Thursday, November 28, 2013

Pilgrims, Prosperity And Poverty

I am thankful for many things.  My family. My friends. My job. I could go on and on. The list is very long.

I am most thankful I was born in the United States of America.  A country founded on the concept of individual rights and freedom.  A country that has embraced the idea of economic freedom, property rights, and capitalism.

Of course, I was born at a different time than where we seem to be today in our attitudes about some of these ideals. Will our young people be as thankful as I am about their country of birth?  I certainly hope so.  However, it amazes me how we fail to accept the reality of the failings and foibles of the human condition throughout history. As a result, the same mistakes and missteps plague us no matter how many times the history lesson is taught.

Look no further than Venezuela.  What was once the one of the most prosperous South American countries now languishes under a socialist regime despite rich natural resources.  Communist North Korea can't feed its own people while South Korea is giving a tablet computer to every school child.  Taiwan flourished in freedom while Red China floundered for decades before they embraced capitalist-based economic reforms. The same was true for East and West Germany.  In all of these cases there was no difference in the people.  They were literally blood brothers and sisters.  It was the governmental system and philosophy that made the difference between prosperity and poverty for the nation's people.

Speaking of history, let's revisit the story of the Pilgrims and the origins of Thanksgiving Day. The story as I learned it in school was about a group of rugged individuals who set sail on The Mayflower in 1620 seeking religious freedom in America.  They encountered many hardships that first year but thanks to help from Indians and the Grace of God (I am sure this is no longer mentioned in the textbooks) they reaped a bountiful harvest in the following year and gave thanksgiving with a giant feast.

The First Thanksgiving At Plymouth, Jennie Augusta Brownscombe

The real story is much more enlightening.  It also shows that there is absolutely no question about which system works best to provide the most prosperity for the most people and limits poverty.  There should be no debate. There is absolutely no question.  It has been shown to be true over and over again.  However, over and over, we see those who think there is a better, more humane, way to best provide for people in a society.

The real story of the Pilgrims was written by William Bradford who was the leader of the Plymouth Colony from 1621-1657.  He wrote "Of Plymouth Plantation" to chronicle the story of the Pilgrims and it is recognized today as the most complete authoritative source on the subject.

One of the best summaries I have read about the Pilgrim story was written by Dr. Judd W. Patton, "The Pilgrim Story: Vital Insights And Lessons For Today".

Let's start at the beginning.  When the Pilgrims decided to go to America they had a problem not uncommon to many of us. They did not have enough money. They lacked the funds to sail to America, equip and establish their colony.  As a result, they got financial help from some investors who financed New World adventures in return for a share of what the colonists made through farming, fishing, trade and other working endeavors.
The contract between the Adventurers (Investors) and the Pilgrims consisted of ten points. The most critical of which stated, “That all such persons as are of this colony are to have their meat, drink, apparel, and all provisions out of the common stock and goods of the said colony.” 
Today we would call this a socialist commune. In other words, the Pilgrims accepted the socialist principle, “from each according to his ability, to each according to his need.” Each person was to place his production into the common warehouse and receive back, through the Governor, only what he needed for himself or his family. The surplus after seven years was to be divided equally, along with the houses, lands, and chattels, “betwixt the Adventurers and Planters.” 
The first year after they set sail for America was particularly difficult.  The voyage itself took sixty-six days. They landed first on Cape Cod even though they had intended to reach the mouth of the Hudson River.  They spent another month sailing the coast of Cape Cod until they finally decided to settle in Plymouth at the site of an old Indian village on December 21, 1620.

Within two months, half of their numbers died. Of the 24 families who had set sail, only four were untouched by death that first year.  Four other families were wiped out completely.  Those that made it to that first Thanksgiving were thankful.  However, it wasn't necessarily because of a bountiful harvest. They were just happy to have survived.
Contrary to legend the harvests were extremely poor in 1621 and 1622. It was normal to be hungry. Governor Bradford referred to 1621 as the “the small harvest” year.  Yet he notes that in “the summer there was no want.” Thankful for what God had given them, Governor Bradford declared a three-day feast for the purpose of prayer and celebration. We all know it as the first New England Thanksgiving – apparently observed in late summer.
Things were marginally better in 1622. The harvest was a little better but many Pilgrims held back and did not work as hard as others.  There was stealing and hoarding. Bradford and the other Pilgrim leaders recognized that this would continue unless they changed the system.  What could they do to prevent another poor harvest?

This is how Governor Bradford tells it in "Of Plymouth Plantation".
“So they began to think how they might raise as much corn as they could, and obtain a better crop than they had done, that they might not still languish in misery. At length, after much debate of things, the Governor (with the advice of the chiefest amongst them) gave way that they should set corn every man for his own particular, and in that regard trust to themselves; in all other things to go on in the general way as before. And so assigned to every family a parcel of land…This had very good success, for it made all hands very industrious, so as much more corn was planted than otherwise…The women now went willingly into the field, and took the little ones with them to set corn; which before would allege weakness and inability; whom to have compelled would have been thought great tyranny and oppression.”
The socialist system was discarded and replaced with a system that was built on individual property rights and that put the trust in individual initiative to take care of the common good of the colony.

How did that work out?
In 1621, the Pilgrims planted only 26 acres. Sixty acres were planted in 1622.  But in 1623, spurred on by individual enterprise, 184 acres were planted!  Somehow those who alleged weakness and inability became healthy and strong. It’s amazing what incentive will do to improve bad attitudes!
However, the Pilgrims still had their challenges. The summer of 1623 was hot and dry. For almost two months there was no rain. Their crops were in jeopardy. Governor Bradford did not lose faith.
Governor Bradford then set a “solemn day of humiliation (fasting) to seek the Lord by humble and fervent prayer in this great distress.” Their prayers were answered. By evening it began to rain. It revived the corn and other fruits. Even the Indians were astonished. The soft showers continued along with beautiful fair weather. The result was a “fruitful and liberal harvest …for which mercy they also set apart a day of thanksgiving.”
By the fall of 1624, the colonists were able to export a full boat load of corn! And the Pilgrims settled with the Adventurers. They purchased the Adventurers stock in the colony and completed the transition to private property and free markets.

The rest is history.  The experience of the Pilgrims went a long way to forming the values and principles upon which our Founding Fathers created a new nation unlike anything the world had ever seen before.  It came to be the most prosperous and powerful country ever known to mankind. For that I am forever thankful to the Pilgrims and the others who endured trials and tribulations to give me the life I have today.

As we celebrate Thanksgiving it is useful to remember the Pilgrims and what their experience can teach us.  I think Dr. Patton summarizes the lessons pretty well.
The Pilgrim experience dating from 1623 was and is yet a prototype for the United States of America.  They learned the hard way that: (1) Socialism does not work; it diminishes individual initiative and enterprise; (2) Socialism is not a Godly economic system; and (3) Famine and drought can be used by God to humble a people and set them on a proper course.  The Pilgrims responded.  The real question today is:  Can Americans learn these vital insights from the Pilgrims or must we too face famine and drought in the coming years?

Happy Thanksgiving!

Monday, November 18, 2013

Another Sad Obamacare Story

On October 21 President Obama made a speech in the Rose Garden of The White House extolling what he said were the virtues of Obamacare.  In his speech he referenced a letter from a woman named Jessica Sanford from Federal Way, Washington who had written to President Obama about her excitement on enrolling in Obamacare.

President Obama on Oct. 21 in White House Rose Garden 

This is what Ms. Sanford wrote to President Obama.
“I am a single mom, no child support, self-employed, and I haven’t had insurance for 15 years because it’s too expensive.  My son has ADHD and requires regular doctor visits and his meds alone cost $250 per month.  I have had an ongoing tendinitis problem due to my line of work that I haven’t had treated.  Now, finally, we get to have coverage because of the ACA for $169 per month.  I was crying the other day when I signed up.  So much stress lifted.”

President Obama went on to say this in his speech.

Now, that is not untypical for a lot of folks like Jessica who have been struggling without health insurance.  That’s what the Affordable Care Act is all about.  The point is, the essence of the law -- the health insurance that’s available to people -- is working just fine.  In some cases, actually, it’s exceeding expectations -- the prices are lower than we expected, the choice is greater than we expected.

Unfortunately, none of it turned out to be true.  Jessica had gotten the wrong information from the Washington State health care exchange which gave her the wrong subsidy amount.  As a result, she not only is not entitled to any subsidy based on her income as a self-employed court reporter (a little less than $50,000) per year but she probably is looking at a substantially higher premium than she would have had prior to Obamacare's passage.

Under Obamacare, the estimated cost of a silver plan for her zip code would be about $6,000 per year according to the Kaiser Obamacare Calculator.  This generally would probably require about a $4,000 annual deductible for herself and her son.  On the other hand, I was able to find a $4,000 family deductible plan in Federal Way, WA for 2013 on for $283/mo ($3,396) per year.  That  is almost half of the Obamacare rate.

Of course, she is uninsured today so she obviously has already decided she cannot afford $283 per month. Therefore, she clearly cannot afford $500 per month and has stated that she will pay the penalty and forego the health insurance.

This article from the Washington State Wire has the full story.  Read it and weep for this poor woman.

What is really sad is this comment from Ms.Sanford which I think is typical of a lot of people who thought that Obamacare was actually going to help them.

“I was dumbfounded,” she said. “I thought this was a total mistake, they’re going to correct this — this isn’t true. How could I not qualify for a tax credit? I make under $50,000 a year. There’s got to be something. So I got ahold of my broker, and a couple of days later he called me back, and he told me that no, it was true.”

What is even sadder is that Ms. Sanford is a big Barack Obama supporter and still doesn't seem to understand that his policies are not designed to help her.

She says she wants to make it clear she has no beef with Obama and Obamacare. She still believes in the Affordable Care Act. “I don’t want this to be a political thing,” she says. “I don’t want to be bashing the president. I don’t want to be bashing the ACA. I don’t want to come across as saying that. I am a big Obama fan.
At the same time she has seen the problems of big government and its bureaucracy up close and personal but it does not seem to register with her that therein lies the problem.

“But to me there is a big problem with the way the state is handling it. It is like a big machine – you put your stuff in there and once you do it, it is impossible to do anything. You can’t get through to them [on the phone], the website is really limited. So you are stuck on this big treadmill of bureaucracy, and you know, it feels very out of control.”
 Sad, sad, indeed.  What more can one say?

Tuesday, November 12, 2013

Turkey Day

Thanksgiving this year is on November 28.  The day when most of us have the big turkey.

However, I think the real Turkey Day this year is going to be November 30.

That is the day that the Obama Administration has promised that will be fixed.

Jeff Zients, the Obama Administration official who was brought in on October 22 to get the enrollment system on track said this three days after he took charge of

"We are confident that by the end of the month of November, will operate smoothly,"

I could not believe it when I heard it and I still don't believe it.  What was most astounding to me was that anyone after only three days on the job could evaluate a system as complex as the Obamacare exchange enrollment system and make that kind of statement.

I had never heard of Jeff Zients before October 22.  However, his statement of October 25 will go down as one that displayed either incredible competence, incomprehensible incompetence or just plain insanity when we look back at it.

I still cannot understand why anyone could or would believe that they could make such a promise after three days on the job. Are we to believe that after they had 3-1/2 years to get the system ready they somehow are going to fix everything in 30 days?

That is why I think the real Turkey Day will be November 30. On that day I believe we will start to see the Democrats in Congress realize that Barack Obama has given them a turkey and a rush will begin for the exits. Democrats will start asking for delays in the effective dates of Obamacare. Jeff Zients will probably wish President Obama had never called him. Kathleen Sebelius will either resign or be fired. Somebody will need to take the fall.

I may be wrong.  Perhaps Jeff Zients has magic in a bottle.  We will see in a few weeks. However, when most tech experts indicate that any system of this size and scope would need a minimum of 5-6 weeks of end to end testing after programming bugs have been fixed, and we are 3 weeks from the deadline, you can do the math yourself.

No matter what the truth is on November 30 you can expect that the Obama Administration will claim it is running smoothly. When you are desperate you will say anything. We have seen that plenty of times already on Obamacare, haven't we?

You also should understand that even if the site is up and running smoothly on November 30 it will have to handle an incredible load of people in short order.  Anyone who wants coverage effective January 1 must enroll in Obamacare by December 15.  Consider the fact that upwards of 4.5 million people have had their individual plans cancelled and you can do the math again.  How does the system hold up to that type of demand? I doubt it will based on the experience to date.

The real question for Republicans is what should their position be on Obamacare once the Democrats realize they have a turkey and start demanding some type of delay in the law?

Yes, expect the Democrats to soon ask for the same type of delays that they adamantly refused to do a month ago which caused the government shutdown.

However, what should the Republicans do in response?  They need to have a well-considered strategy when Turkey Day is upon us.

Should they be willing to agree to a short delay in the individual mandate or a one-year delay in the entire law?  Such a delay may reduce the current pain that is being caused by the law but it also would provide Obama and the Democrats an opportunity to bail themselves out of this mess. After all, given enough time and money almost any technical problem can be fixed.  And both Obama and the Democrats are very good at spending money.

It will be next to impossible for the Republicans to refuse to agree to a delay.  If they do they will be called vindictive, unfeeling and placing politics before the people.

However, my view is that the Republicans need to get something in any deal that provides a delay. What they ask for has to be carefully considered to be consistent with their overall goal (repeal of Obamacare) but which also appears reasonable under the circumstances to voters.  The Republicans have to make sure that they do not overplay their hand with the voters as they did with the government shutdown.

I have two suggestions and both would involve introducing a "sunset" provision into the law. In other words, the Republicans would agree to a delay in Obamacare taking full effect. However, if certain things did not happen the entire law would be repealed (except for the under age 26 provision for children- it would make no sense to take this away at this point). In other words, the law would "expire"or "sunset" if the condition was not met.

My suggestion is that the sunset date would need to be June 30, 2014.

Why June 30?  Why not some later date?

By June 30, insurance companies and employers are going to need to know the rules they are operating under for 2015. It cannot be any later than June 30 without causing substantial disruptions in the health insurance marketplace and uncertainty in the job market and our economy.

What would be the possible conditions?  Here are a couple of ideas.

1) a new bill must be passed by both Houses of Congress and signed into law to replace Obamacare by June 30. This would require a bipartisan approach since the House is controlled by the Republicans and the Senate by Democrats.  A failure to craft a bipartisan bill in the first place was huge mistake. An effort to forge a bipartisan bill should be looked at as reasonable by the majority of voters.  If a new bill is not passed to replace or modify Obamacare, it is repealed as of June 30, 2014.

2) all aspects of the website, enrollment system and the administration of the income subsidy verification system, individual and employer mandates, etc must be totally implemented and operational by June 30. The determination of whether all provisions and operational aspects of the law are being faithfully followed is to be determined by the U.S. Supreme Court. If the Supreme Court fails to certify this fact, the law will sunset as of June 30.

This provides additional time for the Obama administration to get their act together on Obamacare but also recognizes that we can ill afford having confusion and uncertainty about the future continuing to linger. I believe most voters would understand and agree. A date certain is necessary on the future viability of Obamacare and having the Supreme Court make the final determination on whether the law is being followed would also seem reasonable to most voters.

There may be better ideas but the important point is for the Republicans to provide the needed relief to the people of the United States for the immediate problems with Obamacare while also advancing their longer term goal of repealing Obamacare.  They have to be very strategic in their thinking as well as united in their approach.

The website is bad.  However, the policy is much worse. It is also becoming evident that the politics is even worse. There simply are not enough winners to offset the losers from Obamacare. And it is not even apparent that the winners understand they are winners.  If you did not buy health insurance when it was $100 per month why will you think you got a good deal when it now costs $200 but you got an $80 subsidy?

From my perch it looks like we have two Turkey Days ahead of us in the next few weeks.  There is much to be thankful for on the traditional day. I will count my many blessings and eat my share of turkey. Two days later the Democrats may be eating crow instead of turkey.

Sunday, November 10, 2013

Happiness In A Bottle

There is probably no better path to wealth than to buy a great stock and enjoy the ride.

That means finding a great company with great products or services that people want and which can innovate and grow with the economy and with changes in population.

When you buy stock in that kind of company it is incredible what compound returns will do to increase your wealth.

Will Twitter be that stock?

Twitter went public last week and by the end of its first day as a public company it was valued at over $31 billion.

That is a lot of people betting on a lot of future promise and profits.  Twitter has yet to make any profit to this point.  They will need a lot to fulfill the promise of the current stock price.

Will Twitter be on a similar path to Google?

It went public in 2004 (has it really been less than 10 years?) with similar promise.

Google's IPO raised $1.6 billion. Most of the shares were held internally putting the total market cap of Google at $23 billion. Today Google is valued at about $340 billion.  I would say that Google has fulfilled the promise that investors had in the stock 10 years ago.  However, 10 years is not a lifetime.

Apple. Google. Facebook. Twitter. Tesla.

Will these stocks stand the test of time like Coca-Cola?  Can these be lifetime investments?

There are very few people in the world that have not sampled one of Coca-Cola's beverage products.

Credit: Wikimedia commons

Eli Inkrot writing in Seeking Alpha provides some perspective on just how much wealth Coca-Cola has produced for its sharedholders over the years.

Coca-Cola went public in 1919 at $40 per share. One year later it was selling for $19. An investor would have lost half their investment in the first year.

However, by 2011, had an investor purchased just one share of Coca-Cola for $40 initially and reinvested all of the dividends paid over the years that $40 stock purcahse would have been worth $5 million according to Warren Buffett.

However, as Inkrot points out, from 1919 until today is not one lifetime, but several lifetimes.  That is probably not the most realistic example for a current investor. What about a timeframe that we can relate to a little better?

Inkrot chose a starting date of January 2, 1970.  That is a date that I can certainly relate to.  I was in college and had been drinking Coca-Cola for a number of years.  I also drank their newer products, Sprite and Tab, over the years.  Sprite was introduced in 1961 to compete with Seven-Up. Tab debuted in 1963 after the success of Diet Rite Cola, which was the first sugarless soda on the market.

On that date in 1970 I could have purchased a share of Coca-Cola stock for $82. $82 was a lot more money in 1970 than it is today.  However, I had much more than $82 in my savings account in January, 1970 from working a summer job for the U.S. Post Office as a Clerk-Carrier the previous summer. As I recall, I made around $5 per hour for the work. $82 was about two days of pay to me. That was big money for a college student when the going wage was less than $2 per hour for most summer jobs.

What would that one share of Coca Cola stock be worth today?

For starters, due to stock splits, that one share of stock costing $82 would provide a claim to 96 shares of Coca-Cola stock in 2013.

Coca-Cola also not only paid a dividend on that stock in each year since 1970, it also increased the dividend ever year year.  A single share of stock purchased for $82 in 1970 would have provided its owner with $1,190 in dividends over the years. That return on dividend payments alone is nearly 15 times the original purchase price.

If those dividends had been reinvested in Coca-Cola stock through the years and you also account for the overall capital appreciation since 1970, the $82 original investment would now be worth approximately $12,000 according to Inkrot.

Bear in mind that this all occurred during my lifetime in which I drank many thousands of dollars of Coca-Cola products and I never owned the stock.

Trust me, it is hurting me to even write this and think about my stupidity. It was right in front of me and I did nothing.  That is why in investing the biggest mistakes are often errors of omission rather than errors of commission.

Why is that?  Why did I do nothing?

When I looked at Coca-Cola as a stock in 1970, or 1990, or 2010 it always seemed expensive and it always seemed like some other stock had more exciting prospects. After all, Coca-Cola had been around forever. It was easy to have doubts about its future. How much more can they grow? What about sugar prices? What is Pepsi going to do to them? How could they make the mistake they did with New Coke?

Inkrot sums it up very nicely.

Some of the best investments are profitable companies that are sitting right in front of you. There's a reason why companies continuously make money. Meanwhile, quibbling over a percent or two here or there - while prudent in theory - might force you to miss out of some of the best companies in the world.

And he provides some advice that any investor should keep in mind.

 By 1970 Coca-Cola had been paying dividends for half a century and was selling for $82 a share. And you might have thought that price was a couple of dollars too high, or the dividend yield was too low or that it had a good run, but it's time to shine in the beverage world was over.  
You can always find a few reasons why it's not the ideal reason to buy. Years later you would have seen presidential scandals, an oil crisis, double digit inflation, various wars, terrorist attacks and a global financial crisis, the whole thing. There's always a reason, but in the end if you bought 1 share for $82 and reinvested the dividends it'd be worth about $12,000 now. And that factor so overrides everything else. 
Considering the companies that you want to own for the very long-term is often just as essential as thinking about the valuations that the market is offering.

What stock is worth owning for your lifetime?

Thursday, November 7, 2013

The More You Play By The Rules, The More You Get Beat Up On

"The more you play by the rules, the more you get beat up on.”

David Prestin, a 48-year old who operates a gas station and a diner at a truck stop in Michigan's Upper Peninsula is quoted as saying this in The Washington Post this week.

Prestin is one of the millions of Americans who have found that the Affordable Care Act is not so affordable.  He recently found out that his health insurance plan premiums will rise from $923/month to $1,283 per month in order to comply with Obamacare mandates. He found a cheaper plan but he and his wife would have to change all of their doctors and they would need to travel more than 100 miles from their home for hospital care under that plan.

“I pay my taxes. I’m assistant chief of the volunteer fire department here in Cedar River and a first responder for Mid-County Rescue,” Prestin said. “You try to be personally accountable and play by the rules, but the more you play by the rules, the more you get beat up on.”

Why does it seem that every issue that President Obama gets involved with he has a similar mindset. It never seems to cross his mind to think about the people who have worked and tried to do the right thing.  He seems to be only focused on trying to bail people out of their woes.

That is a noble goal.  There are a lot of people that need help.  There are many innocent victims as a result of their upbringing and other circumstances.  However, there are also a large number who did themselves in with poor decisions.  People who bear some (or a lot of ) responsibility for their own plight.

That does not seem to enter into the mind of President Obama.  He is shown he is more than willing to sacrifice those Americans who played by the rules to further his "social justice" agenda.

Obamacare is a perfect example.  Don't worry about the hard working people like David Prestin who went out and bought health insurance without an individual mandate to do it.  He can be sacrificed. It is more important to extend health insurance to someone else who does not have it.  Even if they could have done so but wanted a new big screen tv instead.

Don't worry about the young man waiting patiently in Ghana to come to the United States legally.  Someone who is following the U.S. immigration laws and rules to come to the United States the right way. Go ahead and grant citizenship to the other young man from Mexico who broke our laws and snuck into the United States illegally.

Don't worry about the young couple who got caught in the housing implosion and are now struggling with their mortgage payments.  They cut everything in their household budget to the bone and take second jobs to make sure they stay current.  Go ahead and provide mortgage relief only to those who are behind on their payments or are in foreclosure.

Don't worry about the working couple who started a business in their garage and built it into a success employing hundreds of people. After all, in President Obama's mind they didn't build that. Raise their taxes, regulate their business and put a bunch of costly healthcare mandates on the healthcare they provide for their employees.

Don't worry about the retired couple who scrimped and saved their entire lives to build a nest egg for retirement. They weren't asking for much.  They thought if they could just make 4%-5% a year in interest income off of their savings they could have a comfortable retirement. Go ahead and support a Federal Reserve policy to keep interest rates low to bail out Wall Street and the federal government at the expense of those people who lived by the rules their whole lives.

We see it over and over with President Obama. The rule of law and those who play by the rules seem to matter very little.  The only thing that matters is his agenda and what he considers to be his political base. And he has shown he will say anything to further those goals. Everyone and everything else is expendable.

The problem is that those people that he continually beats on, those that have done it right, are the people that have made America what it is. They are the people that get up early and work late. They are the people who put on a uniform and defended this country. They are the people who have built this country and who have paid the bills.

The United States of America does not work without those people. Barack Obama does not seem to understand this. And in the process he is destroying what has made America great. Unfortunately, those who will pay the biggest price for this in the end are the very people he professes that he wants to help.