Don’t Feed the Alligators

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Killington

Creative Commons License photo figure credit: Derek Purdy

This past Friday I used some comp time at work to take advantage of some non-weekend skiing at Killington Mountain in Vermont.  My host for the day was an old friend who sold a company during the Dot-Com boom and has been, for the most part, living off of the interest and dividends provided by his investment of the proceeds of the sale.  We talked about a lot of things while riding the ski lift, from parenting philosophy to Wall Street bailouts to the whereabouts of our mutual friends.

My friend challenged me in many ways, not the least of which was in trying to keep up with him on the slopes.  But as the memories of freshly groomed courderoy fade away, I’ve been chewing on a number of the things I learned or relearned in our ski lift discussions.  Please excuse the fact that some of these are broad, and some are narrow, but that’s how the conversation went.

  1. Citigroup is not going back to $45 - Throughout most of the 2000s, Citigroup’s stock price was in the $40 to $50 range.  It closed at $1.03 on Friday.  There are two important lessons here: A. You should not own individual stocks unless you own enough and varied stock to be able to weather problems in one particular market segment, like banking or energy — in other words you should be diversified enough to mitigate non-systemic losses.  B. Even if you believe that the market will bounce back, it will have to do so without Citigroup, GM, and any number of other well established, large companies whose stock is now all but worthless.  Money invested in Citi at $45 is gone.
  2. Koreans make bad pilots – There’s a book out now by Malcolm Gladwell called Outliers.  In it, there is a story about the problems that Korea Air had keeping their planes in the sky in the 80s and 90s.  Apparently the problem stemmed from a cultural requirement for co-pilots and other crew members to respect their elders by not questioning their authority and decisions in the cockpit.  It seems to me that a lot of the financial mess we’re in today stems from people not asking enough questions when they didn’t understand the terms of a deal, be it a mortgage or a credit default swap.
  3. This is not the first time the government has bailed out a “too big to fail” company – Do you remember a company called Long-Term Capital Management?  I didn’t either.  But I learned that this was a hedge fund that failed “spectacularly” in 1998 and was bailed out by a consortium of banks.  This fund was “too big to fail” in that its quick liquidation would have led to a collapse of financial markets.  You can’t sell large stock positions all at once since it causes the price to fall sharply, and you certainly can’t do so for many stocks all at once since it causes entire markets to fall sharply.  My ski buddy wonders why we put ourselves into a position again in which unregulated entities were allowed to become too big to fail.
  4. When you can’t find value in something that you need, you can always go for cheap – I was eyeing the sushi bar at lunch time, but a $15+ dollar lunch was not worth it to me.  Instead I went with a $4 hot dog.  This is similar to why I choose index funds instead of managed mutual funds.
  5. Giving up a little can be worth a lot – A season pass at Killington cost $999.  A season pass with 14 blackout days costs $650.  By giving up less than 10% of the available days during the ski season — which also happen to be the days with the longest lift lines — you save 35% on the pass.  This works the opposite way as well.  I’m reminded of the fact that most of the gains in the stock market happen on VERY few days.  If you had invested $10,000 in 1996 in an S&P 500 Index Fund, you’d have $17,280 in 2008.  If you had missed the 10 best days during that period, you would have just $10,748.  If you had missed the 20 best days, you’d have lost money and be left with just $7,360.  (Source)
  6. The government should not have let Lehman Brothers fail – It was distasteful to the American people that the government bailed out Bear Sterns, so it let Lehman Brothers fail to appease the taxpayer rather than do what was right with respect to fiscal policy.  In all likelyhood this has cost the taxpayers far more than it would have otherwise in the form of bailout after bailout.  The failure of Lehman Brothers began a downward spiral which seemingly has not yet found it’s floor.
  7. Don’t take the experts at their word without doing your due diligence – The weather.com “ski index” for Killington on Friday was a 1 out of 10, with 1 being the worst.  I decided to make the 3+ hour drive and see for myself.  At the very worst case it would be a long way to go for a couple of beers.  My friend says that he would have given the day a 4.5 overall (5 in the morning, 4 in the afternoon).  I would give it a 7, since my bias is towards smaller, less challenging mountains with generally worse conditions.  Check out this clip from The Daily Show which features a great quote from Jon Stewart: “If I’d only followed CNBC’s advice I’d have a million dollars today…provided I’d started with $100 million.” (Thanks to David at My Two Dollars for posting the link earlier this week.)

I had a great time skiing, and a great time chatting on Friday.  I like to think they were both somehow good for my soul.  I like to hear your opinion on any of these points.  Leave a Comment below.

There was a time when I believed the old axiom:

“The lottery is a tax on people who are bad at math.”

I understand the math, and I have for quite some time. But a few years ago, I started watching poker on TV. I especially enjoyed The World Poker Tour. I’ve never played poker, but certainly learned a lot about the game by watching.

Two interesting concepts that caught my attention are:

pot odds — the ratio of the current size of the pot to the cost of a contemplated call.

and

equity or expected value — the product of the expected odds of winning the pot and the amount of money in the pot.

Looking at these terms with respect to the local jackpot game yields the following:

Probability Top Prize Pot Odds Equity
1 in 75 $2 1 in 95 million $0.03
1 in 141 $3 1 in 95 million $0.02
1 in 306 $7 1 in 95 million $0.02
1 in 844 $10 1 in 95 million $0.01
1 in 13,781 $150 1 in 95 million $0.01
1 in 15,313 $150 1 in 95 million $0.01
1 in 689,605 $10,000 1 in 95 million $0.01
1 in 3,904,701 $250,000 1 in 95 million $0.06
1 in 175,711,536 $95,000,000 1 in 95 million $0.54

Another way to analyze this is by looking at the history of the pot:

Probability Top Prize Pot Odds Equity
1 in 175 million $12 million 1 in 12 million $0.07
1 in 175 million $16 million 1 in 16 million $0.09
1 in 175 million $26 million 1 in 26 million $0.15
1 in 175 million $37 million 1 in 37 million $0.21
1 in 175 million $47 million 1 in 47 million $0.27
1 in 175 million $59 million 1 in 59 million $0.34
1 in 175 million $69 million 1 in 69 million $0.39
1 in 175 million $83 million 1 in 83 million $0.47
1 in 175 million $95 million 1 in 95 million $0.54

So you can see that as the prize goes up, both the equity goes up but the pot odds go down. The bottom line here is that betting $1 can net you a very large sum of money. How can I afford not to play even though the odds of winning are still very clearly astronomical.

So why do I play? In a word: Hope. It is unlikely that I will ever get to a point in my life where I won’t have to worry what anything costs just by using my head and working hard. It could happen, but it’s probably no more likely than winning the lottery. But all of us still like to dream about what life would be like if we could get up every morning and have our own agenda, rather than carrying out some else’s.

So to balance the mathematician in me who knows that this is a sucker’s bet with the child in me who still hopes that life could change in the blink of an eye, I have a simple set of rules that I follow for playing:

  1. I don’t play until the prize reaches at least $50 million. I figure that the actual lump sum cash payout of $50M is about $30M. After taxes this is probably only worth something like $20M, and then in order to make this money last I can spend somewhere between $500,000 and $1M per year.
  2. I play $1 for the first $50M and then $1 for each $50M (or fraction) for any amount over $50M. So Tuesday’s jackpot is $95M, so I bought 2 tickets.

That’s it.

What would I do if I won? First, I’d photocopy the ticket. Then I’d carefully drive to my local bank, open a safe deposit box account, and deposit the ticket inside. Then I’d find a REALLY good lawyer who could advise me on the best way to collect my prize while revealing as little as possible about myself. I have considered waiting something like 3 to 6 months so that any media hype over the drawing dies down.

After collecting the prize, I would ask my closest friends and family what I could do for them that would be fair and make them happy. Then I would try to accommodate their requests to the best of my ability and prudence. I would put the balance of the money into various investments. Next, I would look for a nice home, and finally I would look to start or buy a business.

How about you? Do you play the lottery? What would you do first if you won?

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Frugal Scrapping

Author: ScrapperMom
03.10.2008

This post is for all those scrapbookers out there who are also trying to watch your spending, which can at times seem impossible with the myriad of tools, papers, embellishments available. Since we try to keep on a fairly strict budget and scrapbooking falls into the discretionary category, I have become the Queen of frugal scrapping. It’s not necessary to sacrifice style to cut costs and listed below are some tips for scrapping on a budget.

Throughout this post I have incorporated some examples of layouts from my own collection, so you can see these techniques at work. Hope you enjoy the layouts and tips and can start saving money while still having a great time scrapping and preserving your memories.

Save your scraps.

Color BlockingEach piece is precious. Ok, you don’t have to save every piece, but if it’s bigger than a 1″ x 1″ square it’s worth saving. If you have a good system to organize your scraps by color or theme you can use them later to make cards, punches and small die cuts. A technique I love is color blocking and it is also a great way to use old scraps. Also if you only have one piece of patterned paper using it in blocks can be very efficient and a great way to incorporate a lot of photos. You can also use one smaller piece on a plain background if you don’t have a full 12×12 sheet. Sometimes this is all the pattern you need for your layout. Read the rest of this entry »

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