AskDong

Unlike many Americans, I’m not all that personally concerned with rising crude prices and the inevitable higher gas prices. I’m lucky I don’t commute to work, and probably fill my 14 or so gallon gas tank a little over once a month. At $2 a gallon I spend a bit more than $500 on gas a year assuming I fill my tank 1.5 times a month. At $4, I would spend about $1000. Spending another $500 a year is significant, but nothing like what most Americans face. On average, the Americans use 541 gallons of gas per passenger car. That translates to $1082 a year when prices are $2/gallon, and over $2160 at $4. That’s a much more significant amount.

This weekend, however, I came to realize how the rising price of crude will effect me. Beer! How is this you might be asking? Rising gas prices has made alternative fuel sources a priority in the last few years. Ethanol is by the far the most popular alternative. While I have many reservations about the viability of ethanol in the long term, the subsidies that have been thrown ethanol’s direction and rising prices have certainly made corn the choice for many farmers. Rising corn prices have lead to higher prices for other foods as farmers choose to grow corn instead of wheat, soy beans, barley and hops.

It’s the rising prices of the latter two products on which I expect to feel the pain. Barley and hops are the main ingredients in Beer besides water. Barley prices in 2007 nearly doubled from what they were in 2006. While I haven’t been personally tracking the price of the beer I purchase, there’s no question that those higher barley prices will trickle into higher beer prices if they haven’t already.

Last week in my February Investment Update I had a chart similar to many a chart found in Mutual Fund advertising. Unlike charts referred to most advertising, I haven’t been beating the indexes since inception. I’ve been mostly lagging until this most recent market downturn. As I created the chart for myself, I was more accutely aware of how misleading such charts can be for reasons even though I was cognizant of I still don’t give enough attention to. It’s one thing to know but another to implement.

It’s rare that you’ll find a Mutual Fund advertising a chart where it lags the market. Why is this?
1) Survivorship Bias
2) The lasting effects of early superior performance

Survivorship Biases
The fact is that mutual funds that are sold are generally ones that have survived some type of incubation period. The average investor does not see the dreck that is started then killed. Most mutual fund companies will start a number of new funds, and from these only a handful will make it to mass market. Funds in incubation are generally open to just employees or select investors. As much as it might seem like a privilege, it’s really not. The incubation process allows a fund company to employ a couple different strategies which can be diametrically opposed. For example, maybe I think Dell (DELL) Computer will get it’s act together and take back market share from Hewlett Packard (HWP), so I start one fund, fund A, and buy many shares of Dell. However at the same time I start fund B and buy tons of HWP just in case. If Dell proves successful, fund A does well, and if HWP reigns supreme Fund B is a winner. Heads I win, Tails you lose. Depending on what happens, a fund company can kill whatever fund is a loser and only market the winning fund. This is survivorship bias at it’s cruelest.

Resting on the Laurels
Once a fund achieves superior performance, it can rest on it’s laurels as far has historic performance charts are concerned.

On that chart I added two Alternative performances. Instead of returning -1% in March 2006, my alternative portfolios returned -8% and +8%. Other than difference in returns for that one month, the performance is the same. It’s clear how one good a month can make my portfolio look like an incredible winner. This type of performance is very typical in many actively managed mutual funds because of the incubation process. Mutual fund companies incubate a “winner” and then start advertising that fund with these nifty charts demonstrating market beating performance. The caveat that often accompanies these charts is that, “historical performance is not an indicator of future returns.” All too true.

I’ve commented in the past how some personal finance bloggers can across smug. However, given the audience, this smugness is not a big deal. The fact is the writers of personal finance blogs reflect the attitudes of the readers. I’m both a writer and reader, and I can personally attest to the fact that I probably too often fall victim to a “holier than thou” attitude. This isn’t really a problem in the blogsphere where we cavort amongst ourselves. The greater problem is in the real world. Despite, my self effacing shell, I am rather self satisfied.However, I do feel very strongly about spreading the wisdom of prudent finances. A “I know better than you” attitude often gets in the way of that. Nobody wants to listen to a know it all. I certainly don’t. I think if we are to give advice to family and friends, we should first admit our own financial shortcomings. I know some of mine are:

1) I’m less careful than I should be - I get more parking tickets, and other fines than I should

2) I spend alot of money of food and vacations

3) I enjoy expensive hobbies like skiing and golf

Telling somone that every life choice that they make is wrong isn’t a way to gain influence and win friends. We shouldn’t be telling people what they’re doing wrong, but rather working with them on doing things better. Criticicsm is healthly, but in small manageable chunks.

Just as important as being able to impart wisdom upon friends is also keeping an open mind for oneself. Just because your plan works today doesn’t mean it’ll work tomorrow. I find it useful to get off my high horse at least on occasion and revevaluate some of my beliefs. It’s the only way to keep on learning. For example, I used to be much more dismissive of commodity investing than I am today. I realize in the current market there’s really nothing else like commodities as much as I wish there were.

Yesterday, I received yet another inquiry from a certain wealthy individual seeking help with “a large sum of money”, $28.5 million to be exact. I’m not sure who they think they’re tricking with these emails, but I certainly don’t plan on being one of them. Normally I wouldn’t think too much of the email, but I was astounded by the lack of guile in the email.

Normally these emails are from some individual in Africa, Asia or Eastern Europe. The story of hardship and bureaucracy sound on the fringe of plausible. The email yesterday was from gentleman in the Netherlands. The Dutch have not been know for their oppressive and imperialistic ways in centuries. Sure, there is currently some ethnic strife between what has been of the more liberal European populations of the past century and recent Muslim immigrants. These conflict however are pale in comparison to the tales of corruption that are rampant in other parts of the world. I would not expect a Dutch citizen to require the help of an individual like myself to get at money that is legally his.

Regardless of the exact tale. It’s not important since it’s not true anyways. What really shocked me was the moniker this is supposed millionaire went under, Joe Smith. I mean can you get any more fake than that?

I came across this article on CNN on black police officers in Georgia were only getting percentage of what white police officers who had similar lengths of service. What I found incredulous is not that we are still feeling the impact of historic racism today, but that it wasn’t until 1976 that black officers became eligible for the pension plan enjoyed by white officers. I was born in 1976.

While I think wholeheartedly in this situation that the Government of Georgia owes these police officers something to make up for the discrimination that they were subject to, pensions are tricky. It’s not just retired black police officers, but old NFL players, and airline workers. The problem with most pensions is the disconnect from what they are and what they should be.

The traditional view of pensions and the prevailing attitude is that they are a guarantee to provide us for in our old age. There’s nothing wrong with this attitude and view. However this view as of late has begun to conflict with the reality of the pension system. Pensions are nothing more than a promise to fund us in our old age, funded by a big pot of money paid by both past contributions and current earnings on the part corporations. The problem is that many companies (think auto companies) are not going to meet those obligations going forward. The money they’ve set aside is too little, and the business too weak. Nobody 50 years ago thought that GM would be on the brink of collapse, but here we are now.

Starting with the introduction of the 401k (and 403B), individuals are much more responsible for planning their own retirement, and that’s a good thing. Indivual responsbility leads to greater transparency, and keeps companies from making ill advised promises. I believe there should be a safety net for retired and retiring workers, but that safety nest is probably best handled outside of the confines of any individual business. The global economy is too fickle and too fast to believe that companies will be able to keep promises that it makes today in 50 years. Some will and some won’t, and I rather not hand over my retirement to luck of the draw.