Thursday, November 18, 2010

Value Investing

The other day I overhead some finance majors talking about an assignment where they had to practice "value investing."  The weird thing was that it sounded like the first time they had ever heard the term even though they were upperclassmen.  This is why unless you are willing to engage yourself in the world and do something like read on your own, you should probably not consider getting a finance degree from a rural state school; You're only going to be competing with the economics and mathematics grads from either the flagship state university or better private schools.  Sorry.

On a similar note, I am currently reading a book on Warren Buffett called "Warren Buffett, the Making of an American Capitalist." This book really gets to the nuts and bolts of how Warren Buffett has made decisions over his career and highlights his unrelenting striving towards cutting the fat in his own life and the companies that he invests in.  Overall I have come to admire the attitude he has towards his wealth, as well as the frugality he practices in his everyday life-even though he does go overboard sometimes.

Tuesday, November 16, 2010

Thoughts on the Mortgage Interest Deduction

After reading an article at The Atlantic website this morning on this issue, I thought it might be worth it to talk a little bit about this deduction myself.  Pertinent background information on me includes the fact that I am a renter and I am also an accounting student currently taking an income tax class.  Neither of these things qualifies me to be an expert on this issue, but a stakeholder nonetheless.

A few points from The Atlantic:
  •  Canada does not have this deduction and has the same home-ownership rates as America
  • Three out of four dollars from this handout goes to people with incomes over $100,000
  • Only one in seven homeowners in North Dakota take the deduction
As a renter I view this as one of the issues that makes homeowner-ship a round-about investment.  Their are obvious advantages when it comes to exclusion of capital gains and the like, but the hassles involved with this "investment" are never-ending.  I was studying for a test last night, and was shocked by the number of fees mortgage holders pay to service their loan.  By the way,  in order to pay off one's loan early it is necessary to pay a fee for this privilege (an otherwise prudent decision).  For a rental there is one fixed payment a month (even if only for a year), and the hassle of paying the tax bill, various utility bills, and maintenance costs do not exist as separate bits and pieces floating around in your life.

As a renter who would potentially buy a home from $100,000-150,000, the mortgage interest deduction would hover around the standard married filing jointly deduction for my husband and I.  Because of this, I don't necessarily have a vested interest in the deduction sticking around, and I also wouldn't necessarily want an incentive to pay my mortgage off over the longest period of time possible either. 

Another article I read today was that it doesn't pay to remodel a house. No surprise here, but I do have a real life example of this truism in my parents.  My parents hit the home-owning lottery and sit on a piece of lakeshore that has appreciated in value substantially since they bought it at a steal.  Their house is an ordinary 50's ranch house, but they have never been deluded that their house has any intrinsic value, because they have always known that it would be a tear-down for any potential buyer. As a result of this reality, my parents have only made a few improvements over twenty years of living where they live.  This has only included replacing some linoleum, recently replacing the carpet in their room, and the biggest splurge of all--new siding.

On the other hand, my husband and I know more than a few people who live in the suburbs, and because they can't afford to upgrade to a new house, have updated their current homes like crazy.  The intrinsic value of these houses has probably remained the same even after the remodeling (primarily the land, and location, etc), and hopefully have made these homes more livable for their inhabitants, and perhaps more sell-able.  In the end the neighborhood and school district probably dictates the future selling price more than upgraded faucet fixtures and granite counter-tops.

Car Problems

My husband has a car but needs a new car.  Over nine years of being together we have never fought over anything like we have over this issue.  The biggest source of contention is his desire to buy a very inexpensive vehicle that will inevitably have very high miles and is older than 10 years.  My concern is that an inexpensive car will lead to expensive repairs and extensive hassles.

It also doesn't help that my husband's first car as a teenager was a $300 1985 Toyota Camry.  Unfortunately for me, this car was not a lemon and lasted for more than a few years.  This past week my husband found a 1995 Toyota Tercel on craigslist that he is going to purchase today. I'm not sure if lightning will strike twice and this will be a reliable vehicle, but with Toyotas you can usually run them to the ground.  The funny part of the story with this Tercel, is that it is being purchased from a private seller from one of the toniest suburbs in Minnesota: Edina.  The seller is a Tercel fanatic and is upgrading to a 1997 Tercel with an automatic transmission because of his arthritis. 

With a small car, the most important thing to my husband and I was that it had a hatchback in order to maximize cargo room (not a feature in said Tercel).  A manual transmission was also a must for my husband.  My Toyota Echo has a manual transmission, but I would have preferred for one of our cars to be an automatic (tear).  My husband is a rarity because he is obsessed with minimal cars, or cars that are for people who are not obsessed with cars (if that makes sense).  About a month ago my husband test drove a Ford Festiva.  This is one of the most stripped-down cars you can buy, but it freaked me out because it was terribly small and has no airbags.  My husband decided against this option, but almost bought it a few days even after deciding it was unsafe.  End of story, the Tercel has airbags, we paid for it in cash ($1,950), and I hope car makers start to get a clue that people want small cars again.

Saturday, November 13, 2010

A More Rational Christmas

My husband's family celebrates Christmas as if it were 1999.  Because DH's parents are divorced, there are two Christmases with two sets of families, and then there is my parent's more modest Christmas/Solstice/Hannukah affair.  All I can say, 3+ Christmas celebrations are starting to get more than a little annoying.  When my husband and I say that we "don't want anything" or when we give suggestions for a few things that we really need, we still end up with junk that we neither have room or a use for.  While one of DH's families has lots of people to get one thing for (this year it is 7), we are often his mother's sole focus on Christmas.  The result of these celebrations is the same--an incessant pressure to give and receive about the same about of Christmas booty at each.  There is also an incredible imbalance between my family and his.  I usually get my parents one or two things (this year a quart of maple syrup), and sometimes small gifts for my three grandparents.  In comparison, for DH's family it usually requires an outlay of $250-400+ for everyone involved.

The last couple of years have involved tremendous stress on my end to pick out things that DH's family will actually appreciate; will be reasonably priced; and will be what I view as a "quality" purchase (no junk from China).  Is the past this has involved gifts of food, some select toiletries (high quality and often organic), some choice DVDs, and things that will be "used up."  Unfortunately what I have found is that these items are not "used up" by the gift receiver and will probably sit in cabinets for eternity.

When we could not afford to spend very much, such as last year before our wedding, I went the extra mile to make Christmas cookies, and to purchase most of my gifts throughout the year at the lowest possible price. In the end I have largely felt that my efforts have been wasted.  Very few of the recipients of my gift seem to actually appreciate the thought that I put into their extravagant customs, which are largely a vestige of DH's childhood Christmases (need I mention that no one is a child anymore?).  This year I may try to escape to my grandmother's house far away and let DH handle the madness, or I will probably end up going again through the motions and asking for more specific things.  Things we have a use for, but no room. 

What living above our means has wrought...

When baby-boomers were building up their houses and gleefully borrowing from their home equity, did anybody stop and think who was going to afford their over-sized monstrosity?  Many of these same people did not set aside a dime for their children's education, but they still expected the youth of tomorrow to able to afford their suburban albatross.  We are all connected, and the housing mess has highlighted things we before took for granted.  This article discusses the economic eco-system that we inhabit, and the long-lost notion of mortgages and mobility.  If there is no-one now to buy your home, and the young and old alike are suffering.  Obviously things were not suppose to be this way, but the flushest generation in history--the baby-boomers, put most of their eggs in the mortgage basket, and have left us to pay for their unsustainable ways.

Housing Problems and Solutions

The trends in how our generation will live is uncertain.  The housing bubble has popped, but it is very difficult to scrape together a down payment for one of these "bargains," not to mention that job security is almost nonexistent. My husband and I are experiencing this problem first-hand, and there really is no easy answer.  Sure, we have the income to save $1000 a month for a down-payment (on top of a rent of $750), but will our jobs be secure enough to take on a 15 or 30 year loan commitment?  The second question is whether the market in the Midwest United States really is at rock-bottom.  It has always been relatively inexpensive to live in the Midwest, but owning a home is still a daunting prospect for your average twenty-something year old.  Interest rates are not at "historic lows," but interest rates are not as important as a low selling price.  I only say this as future taxes are based on house appraisals, in addition to the time it will take you to pay off your ball-and-chain.  Is renting forever a realistic prospect, or is there some middle-way in this whole maelstrom of housing misinformation.