The Half Baked Lunatic

Here’s an old high school physics puzzle, let’s see if you can get the right answer: You have perfectly insulated room (i.e., no heat can escape).  Inside the room is a refrigerator, plugged in and running – but the refrigerator door is left wide open. As the refrigerator runs, does the room: A – get colder B – get warmer C – stay the same temperature Think about it for a minute ... (and yes, I first heard this from my high school science teacher back in the late 70’s) The answer is ... (drum roll please!) ... “B” – the room will get warmer.  In fact, the room will get hot. So hot that the refrigerator will likely catch fire and the insulation will melt off the walls. Why? Because a refrigerator doesn’t “create” a cool environment, it just transfers heat from the inside chamber to the outside environment. And since it’s not 100% efficient, it actually creates substantial heat while doing this.  (Don’t worry, I didn’t get it right the first time either). Another way to look at it – you have energy going INTO the room (in the form of electricity) but because the room is perfectly insulated, no energy (in the form of heat) can ever escape FROM the room. I was thinking about this puzzle the other day while reading a report on global warming, and I thought of a follow up question: lets say that instead of having the refrigerator plugged into an outlet, you have a big bank of car batteries in the room – which are strong enough to power the refrigerator for some reasonable amount of time. Now, the energy is already IN the room from the beginning. Hmmm. As long as the fridge is not connected to the batteries, the temperature in the room will stay the same, of course. But as soon as you connect the batteries and the refrigerator starts running, heat will be generated. Batteries that store electricity are said to have “potential” energy; the energy isn’t actually activated until a circuit is made. Coal and oil in the ground have a s... [More]

The star studded 1983 movie "The Big Chill” was about a weekend reunion of a bunch of old college friends – now in their early 30’s – who all get together for the funeral of Alex, one of their classmates who committed suicide. The movie is poignant, intelligent, very funny, and somewhat disturbing all the same time. It’s about rekindling old friendships, coping with the shock of their friend Alex’s death, and wondering what happened to the social idealism that they all shared when they attended the University of Michigan in the late 60’s. They were all anti-establishment, idealistic, smart, enthusiastic, with a vocal desire to change the world and make it a better place. Alex, now deceased, was a charismatic science major. Everyone thought he was the most intelligent one of the bunch – and their mutual friendship really survived through the years because of him. He was the glue that kept them all together, but he was never able to get his own life straightened out. Now, in 1983, they realize they are becoming the conservative “establishment” that they protested against in college.  They are all relatively secure financially, and on upward career paths – so they can’t even blame each other for “selling out” as they are all equally guilty. It’s an excellent story, a wonderful cast, with an infectious late 60’s hit-filled soundtrack.  Let’s get to know the characters a little bit: Sarah (Glenn Close) is a physician, and married to ... Harold (Kevin Kline), who is a business executive. We find out that Sarah had an affair with Alex at one time, but Harold has forgiven her. Chloe (Meg Tilly) – Alex's young girlfriend. She is the only “outsider”, not part of the college group. Alex and Chloe had been living at Sarah and Harold’s home for some time before he slashed his wrists in their bathroom. Sam (Tom Berenger) had been a vocal protestor in college but is now a Hollywood star, somewhat reminiscent of Tom Selleck. He is now divor... [More]

  A good friend of mine forwarded the following email to me the other day.  Now, before I begin, this friend is one of the smartest people I know.  He is the CEO of a rapidly growing company, introducing successful new products into the marketplace even in this economy. He is a vocal Republican, so all I ever heard from him for about 20 years was that “it’s the Democrats fault” when referring to ANY problems in the world.  I’m neither democrat nor republican, so it's never bothered me any. But then, halfway through the second term of the Bush administration, he swung around and admitted that maybe it’s not ALL the Democrats fault, the Republicans need to take some part of the blame for the state of the world’s affairs. And horror of horrors, he hesitantly (accidentally?) said some positive remarks towards Obama during the election (but really, I think it was more of an anti-McCain sentiment than anything, in one email he said “clearly McCain is an even worse war monger than Bush, very scary.  I bet he never met a weapon he didn't buy.”) However, he’s back to his lovable anti-Democrat rant, and has been forwarding some very snide, and occasionally humorous, emails.  The most recent one he forwarded is what prompted this blog posting: Dear Employees: As the CEO of this organization, I have resigned myself to the fact that  Barrack Obama is our President and that our taxes and government fees will increase in a BIG way. To compensate for these increases, our prices would have to increase by about 10%.  But since we cannot increase our prices right now due to the dismal state of the economy, we will have to lay off six of our employees instead. This has really been bothering me since I believe we are family here and I didn't know how to choose who would have to go.. So, this is what I decided. I walked through our parking lots and found six 'Obama' bumper stickers on o... [More]

  Following the hugely successful launch of AloeBoost and AloeRest, I am happy to announce that USAloe is now shipping their third product, AloeControl. AloeControl™ is your unfair advantage in the struggle to maintain a healthy weight. In each healthy 2oz serving you'll enjoy a unique blend of the world's finest fruits, vegetables, and natural ingredients designed to help you control your appetite, efficiently burn calories, and provide you with the essential vitamins and minerals that are MISSING in today's typical American diet. The four core components of AloeControl™ include Appetite Control, Metabolic Enhancers, Digestive Aids, and Core Nutrition. Get all the details and the ingredient list at: http://shop.usaloe.com/products-aloecontrol.aspx I don’t mean to brag, but AloeControl beats everything else on the market – all other weight management products pale in comparison! Forget fad diets. The old school philosophy is still the best way to maintain your health: if you consume less calories than you burn, you WILL lose weight.  Of course, eating healthy foods and getting proper exercise is an important part of this – but reducing the amount that you eat is the best first step.  AloeControl eliminates your desire to eat large portions, while helping your metabolism, your digestion, and your nutritional balance at the same time.  This is the real deal! All three products (AloeBoost, AloeRest, and AloeControl) are available in 2 oz single serving shots, or in quarts – which are 16 servings per bottle. The suggested retail price of the shots is just $3.99, but purchasing in quarts is an even better deal as it comes to only about $1.80 per serving.  Just visit http://Shop.USAloe.com to place your order. All products have a 30 day “empty bottle” guarantee – if you aren’t completely happy, just return the bottle and get a full refund. Additionally, we are still looking for ... [More]

You normally don’t think of Kenya as being at the forefront of technical and financial innovation – but I was struck by this story I saw recently on CNN: http://edition.cnn.com/video/#/video/world/2009/04/15/mckenzie.kenya.mobile.money.cnn What started out as a way to transfer pre-paid cell phone credits to family and friends has turned into an entire micro-transaction commerce platform that is replacing banks in Kenya. And there’s no reason why it wouldn’t work elsewhere! Think of it as PayPal for cell phones.  For example – you want to buy a magazine from a vendor on the street, but you don’t have change.  The vendor doesn’t take credit or debit cards. So you just enter their cell phone number, specify how much you want to transfer, tap in your security code, and hit send.  Just like sending a text message, but you’re sending cash.  The vendor’s phone beeps, notifying them that they just received a payment and he gives you the magazine. Or, say you are short on money this month and need a loan from your best friend – who happens to be visiting family in another state.  Just send a text message asking for some dough, and she can reply back with a transfer. Need to pay your babysitter for a few hours work?  No problem. What a great idea! Very simple, elegant, and technically feasible.  Where does the money come from, and where does it go?  Easy – everyone that owns a cell phone would have an “account” of cash, and you’d use it just like using PayPal to buy something on eBay. You could go online and transfer money from your savings/checking account to your cell phone account, and vice versa. And for people that don’t have internet access or bank accounts, this could be their bank account – which is what has happened in Kenya. A street vendor who sells magazines (or whatever) all day long will have a few bucks in their cell p... [More]

Like everyone else, I’m completely outraged by the whole AIG bonus issue. Bonuses should reward exceptional performance and positive results.  Where’s the accountability? This has been hashed to death in the press, so I’m not going to go into all the reasons why it’s just rotten to the core. But let’s back up a little bit and see how this fits in with the bigger picture of executive compensation.  This has been an issue for many years, well before the economic downturn. It’s a big thorn in the side of many shareholders of large companies. Executive compensation needs to be tied not only to performance, but also to their own personal risk.  For example – a hired CEO brought in to run an established company has a lot less “skin in the game” than a founder who built the company from scratch, putting his or her own net worth on the line as collateral while the company was in it’s critical growth phase. It really irks me when a CEO is able to name his/her own price, with compensation that is EXCEEDINGLY excessive and not tied to any personal risk ... and sometimes not even to performance. Ok, admittedly, it does take a certain skill set to be a CEO of a large company.  I’m not denying that. And everyone LOVES to hate the rich.  But remember, the people that have the skills that it takes to run a large company are also the people that are able to build libraries and hospitals and museums and charitable foundations. Putting these projects together is not easy, and we all benefit from them. Frankly, these are things that our society needs, as well as well run companies. So I am very much in admiration of people that have the skills, the education, the experience, and the fortitude to be a CEO.  But still – the issue at stake 1) isn’t just CEO’s, it’s the compensation for all levels of upper management, 2) there needs to be actual results to justify... [More]

There is absolutely NO WAY that any kind of a mortgage bailout will be fair.  The people who would benefit from mortgage assistance are generally the ones least likely to deserve it. Hardest hit are people who either bought a bigger house than they could really afford, and people who snagged one of those great “no money down” loans.  Are YOU willing to subsidize someone who is living in a luxurious home they shouldn’t have been able to afford in the first place?  Is that the kind of behavior that we are trying to encourage? Absolutely not! While I do have great sympathy for someone who is losing their home after 20 or 30 years, let’s look at the reality of who this might be: Assume someone bought a house twenty years ago, with a conventional 30 year fixed rate mortgage and a 20% down payment.  At the time, the national average home price was just about $75,000 (not inflation adjusted).  Our example homeowner has been paying on their mortgage for twenty years – and even with a fairly high 9% fixed rate loan, the payments are only $483 a month (not including taxes and insurance).  If they’ve kept up on their payments, they now owe $38,000 on a home that is worth at least $200,000 – which is the average value of our example home today, after the latest downturn in prices.  How in the world could their mortgage be in trouble?  Our example homeowner should be able to afford a mortgage payment of $483 a month, even if they are living on a salary of $25,000 per year. And although the value of their home has dropped some $50,000 in the last two years, they should still have over $150,000 in equity. “But”, you say, “they probably re-financed along the way, or they took out a home equity loan, so they actually owe a lot more than this ...” EXACTLY MY POINT – we are not bailing out their mortgage, we are bailing out the cash that they took out of their home and spent on who knows what ... vacations, cars, impulsive shopping, an... [More]

USAloe, a company in California that I've been doing some consulting work for, is launching two new products this week:  AloeBoost (an energy drink) and AloeRest (a relaxation and sleep aid). Both are made with Aloe Vera juice and other healthy, all natural ingredients. What's interesting is that these products are going into a network marketing channel instead of a traditional retail channel, and I think people are going to make pretty good money from it. Now, over the years, I've had plenty of people pitch me on different network marketing companies. All of them have said pretty much the same thing: "I'm going to be retired in two years!"  I've checked back with a few of them, and none of them had the financial success that I've had. The truth is, a lot of people HAVE made a very substantial income with network marketing (or multi-level marketing, or whatever you want to call it) but these people are in the minority.  The majority of people who are in an MLM organization just use it to supplement their exiting income, and as you probably know, there are those who haven't made a dime. Just like any company or product, there are winners and there are losers.  Over 50% of all businesses in the United States fail in the first two years, and it's no different with MLM companies. Why do I think that USAloe one is going to be one of the winners?  It's the right combination of product, program, timing, and people. There's a common perception that in network marketing, just a few people at the top make all the money.  That's not entirely true, but yes - the system does tend to favor people who get in early with a successful company.  But this doesn't apply only to MLM companies - there were countless people who made millions by getting a job at Microsoft in the early 80's, even secretaries and janitors.  I joined Microsoft in 1997 and made a decent salary but didn’t make much on my stock options.  I worked f... [More]

When people think about trading options, their first response is usually "too much risk". While it's true that options can be misused, they are often used to REDUCE risk by hedging other investments.  For example, buying a stock and selling a "covered call" is a substantially more conservative investment than just investing in the stock itself (less risk, but also potentially lower return). And yes, I have learned the hard way what can happen if you lose your head.  After about ten years of successfully and profitably trading options, I entered into an overly aggressive position in 2006 that went south - and pretty much wiped out my entire gains of the previous ten years.  Lesson learned: stick to your strategy and stay within your limits! But in general, even with that painful experience, I am still a firm believer that trading options is more prudent than buying stocks. Admittedly, options are far more complicated.  With stocks, you have pretty much four choices - you can buy a stock, you can buy a stock on margin, you can short a stock, and you can short a stock on margin.  With options, you can buy Calls or Puts, sell Calls or Puts, all at different strike prices and different expiration dates. And there are literally THOUSANDS of combinations that make up bear spreads, bull spreads, calendar spreads, butterflies. It's mind boggling! Additionally, you need to learn new concepts like "implied volatility" and figure out "the Greeks" (primarily Delta and Gamma - two measures of how an option position changes in value with respect to the underlying stock). Among all these choices, there are two strategies that are a "replacement" for simply buying (or shorting) shares of stock. These two strategies are superior in every way to a straight stock purchase - EXCEPT if you are buying a stock specifically to get a dividend payout.  Option positions do not receive dividends. The first strategy is buying "deep in the money" LEAP's. LEAP... [More]

  I've been doing a little research on historic real estate price trends.  I don't think that many people realize how much appreciation we really had in home prices from 1998 to 2006 - it was an amazing run! Even with the bottom dropping out of the market, we're still above the 30 year "average trend line":   But as history has shown, real estate prices are cyclical.  Just like the tech stock crash in 2001, the faster the run-up in prices, the further things fall.  Most people who've owned their homes for ten years without re-financing are still sitting on very good equity - and even their "annualized" return is probably pretty good at today's prices. These folks are in good shape, even if they're kicking themselves because of the value they've lost in the last year. The people who are in trouble are the folks that re-financed to take out cash, drew money out of home equity loans, or bought a home at the top of the market with a higher than 80% loan to value mortgage. A good portion of these homeowners are now underwater. I've said this before in another posting, but it bears repeating: the root cause of all our current economic problems is too much debt. One mortgage that's underwater wipes out the profits for hundreds of "good" mortgages, which is why the banks are in so much trouble. Yes, "credit default swaps" and other complex financial instruments were idiotic and definitely made things worse. And yes, the highest percentage of the problem mortgages were in the "sub-prime" category - but certainly not all of them.  There's plenty of blame to go around. But I maintain that the banking industry is in trouble primarily because the traditional 20% down payment rules went out the window. Where do we go from here?  During the Great Depression, home values continued to slowly fall for almost 13 years!  Ouch! Yes, it can happen again.  Depending on how you read th... [More]