President Obama $3 Million IRA/401k Limit

Since I work in the financial industry when President Obama recently announced that he would cap the amount you could have in an IRA/401k plan to $3 million. The $3 million dollar amount was calculated by saying if you received a $205,000 annuity from the time you retire until you die how much money would be needed. However, there are a few problems with this calculation. First, as interest rates change the annuity required would also change. Second, as people live longer the amount required may substantially increase as people require more funds to live. This boneheaded proposal would only bring in $9 billion over 10 years which is not much given the budget is over $3 trillion. According to data from, Employee Benefit Research Institute as of 2011 only 0.03% of IRA accounts were greater than $3 million. By the end of 2012 .0041% of 401k accounts held more than $3 million.  

What is really insane is that this would hurt just regular people who save on an annual basis. Assume someone started an IRA with just $1. Then assume they invested $10,000 in their IRA every year for 45 years. Assuming they earned just 8% per year they would end up with $3.8 million. What also is forgotten is that required minimum distributions force people with an IRA/401k to take out distributions every year after a person reaches 70 1/2. The person is then taxed on that income at ordinary rates. So once Mitt Romney turns 70 ½ he will have a huge tax bill (he will pay ordinary income on all of that income as well-no capital gains).

Honestly, I don’t even know how this would be implemented. If someone had $2,999,999 million dollars and they get a $2 dividend check will you be denied $1? This truly is a confiscation of wealth. If people work hard and voluntary save their own hard earned money why should the government limit how much they can save?  

Larry Ellison and Billionaire Spending

As someone in the financial industry personal finance is something that is always interesting. If you are really interested in how even the rich can go poor I suggested Robert Frank’s “High Beta Rich” which has great stories of how even the top .01% can become the bottom 99% or even in some cases bankrupt. When I saw this story about Larry Ellison increasing his line of credit to $4.5 billion I began to wonder why he even has a line of credit.  Basically Ellison was using Oracle stock (company he founded) as collateral in order to pay for things he shouldn’t be buying (an island for example). According to Bloomberg Billionaires Index Ellison is worth around $38 billion. Larry Ellison is one of the highest paid CEO’s. For the past fiscal year Ellison made $96 million ($90.7 was due to stock option awards which few people actually know take years to get since they are actually restricted stock where an executive may have to wait 3 to 7 years even before they can cash out the options). Essentially 95% of the stock price is tied not the short term performance of Oracle but the long-term (3-7 year period) after the shares are awarded that matter. People forget the options Oracle gave Ellison could be worth less than the $90.7 quoted in the future if Oracle were to tank or not create shareholder wealth. According to this WSJ article Ellison between 2001 and 2010 made roughly $1.84 billion being the CEO of Oracle. If I do a performance chart of ORCL (Oracle) over the same period of time the stock was down close to 16%. Is Mr. Ellison overpaid?

It seems though that even though Larry Ellison is raking in the dough he is also spending a lot of it as well.  Usually people never change (even if they say they have). I found this great article published in 2006 from the SF Gate detailing Ellison’s ridicioulous spending  (even by billionaire standards). Phillip Simon who was Ellison’s accountant in 2002 told Ellison “I’m worried, Larry…I think it’s imperative that we start to budget and plan”. Apparently Ellison was living the really good life. He was spending $20 million on his “lifestyle”, $75 million on interest, $25 million on a villa in Japan, $194 million on a new yacht, $80 million on the American Cup and a random $12 million on UAD (which no one seems to know what it is).  He did build an insane $200 million Japanese style house. He is also charitable and wanted to increase the funding from $35 million to $100 million per year. This is all of course excluding the money he spent on Gulfstream and Cessna jets, cars (McLaren F1 car), Armani suits, and financing all these purchases by borrowing against his Oracle stock. I just hope Larry doesn’t one day face a margin call. Keep in mind at the time Ellison was worth closer to $17 billion. Not only was Ellison spending a lot but breaking one of the first rules of personal finance which is diversification. No one should have their net worth tied to one stock no matter how high quality it is since you never know what can happen in the future. Larry’s financial advisor was trying to diversify him out of Oracle stock however Ellison was increasing his ownership interest. 

Ellison started his company with only a dozen employees and had software that was being used by credit card companies, hotels, and airlines to process transactions. Now Oracle’s s software is used by over 70,000 government and commercial customers and has 115,000 employees.  Ellison was no whiz kid in school either. He left the University of Illinois during finals and ended up not taking them. He in fact remembers one exam where he just sat for an hour because he knew he had to spend 3 hours answering the questions. Larry did end up taking some physics classes at the University of Chicago which seem to interest him and lead him to actually lead him to computer programming. More of Larry’s story is told in the book “Softwar”.

Ellison basically came from nothing to build a business that earns billions of dollars per year. I admire this since he wasn’t given a business or just an inheritance to build it. Although, Ellison has built a successful business there are still laws of financial planning he has to follow like diversifying his stock, trying not to use Oracle stock as collateral, and not spend so much. I just hope that Ellison doesn’t end like other CEOs who financed themselves so much that they lost everything. 

The Koch Brothers: Inside Koch World (A Family History)

The Koch family is probably one of the most interesting families. Stories of money, power, and lawsuits have affected the whole family. I have covered the historical net worth of the Kochs brothers here.

 I first learned about Charles Koch after watching a celebration dinner for Dr. Walter E. Williams and was curious about who he was and when I found out he was it lead me to explore not only who Charles Koch is I realized there were four Koch brothers (Charles, David, William, and Fredrick). The easiest way to remember them is Charles likes to collect money, David (use to) collect women, William collects everything, and Frederick collects castles.

To understand who the Koch brothers are today we first have to understand where they came from. The brothers were the son of Fred Koch who created a better way of turning crude oil into gasoline. Koch then went to the Soviet Union and installed cracking units through the country. In 1940, Fred Koch created Wood River Oil and Refining Company and then acquired Rock Island Oil and Refining Company in 1946 which then turned into Koch Industries.

Growing up the Koch boys were all taught about hard work. Fred Koch didn’t want his sons to become country club bums. When Charles was only five and Frederick was seven the boys showed up to work to a former marine who was a groundskeeper. When asking for money David Koch remembers “If I wanted to go to the movies, I’d have to ask him for the 25 cents”. Growing up Fred Koch took his sons on trips to Africa and the Arctic Circle where they would hunt and fish. All the boys went to different schools growing up. Charles and William both went to Culver Military Academy in Indiana, Frederick went to Hackley School in New York, David went to Deerfield Academy in Massachusetts. Charles got busted for drinking on a train and was expelled from school. Brother David in this article describes his own brother as “a bad boy who turned good”.

In 1958 Charles, David, and William were enrolled at MIT earning engineering degrees.  Charles and David both earned master’s degrees in engineering while William earned a PhD in chemical engineering. Although William earned a PhD it took him eight years and he finished it in 1971. His dissertation was entitled  "Flow of light gases through the voids, on the surface, and in the solid of a microporous media" which ended up being 372 pages and the citation can be found here. While at MIT David and William were both on the basketball team. Charles, David, and William are all above 6’0 tall (David is 6’6, William is 6’5, and Charles is 6’3). David held the record for the most points scored in one game until 2009. What is impressive however is that David averaged 21 points per game (how many modern day billionaires can say that?) William was second string on the team and sitting on the bench. At MIT both Charles and David were in fraternities.  Frederick went to study English and drama at Harvard and Yale.

After college Charles went to work for Arthur D. Little after he graduated and then went to work with his father in 1961. Fred Koch told his son that if he did not join the company he would sell it. When Charles Koch took over the company had $250 million in revenue and today the company has around $100 billion in revenue. Charles at first was not interested in the family business but thought managing a company was more interesting then working for someone else. The first job Charles had was to create an engineering division in Italy. According to a Wichita Eagle article from 1998 Charles worked seven days a week in the beginning. In the early 1980’s according to this article he was putting in 10 hour days. Charles not only worked long hours at home but according to this 1997 Fortune article he worked 12 hours per day and expected executives to work on Saturday mornings and would call meetings that ran into Saturday night. Charles even proposed to his wife Elizabeth over the phone and flipping through his calendar to plan a wedding date. Charles is what I would call a busy man trying to create value. 

 David was no slacker either as in this article talks about how he left for work around 9 A.M. has a driver pick him up around 9 P.M. for dinner. In 1966, Fred Koch died at the age of 67 of a heart attack while hunting ducks. Interestingly enough every day for breakfast Fred has a tall glass of buttermilk which made have lead to heart problems in his later years. 

Day in Life of CEO

H/T-Inc.

Koch Brothers Wealth: Historical Net Worth 1984-2012

Being the researcher that I am I was curious to know what the Koch brother’s net worth has been historically. Through some painstaking research via library databases (NewsBank, Forbes, and USA Today) I found the net worth of both Charles and David Koch dating back to 1984. The chart shows the net worth of each Charles and David Koch individually and not there combined net worth. The scale is in billions. Since they own the same percentage of Koch Industries their net worth is equal every year.

The growth in net worth is astonishing. In 1984, the net worth was only $375 million each. Brothers William and Frederick also had the same net worth as well. However, over time David and Charles seemed to increase their net worth at a faster rate than their brothers. The last year I could find for both William and Fredrick Koch was 1990 when William was worth $650 million and Frederick was worth $500 million. William didn’t appear back on the charts until 2007 when his net worth was $2 billion (his net worth is around $4 billion these days). What is interesting is that William actually worked for Koch Industries from 1968-1980 and was fired. William went to go on to start his own company The Oxbow Group in 1983 and this is what helped him become wealthy. Frederick on the other hand likes to buy castles, villas, and estates which doesn’t seem like a cheap hobby.

There is no doubt that Charles and David have been superstars with increasing their net worth. On a compound annual rate the Koch brothers have increased their net worth at a rate of close to 17% per year which would outperform the S&P 500 or Dow Jones Industrial Average. What is interesting however is the standard deviation or risk of their net worth is 44%. People often talk about how well off the rich are. However, the only way they can get that way is by taking risk. In fact, I would argue they have to take above average risk in order to the place they are.  The Koch’s have a substantial part of their net worth within Koch Industries which leaves little room for diversification. On the spending side the Koch’s don’t really seem to spend that much personally.  David Koch did own a Ferrari in the late 1980’s according to this article. The Koch brothers have supported their own charitable foundations which primarily try to spread free markets and the message of limited government.

Personally, I hope the Koch brothers reach 1 and 2 on the Forbes list. Given Charles Koch is 76 and his brother David is 72 it can be said that the Koch brothers are getting up there in age. Hopefully they will continue to live a long time to continue to spread the ideas of free markets and liberty and also serve their fellow man to increase their net worth. 

CEO Compensation in Options 1965-2011

The following chart shows the relationship between CEO-worker compensation in the form of options (H/T Greg Mankiw). Usually executives and sometimes employees are granted stock options so the company can tie performance to how well the company is doing. The idea is that if that people are given stock options they will want to work hard to increase the value of the company thereby increasing their own compensation.

Options are granted by the company to the employee. However, the employee must wait a period of time before they can actually exercise or have the right to buy the options. I have a feeling many people think executives can just cash out there options whenever they want however the board of directors and shareholders are not stupid. The employee has to wait until the vesting period is over. The vesting period is the amount of time the employee has to wait before he or she sells their options. Typically the average amount of time is between 4-5 years. So really management or employees can’t have a short term view since they can’t even cash out their options until the 4 or 5 year period is over.

The blue line in the graph shows the ratio between the options that were granted and when the options were actually exercised by the employee. What is interesting is nearly every year from 1998 to around 2003 the options or the money that employees got was actually worth less than when they were granted. One reason for this is because the stock could actually decrease in value which decreases the value of the shares. Also the relative pay of CEOs increased dramatically in the 90’s and then fell by half. I have a feeling though people will point out the factor of how much CEOs make compared to workers. There are a couple of points I would bring up. The first is that employees often times don’t in the same position forever. Especially early on in their career they are trying to move up and get a higher paying job. By moving up this would decrease the factor of what CEO’s make compared to employees. Some people who start at the bottom of the company reach an executive level position before their career is over. Other people may get promotions however not want to take them due to family responsibilities, illness, or may not want the increased responsibility and pressure. Executives have extremely stressful jobs. They essentially spend their whole life at the company (or many different companies). Another point that is important to point out is that executives often pay ordinary income on their options which in places like New York City (city, state, and federal taxes) can easily exceed 50%.

I honestly believe only a few people really want to be executives. Everyone claims they want to get to the top but when you look at who wants to and actually can make it to the top it is only a very small percentage of people. Maybe next time when people complain about CEO compensation they should first understand what it is like to be a CEO.

Billionaire hedge fund manager at 38 retires

Recently, John Arnold announced that he would close his hedge fund Centauras Energy and return money to investors. Arnold is pretty young being only 38 and has been an energy trader for 17 years. Apparently, the fund only made a 4% return for advisors which is not the typical double digits return that John Arnold would return. Last year he returned 9% and made $360 in the process. In 2006 Centauras Advisors earned 300% which was much better than in 2005 when they earned 150% (mostly due to the blow up of Amaranth Advisors).

Arnold got his start at the now defunct Enron. He went to Vanderbilt University where he earned an economics degree and even his professors weren’t surprised when they heard he was earning billions. When he worked at Enron Arnold was a natural gas trader and did very well. In 2011 alone he earned $750 million. Many people and politicians complain that traders create little to no value. However, this is not true. Traders don’t increase prices because they are responding to the fundamental market conditions. In order for a trade to be made there has to be both a buyer and seller. People get enraged when prices of oil increases however don’t even talk when the prices go down which is due to traders like John Arnold.

Arnold is setting off into the sunset quite early. He mainly wants to depend his time and resources with the Laura and John Arnold Foundation which has around $700 million. In 2011 alone John and his wife Laura donated $100 million to various different causes. Really John Arnold is saying is that he does believe he can’t earn the great returns he has been making. Usually financial planning professionals say that you can withdraw up to 4% of your income and still be able to retire. So essentially John Arnold could withdraw $120 million per year which is a substantial amount of money (this would vary depending on how much he gave to charity). Clearly, though there an opportunity cost for Arnold not running a hedge fund. He could be helping other people get rich but has decided that philanthropic pursuits are worth then what he can make in the future. I have a feeling that after a while John Arnold will want to get back in the investing game in some way in the future.

David Koch Donates $35 Million to Smithsonian's Natural History

The other day David Koch gave $35 million to the Smithsonian’s National Museum of Natural History in order to build a dinosaur hall. This is not Mr. Koch’s first donation to the museum. In 2006 he gave $20 million to create the David H. Koch Dinosaur Wing and then in 2009 he gave $15 million for the Hall or Human Origins (which now bears his name). No doubt that this money is for a good cause. As I mentioned in this post David Koch is an American hero not only for running a successful company but also for his very generous charitable giving. Nearly every article I have read in some way shape or form mentions how Koch has been a long time donor to the Republican Party. I would be willing to bet that his charitable donations have far surpassed his donations to any political party.

Koch credits his father for taking him and his twin brother Bill at any early age to visit the museum.  It is great that Koch is giving back. Although, you could argue he really doesn’t need to give back considering how many jobs he has created, how much food he has put on the table for Koch employees, and how many retirees are benefiting from working for a company that exploded in value under both David and Charles Koch.  As Walter E. Williams would say the only people that owe anything to society are criminals since they are really the only people who took from society. Koch has not only created wealth for himself and Koch employees but is now using that wealth to give back to charities whom will do far more good than the government. In fact, maybe someone should nominate David Koch for the Nobel Peace Prize by creating thousands of jobs, increasing the standard of living of many more, and giving back to charity. It is really sad when the media vilifies the Koch brothers considering how much they both have benefitted society. 

Billionaire Index: Outperforms S&P 500

Dr. Joel Shulman of Babson University has published a recent study in Institutional Investor’s Journal of Index Indexing which shows that an index of companies that billionaires managed by individuals on the Forbes billionaires list. I for years have been wondering how an index would have done. Dr. Shulman has done the research and the results. Let’s look at what he found.

When the “Billionaire’s Index” was compared to a benchmark of the S&P 500 the Billionaire’s Benchmark outperformed the S&P 500 over time. From 1996-2011 the Billionaire Index increased a staggering 400%. The S&P was up over 104% during this same period (dividends not included). If you started with $1,000 in 1986 and updated your portfolio every year to match the new Forbes billionaires list you would have ended up with $5,000 by 2011. If you had invested in other benchmarks like the Russell 2000, Russell 3000, or the S&P 500 you would have $2,500 or less. It should be pointed out the Billionaire Index is riskier than indexes like the Russell 2000 or S&P 500. As investors know you should never put all your eggs in one basket.

People often complain how the top 1% keeps getting richer. However, now there is a way to join them. In fact as a shareholder you are part owner in their business! The only problem is I haven’t actually seen a Billionaire’s Index listed on any of the exchanges. Right now Dr. Shulman works for EntreprenuerShares which has some funds yet doesn’t offer a Billionaire’s Index. One problem is that if people knew the Billionaire’s Index returns were very good they would start investing in it which might actually reduce the return. Since the index has only existed in theory and not in practice it is hard to tell how it would have actually done.

50% of Americans No Federal Income Tax Liability

From the Heritage Foundation this graph shows the number of people who have no federal income tax liability. The number has only increased since the 1960's and I am afraid this percentage will keep increasing. Politicians talk about how the 1% don't pay their fair share, however how is it fair that 50% pay nothing. If anything we need more taxpayers. Also doesn't Congress already do more than their fair share of spending?

Bloomberg Billionaire Index

Today, Bloomberg released the Bloomberg Billionaire Index. The billionaire index is updated every day at 5:30 P.M. will price the net worth of the top billionaires. Before this we had to wait towards the end of the year when Forbes would list the 400 richest people. Forbes has had the Forbes 400 since 1982.

Carlos Slim debuted at the top of the list with $68.4 billion. However, in just one day he lost over $135 million. To most people this seems like an extraordinary amount of money. It should be pointed out however that the rich by definition have to take more risk than regular individuals. You can’t become a billionaire working a 9-5 job. I have no formal psychology training (other than the course I took in high and college) but I would be willing to bet that a large majority of people on the Forbes 400 list or now the Bloomberg Billionaire Index are workaholics. Being a billionaire is a side effect of being a workaholic. What is somewhat irritating is how people complain that people don’t need all this money. Of course, people would like to supersede the voluntarily decisions of millions of people who vote with their feet and their wallets. What seems to be more incredible is that even when people fall into “sudden wealth” they seem to mismanage it. One thing that comes to mind is lottery winners. Often you seem them blow through their money relatively quickly and ultimately file for bankruptcy. It seems as if the 99% when given extreme wealth ultimately end up back in the 99%. Perhaps the universe tends to unfold as it should. I don’t think I have ever heard of a lottery winner who then bolstered their wealth to new heights. Also a majority celebrities and athletes are notorious for blowing through their money.

One thing that is curious is how Bloomberg actually values the net worth of billionaires. Evaluating someone like Warren Buffett or Bill Gates is easy since most if not all of their net worth is in a publicly traded company. However, what about calculating the net worth of individuals that work for private companies? If you compare some of the numbers to Forbes they are different. For instance, Charles Koch on Bloomberg’s list is worth $34 billion yet last year he was worth $25 billion on Forbes. Of course Koch is CEO of Koch Industries which is privately held company. Bloomberg in evaluating the net worth of privately held companies looks at publicly held companies with similar values and price to earnings ratios. This is not a bad proxy but how does it lead Bloomberg and Forbes to be off billions in their evaluation of net worth?

Whitney Houston: Death, Drugs, and Money

A couple hours ago it was reported that Whitney Houston died. Houston was known as a great singer and had a great voice. It is reported she sold 170 million albums (yes we use to have albums in the old days). It is reported she signed a record deal in 2001 for $100 million in which she would have to produce six albums. There will be no doubt there will be surge in the albums she sells. Whitney Houston knew how to earn money. Below is a list of tours and how much they grossed.

Greatest Love Tour (1986) $4.8 million
Moment of Truth Tour (1987-1988) $24 million
Bodyguard World Tour (1993-1994) $33 million
Nothing But Love Tour (2009-2010) $36 million

This is of course is what the tours earned not what Whitney personally earned. Plus, this is a gross amount which doesn’t take into account costs as well. Whitney herself in 1988 earned $30 million according to Forbes. It is rumored that she was broke and was asking for money within the past couple of months. It is also known that she had a problem with drugs and alcohol. She admits that during the 1990’s she was doing drugs every day. Drugs and musicians seem to go together although they really shouldn’t. One reason why I think musicians and performers look to drugs is because if you think about their schedule of giving it there all and going night in and out dancing and singing they probably won’t get by without some time of stimulant. If you include the traveling, interviewing, and promotional things musicians have to endure they have crazy schedules. I am in no way defending their behavior although I understand why they do it because of the incentives they are faced with. This makes me think of a similar analogy to baseball and the use of steroids.

Now that Whitney Houston has passed it will be interesting to see whether or not she died with a will (dying intestate). If she did die without a will then the public will become aware about her finances. Personally I am curious to see how much she had left over after earning many millions of dollars.

Income Inequality: Top 1% Myths

Time magazine recently named “The Protestor” the person of the year. No doubt this year we saw complaints between the bottom 99% and the top 1%. However, although many people in the bottom 99% may be complaining I would question whether they have all their facts. According to Federal Reserve data 33% of the people in the top 1% in 2007 were no longer in the top 1% in 2009. Note that this is only over a two year time horizon. Less than 15% of people on the Forbes 400 stay on the list for over a 21 year period. Also it is important to note that inherited wealth is in fact the minority of people on the Forbes 400 list. What is even more interesting is that according to the Edward Wolff of NYU is that the percent of inherited wealth has been decreasing. In 1989, 23% of the top 1% inherited their wealth. By 2011, this percentage decreased to 9%. Also it is interesting that income inequality is lower now than where it was in 1995. Also the concentration of wealth in the top 1% is lower now than where it was in 1998.

People will always want more. This desire is part of human nature. What seems puzzling is why people are envious of other people who work harder, longer, and smarter than themselves. To me if someone wants to work 80-100 hours per week earn all that money and contribute to society more power to them. As long as they are not asking for government money everyone should be fine with this arrangement. We could of course cure income inequality by having recessions. Everyone would feel more equal yet it would come at the price of growth and expansion. One point people forget is that the top 1% often take the most risks. This is known what Robert Frank describes as the “high-beta rich”. Frank makes an interesting argument that the top 1% has more because they took more on more risk. This is common sense. Often people who have large amounts of wealth have most of their net worth tied up in their stock options or their business. The majority of Americans don’t have stock options and live off their paychecks. Since a large percentage of people in the top 1% have their net worth in one asset they have to constantly worry about what happens if that asset implodes. This means that the super rich have much more volatility in their net worth than say the average person. One year you might have $200 million and then the next $50 million if the stock market drops.

Income inequality should make people want to work harder (if they decide they want more money). Complaining about why other people are successful does nothing for any individual. Everyone wants more money yet very few people want to do what is required or necessary to get there. We can’t forget that people are paid on value creation and productivity.

Special thanks to Robert Frank for giving me the idea for this post.

Bottom 99% Are Already Top 1%

I think it is interesting when people show graphs of income inequality over time between the top 1% and everyone else. One thing I think people fail to understand is that the top 1% of today is not the same top 1% of yesteryear. Recent data from the Tax Foundation drives home this point. The Tax Foundation looked at tax returns between 1992-2008 and looked at the top 400 taxpayers. The results are somewhat interesting.

Close to 73% of individuals were only in the top 400 taxpayers for one single year over the 17 year period. Only 3% stayed on the list for 5 years. Only .4% of people stayed on for 15 years and .1% stayed in the top 400 taxpayers for 17 years. This would say only 4 taxpayers were in the top 400 taxpayers for 17 straight years. People might complain that even 4 is too high. The evidence shows that an overwhelming majority of people only stay in the top for a short period of time. One explanation is that people do sell their businesses or they retire and have options that get exercised. So what is actually happening is that people are high income earners and then drop out of the top 1%. In fact, according to

a report entitled “Income Mobility in the U.S. from 1996-2005” 57% of the people in the top 1% had dropped into the bottom 99%. For the top 5% around 46% moved into lower income groups. The major point is that the top 1% or even top 5% are not some elite group that stays constant.

An even better point is that even the bottom 99% have a higher standard of living than many of the people in 10% in other countries. Real per capita GDP over a longer period of time has been increasing. When people complain how things are today the question should be would you rather live today or in the 19th century? The things people had to worry about in the 19th century are much different than things we worry about today. Infant mortality was much higher during this time period. People had to worry more about sanitation and also worry if there would be enough food. People during this time didn’t even shower daily. Today, these are things even the homeless don’t really have to worry about (if they seek a homeless shelter) I have seen people at stores purchasing their groceries with food stamps yet they have IPhones. No one a decade ago had an IPhone. The amazing thing about markets is that it brings creative destruction. Entrepreneurs and inventors figure out what people want and bring it to the masses. Competition keeps out bad products and services while ensuring high quality and low prices. The bottom 99% should be embracing markets and income inequality should be an incentive to want to work hard to get in that top 1% (even if it is only for one year).

"Old Americans are 47 times richer than young"

A story I recently saw was titled “Old Americans are 47 times richer than young”. Data shows that in 1984 people 35 and under had a net worth of $11,521 while people who were 65 and older had a net worth of had a $120,457. This numbers for 2009 show a different picture. The net worth of people under 35 in 2009 was decreased to $3,662. Meanwhile, people 65 and older had a net worth of $170,494 (numbers adjusted for 2010 dollars). What this would say is that older Americans now have a net worth that is 47 times that of younger people. Why are not people shouting about net worth inequality?

What people forget is that people who are 65 have had 30 years more to income to accumulate net worth. It would make sense that older people have more assets than younger people. Also another interesting data point is that 37% of young household have a zero or negative net worth. In 1984, this same percentage was only 14%. Perhaps this generation is spending more than previous generations.

One argument I find very interesting is how we can’t afford to cut back on Social Security payments to senior citizens when the data clearly shows they have a larger net worth than anyone else. A large majority older people are in low tax brackets because they are not working. The income they earn usually comes in the form of dividends, interest, and other fixed income. Not only are these older people using their income from all these sources to live on, but also can sell assets if they need money to live on.

Having a net worth of a little over $170,000 is still not a lot to live on. If you consider health care costs and nursing home costs it could be hard to live with this net worth. If a 22 year old started with a $1 and saved $3,000 per year until the age of 70 invested it in the market (average return of around 7.5% over the long-term), that individual by the time they turned 70 would have $1.34 million. If the individual become ambitious and saved $5,000 per year they would have $2.23 million. I have a feeling very people consistently save year after year. People nowadays have credit cards and can charge almost anything. One of the rules of personal finance is never to put anything on a credit card that you will consume before you get your next bill. The best way really to reduce spending is to just spend the cash you have on hand. This way you feel the “pain” when you pay for things out of pocket. When you buy things on credit you might have an idea of what something costs, but you don’t feel how much it costs. The key to accumulating wealth is saving.

Down With Evil Corporation Fools

Wall Street Protesting Nonsense

In the past couple of weeks there have been protests going on across cities nationwide. It seems as if the protests started in New York and spread to other cities like Washington D.C., Los Angeles, and Houston. The one small point I agree with the protesters is the crony capitalism when major banks got bailed out. Everything else these people are talking about is utter nonsense. The people claim they are the bottom 99% and are complaining about the top 1%. Of course, people are okay with the top 1% who claim they want to pay higher taxes (but don’t voluntary do so). Presidential candidate Herman Cain said, “If you don’t have a job and you’re not rich blame yourself”. I partially agree with Cain. However, government legislation and regulation have been putting people out of work. The protesters claim that corporations have power. I find this interesting since no company has ever forced me to buy any of their products. I voluntary got out of my chair, voluntary drove to the store, and voluntary handed the cashier money to purchase that product. The main complaint is that corporations have large lobbying power. What the protestors forget is that corporations want lobbying power because the federal government hands out valuable goodies. The government spent over $3.5 trillion last year. If companies could get any part of that federal money through contracts or through specialized legislation they are willing to spend money to get favors. The protestors have the cause and effect backwards. The power of government is causing corporations to spend money to get favors granted. If the scope and size of the government was limited politicians wouldn’t have as many goodies to hand out which would put the lobbyists out of business.

If the protestors think they have it that bad they should take a visit down south to Cuba. Economics is the studying of allocating resources and considering alternatives. The last time people are not trying to break out of the United States to flew to Cuba. Rewarding people for hard work and punishing people who make bad decisions sounds pretty fair to me. No economic system is perfect. The question is what system has lifted more people out of poverty. The answer to that question I would say is free market capitalism.

Koch Wealth

Seems as if the Koch brothers are creating wealth by pleasing their fellow man. Although, the brothers inherited the company from their father they still have grown the company by leaps and bounds. People forget that just because you inherit something makes you rich. People can inherit companies or money and blow through it very quickly. Most of the time this is the case with inherited wealth. One generation will create and the next generations will either give the money away or squander it.

Apple: Most Valuable Company?

As of today Apple is now the “most valuable company”. Apple now has a market capitalization of $337.2 billion surpassing ExxonMobil with a market cap of $330.8 billion. I put most valuable company is quotation markets because the market can misprice things. The technology bust of 1999-2000 and the financial crisis are just recent episodes of this. The sector weightings of both technology and financial companies during this period became very high. The weightings became high creating bubbles within certain sectors that eventually went bust.

Apple is known for producing computers and electronic devices that consumers use around the world. The iPhone I would say has been the biggest hit for Apple in recent years. The iPad also seems to be very popular as well. Even though Apple has had successes they have also had failures. One failure that sticks out in my mind is the Lisa computer that was developed in the early 1980’s. The computer would be over $21,000 in current dollars yet lacked the computing power of any modern day cell phone. Another flop I remember was the Apple Newton which is what use to be called a personal digital assistant (PDA). Basically the device allowed you to set your calendar and organize contact information.

One problem that I think few people realize about Apple’s success is solely based on Steve Jobs. The biggest worry is the health of Steve Jobs. In 2004, he had a rare form of pancreatic cancer. In 2009, he had a liver transplant. The five year survival rate for liver transplant is between 75-90%. I honestly would be shocked if Jobs lived a long live. Being CEO is hard on perfectly healthy people and would be even harder on people with health issues. Jobs seems to be the superstar for Apple and if he were to leave it would cause great uncertainty for Apple. Jobs himself has created over 230 patents.

What is perhaps the most interesting is how the media and even some people think of Jobs somewhat of a hip entrepreneur who is earth loving and kind. I don’t think people understand the type of personality Steve Jobs really has. Steve Jobs is intense and demanding. From what has been written about Jobs he is obsessed with making something people will enjoy. It wouldn’t be hard to classify Jobs as a perfectionist. There was a movie years about a decade ago called “Pirates of Silicon Valley” that shed light on the type of personality Jobs may have had during the early days of Apple. Whatever his personality may be Jobs has made everyone else better off including himself. Steve Jobs got rich by figuring out what consumers trying to perfect exactly what consumers wanted. As a result Jobs has a net worth today of $8.3 billion.

Jobs created a company that very consumer eccentric. Apple figures out what consumers really wanted. People complain that Apple products are more expensive, but there are always alternatives. Being paranoid and a perfectionist are not classified as desirable traits yet in the case of Steve Jobs millions of people have benefitted.

The Poor: Better Off Than People 20, 30, and 100 Years Ago