Advanced Consumer Econ pt. III - Greybeard University

Some time ago, I shot off my mouth about investing specifically, and the state of corporate America in general. Rather than get right to the nut cutting about investing, there was a little discussion about consumer debt, and another very basic course about keeping one's own donuts on one's own extendable donut holder. Finally, as promised, is the end all and be all of investing on the 21st century (sort of, this will be a multi-part presentation).

Just need to clean up two matters from before. Federal law now entitles you to a free credit report every year. It is possible to request your free report on line, but here are two cute tricks. You can't hardly Google your way to the correct web site, which is www.annualcreditreport.com . The link is accessible from Experian, but you cannot get the free report directly from the bureaus, gotta go through the link. Trick number 2... when you go to www.annualcreditreport.com don't ask for reports from all three bureaus at once. Make it a habit every four months to go to the web site, and rotate who you request report from. For example, pick Experian today, go back and get Equifax 4 months from now, TransUnion 8 months from now, and start the cycle again next January with Experian again.

If you do this, you can continually monitor and correct your credit year round, without being out any dough. Also, it takes a couple of months to clean up your report, so if you correct something on Experian now, the correction should show up on Equifax 4 months down the road.

Bonus trick! Also, you gotta understand that your Transunion score is usually the lowest of the bunch. TransUnion tends to report more of your bad behavior than the others. That is why you need to put it at the end of the cycle, you give yourself 8 months to start clearing up erroneous credit reporting before you get to those weasel-nuts.

One more house cleaning matter. Earlier I extolled the virtues of gold, but even when the Dow hit 11,000 the other day, gold was at its highest point in several years. If, like me, you believe that the US housing market is about to rollover and heave like a coed at Mardi Gras, gold is still a good buy even at today's price. There is a series of gold coins that is a bit undervalued right now... they are commonly called Coronet coins, made in the mid-1800's through the early 1900's. Most of the coronets minted 1877 and afterwards are a helluva bargain right now. If you have a good local dealer, go see him. If not, try this guy . His collector coins are a little pricey, but he will do you right on the gold.

Also, keep in mind that other precious metals have more industrial uses than gold does (and therefore more intrinsic value). Platinum comes to mind...

Either way, I still fear the Chinese... I meant to say, I for one welcome our new Chinese overlords. In 1995-ish, the US only had enough currency to physically embody 8% of the total "wealth" held within the economy. All of the rest of the "money" was nothing more than electronic transfers and bank ledger entries. In short, the money didn't exist, you only had money to buy things because the bank said you did; even if there was cash to be had, it is only worth anything because Uncle Sam says so. Gone are the days when you can belly up to the Federal Reserve with a fistful of sweaty singles, and exchange it for gold. Once the Chinese bend us to their will, the only tender that the US dollar will be good for is kindling to keep warm while all the world's oil goes to China and India. Soooo, gold may be a bargain today at any price.

With that upbeat message, on to today's lesson.

Investing, unfortunately, means more than socking some cash into a Mason jar or picking up some lottery tickets while grabbing a drink for the evening. Modern day investing is little more than an updated form of alchemy. It largely consists of giving your worthless green stuff, cash, to someone else in the hopes they will give you more green stuff, cash, back. Lead to gold, cash to cash...

While there are many ways to have people give you cash, the alchemy of choice today is the stock market. Because there is so much money being dumped into the stock market now, there are 18 different kinds of hucksters, used car dealers, pimps, lawyers, brokers, bankers and shunned dentists trying to separate you from your paper lead. What result is a complex trading system that benefits from your ignorance and inaction.

Since we have all agreed, for the time being, that those funny looking green sheets of toilet paper can be exchanged for goods and services, then we gotta figure out a simple way to suck as much cash out of the system as we can. The odds are stacked against us. The rules are complex, or out of date. The alchemists use big words, sliding through ambiguities and slipping through cracks they help create. A swift kick in the nuts ought to slow them down long enough for us to get ours too.

So if you are gonna play in the alchemists' lab, you need to understand what the rules are.

Hypothetically, one could use a green piece of paper, cash, to buy another piece of paper, a stock certificate. One piece of paper says "In God we Trust", the other piece of paper says "Owner and Holder of 1 Share of Infinitegtr, Inc., and entitled to all rights and appurtenances therein." Taken by themselves, one piece of paper is as useless as the other.

If you show up at the locked, gated entrance of Infinitegtr, Inc., with stock share in hand, you ain't getting in to see the President, no chance in hell will the guards let you into the control room and pull the red handle with the placard saying "Do Not Touch!". If you try to drive one of the company vehicles around the corporate campus, somebody is gonna Taser your ass. Even though the new piece of paper in your hands says you are a partial "owner" of Infinitegtr, Inc., no body is gonna jack with you or listen to your great idea about how to generate more of the green paper.

The only way that the front gate lets you in is if you have lots and lots of green pieces of paper, and exchange that paper for lots and lots of stock certificates. Even then, although you "own" lots and lots of Infinitegtr, you still cannot fire the smart-ass, slack-jawed lackey working the guard house because he is picking his nose with one hand and using his "crotch-hand" to maintain his ihateinfinitegtr.com website.

Instead, there are at least two layers of other people between you and your company. The first layer is the Board of Directors. Every so often, you get to vote on who is on the board, and who is off. You also get to vote on suggestions that the Board makes regarding how the company is run. Voting for directors, or the directors' suggestions, is worse than voting for politicians. Political elections, at least, give you months and months to see what kind of asshat you are dealing with. Directors stay below the radar, and they have lawyers and other liars draft the suggestions being voted on, so you Mr. Owner Man, don't know what the hell you are voting for anyway. Most boards are like politicians, in that they really don't do anything of great importance, other than soothe their own sense of self-importance.

The second layer are the officers. These are the folks with the offices on the top floor of Infinitegtr, they fly the corporate jet all over the place, have big parties, and give money out of your corporate coffers to charities like Jack Abramoff.

The officers and the directors try to keep you happy while keeping themselves wealthy without going to jail. This is usually done in two ways: growth or income.

Growth means that you use 1 piece of green paper to buy you stock certificate; and 6 months later you sell that same stock certificate to someone else for many many pieces of green paper.

Income is the uglier, but more interesting, sister to growth. Instead of selling the stock certificate for many many dollars, you keep the stock certificate, and every so often Infinitegtr sends you a couple dimes and and cents for every stock certificate that you hold in your sweaty hands. Your paper turned into coin. You get to keep the paper AND use the coins to obtain goods and services. Modern alchemy.

When the system works, it is a good thing.

If the officers and directors don't succeed in that sweet voodoo magic of turning nothing into something, if they can't help you sell your paper or turn paper into coins, the directors can fire the officers, and you and all your shareholder friends can fire the board. If they screw the deal up, you may decide to trade your certificate for green paper, but for less green paper than you originally traded. If the folks at the helm really screw up and have to put Infinitegtr into bankruptcy, then you are sucking wind. You and your friends with the stock certificates will get paid last, if you get paid at all. (The term "getting paid in bankruptcy dollars" may be the most honest assessment of modern currency yet).

The next class will focus on finding a good company that might provide growth and/or income. The suggested reading for next class is here.

This morning, Infinitegtr, Inc., rebounding from sleazy scandals that submarined the ailing company, announced that in order to clean up its corporate image, cleanse its corporate soul, avoid a moral bankruptcy and relieve itself of growing and unmanageable shame, the company is selling its largest, high profile division...Formerly Living.