on shaky financial ground? From where I stand, you can do three things.
1) Don't lend the company the $1,000.
2) Charge the company a higher interest rate, say 10%. However, this is still no guarantee.
3) Buy a CDS.

A credit default swap is basically a guarantee that someone else will pay you back the $1,000 if the company defaults on the debt. Let's say for the sake of argument that you can buy a CDS from Banco Gigante for $1 on your $1,000 bond. You pay Banco Gigante $1, you both sign this agreement, and if the company ever misses an interest or principal payment, Banco Gigante will give you your $1,000 back and take the bond off of your hands. If the company never defaults on the bond, Banco Gigante keeps the $1.

Of course there's also the issue of Banco Gigante's creditworthiness. What if Banco Gigante sold 10 million of these swaps, and ends up on the hook to pay out $1 billion when the company defaults? (rhetorical question for you to think about on your own time)

The existence and widespread use of CDS as insurance against bond defaults makes for even more ways for hedge funds and institutional investors to make bets in the market. In general, the price of this CDS insurance goes up as the perceived credit risk of the company goes up. For example, if people thought the company mentioned above was going to be the target of a leveraged buyout, which would add significantly more debt to its balance sheet and thereby make it less likely to be able to pay you your $1,000 back, the price of its CDS might go up to $5 or $10.

Wikipedia points to another article about some fund managers have been able to make risk free returns using a CDS-based strategy.

News stories have been reporting on CDS more and more as people have gotten more familiar with them. For example, this story from Bloomberg about the firing of Home Depot CEO Robert Nardelli today talks about how "The perceived risk of owning Home Depot's bonds rose after the announcement. Credit-default swaps based on $10 million of the company's bonds jumped 22 percent to $25,000, from $20,500 yesterday, according to data compiled by Credit Market Analysis in London. An increase in price indicates deterioration in the perception of credit quality; a decline suggests improvement."

As far as I know, there is currently no way for individual investors to play the CDS market, but I think they are definitely something worth knowing about.

Tuesday, January 2, 2007

My High FICO Score

So as part of our whole New Year planning kick, my wife and I looked up our FICO scores online yesterday and they were remarkably similar.

We started off by going to to get our free once-a-year credit reports to make sure we had no errors on our reports, that our identities hadn't been stolen, and in general to make sure that all was well in credit land.

Then we decided to pay the $8 each to get our FICO scores because, as I have mentioned before, we are hoping to buy a house within the next couple of years and we wanted to get a better idea of the kind of interest rates we would be looking at.

To my chagrin, she beat me with an amazing score of 798. I wasn’t too far behind at 782, but that didn’t keep her from doing a victory dance around our livingroom.

We both received the same congratulatory paragraph from Equifax:

“Your score is excellent, and a wide array of loans and credit cards will likely be available to you, often at attractive rates. It is unlikely that your credit application would be denied based on this score alone. The fact that you have received such a high score implies that you scored the maximum (or very near the maximum) possible points for many of the aspects that are evaluated by the FICO score. As such, you should not consider the factors discussed later in this analysis to be any serious flaws with your credit history. They simply indicate the few factors on which you did not score the absolute maximum possible points. And while the guidelines associated with the first few reasons may help you improve your score by a few points over time, you should already have a wide array of credit products available to you.”

A quick lowdown on FICO scores for the uninitiated: a FICO score is a credit score provided by a company called Equifax, and it is used to judge how risky it would be for someone to lend you money. Scores range from 300 to 850, with 300 being the biggest risk and 850 being the smallest risk. Someone with a score of 300 is less likely to repay their debts than someone with a score of 850. Lenders use this score to determine whether or not they will lend you money, and if they do, the rate they will charge you.

Generally, if you have a score of 720 or more, you will be able to get the lowest rates a lender offers on things like car loans and mortgages. Once you get below that general level, lenders identify you as a higher risk, and they will charge you higher interest rates to compensate them for the additional risk they are taking on by lending you money.

So how did we get such high scores?

We never missed any payments, for one. My wife and I both have a few credit cards, and we have never carried a balance on any of them, paying them off in full every month. This is due to the fact that we only used credit cards to purchase things we had the money to pay for. The other main accounts that showed up on our credit cards were our car loans. Neither of us ever missed a payment on those loans, and in fact we both paid off our loans early. Our cars are very modest sedans. In addition, she had a student loan that she paid off shortly after she left college. I have never taken on any student loans.

For another, we have high credit limits and low current balances on our cards, so our ratio of debt to available credit is very low.

What kept us from getting perfect scores of 850? The credit reporting agencies never disclose exactly how their models work, but they gave us some general negatives on our accounts.
My wife got these four nuggets at the end of her report:

1) The time since your most recent account opening is very recent

2) You have a relatively high number of accounts with balances

3) The length of time your accounts have been established is relatively short

4) The proportion of balances to credit limits (high credit) on your revolving/charge accounts is too high

I can explain number one. We recently got a new charge card that pays us frequent flyer miles. That negative should go away in a year or two.

Number two is kind of weird to me. She has 3 credit cards and two have very low balances on them.

Number three is the kick in the face that most people under the age of 30 will get. I think they are looking for you to have had cards/accounts open for 10 years or so.

Number four is a mistake, in my opinion. One of her credit cards (the one she shares with me) shows up as having a credit limit of $0, and we have about $100 charged to that account. I think (but am not sure) this is the reason why she is getting that red flag. Otherwise, her proportion of balances to credit limits is like 3%.

I also had four explanations for my score at the end of my report. #1-3 were the same as hers, but my fourth was “the length of time your revolving/charge accounts have been established is too short.”

Since we are already in the highest credit category, I am not worried about these small black marks against our credit record, and most of them will go away over time. If I was on the borderline, I would definitely try to get her #4 fixed. I don’t know why her credit limit would show up as zero for that one account when I know it is much higher, but it is not something I feel I need to waste my time on at this point.

Anyway, when we do our computations regarding how much house we can afford, knowing our credit scores makes us confident we can use the lowest advertised rates we see out there to make a decision.

There are a plethora of debt reduction books/websites/flyers/podcasts/videos/1800 numbers/interpretive dance troupes/television programs/seminars/booklets/pamphlets/radio shows/bobbleheads etc… etc… They all promise you methods to “improve your credit score fast” and other jibberish like that, but you don’t need them.

I have relied on one secret to keep my credit score high: I only bought what I could afford to buy. Tape that above your desk… “Only Buy What You Can Afford to Buy.” You don't need a flashy new car, you don't need brand new leather furniture with a built-in refrigerator, and you don't need a giant TV. The cheap stuff works just as good. If you have the money to get the big stuff, by all means do it, but don't borrow that money from your credit card company if you don't have it. You'll enter the debt spiral if you do.

Monday, January 1, 2007


Back in the 1980s I was a young child wearing short shorts, socks pulled up to my knees, and lighting ants on fire with a magnifying glass, but I vaguely remember hints of this big American obsession with Japanese management styles, and how America was falling behind in the world. If you’ve seen the movie Gung Ho (imdb), then you’ll have some idea of what I’m talking about. That whole era and the literature (Amazon) it produced focused on the old-fashioned, pre-PC, manufacturing-centric view of the business world. NBC put out this seminal work (wikipedia)related to the whole craze, if you’re interested.

While I don't discount everything that came from that school of thought, part of me just squirms when I read books that talk about dictating memos to your secretary, reading stock quotes off of a ticker tape and other old-fashioned workplace relics, and these references are hallmarks of books written about the Japanese management craze. By the way, the craze had sort of a predictable ending - despite all of our admiration for Japan, its economy peaked around 1989 and showed basically no growth for the next 13 years.

One interesting concept to come from that time that continues to be popular today, particularly as a part of six-sigma (wikipedia) training courses and things of that nature. This is the concept of Kaizen, (wikipedia) a Japanese word meaning “change for the better” or often thought about in English as “continuous improvement.”

What Kaizen basically stresses is that small improvements add up over time, and that workers should try to do things a little better today than they did yesterday.

This isn’t a revolutionary concept, but it was something that popped into my head while I was thinking about my 2007 goals, and how I might try to approach things a little differently when I go back to work tomorrow. Sometimes we tend to stagnate, and making a big change seems like a daunting proposition. Why not go for a bunch of small, steady changes over time? I think this is something you can do no matter where you work, or what your position is.

Maybe you can set up a macro to take a few steps out of a task you frequently run in Excel. Maybe you can cut out your morning recap of and instead use the time to plan out your day. Maybe you can get a file holder for your desk to keep more frequently used files within closer reach. Nothing huge, but just enough to be able to say that you have done things better today than you have yesterday.

Hopefully a focus on little improvements over time, Kaizen, will make you more valuable to your employer, and as a result, more highly compensated.