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Bucks Blog: Carl Richards: More Lessons From His Short Sale

November 22, 2011 by Leave a Comment

Carl Richards

Carl Richards is a certified financial planner in Park City, Utah. His sketches are archived here on the Bucks blog. His new book, “The Behavior Gap,” will be out in January.

One of the most powerful outcomes of writing about your experience is that you learn things you didn’t know before you started.

The process of sharing one of the more intense experiences of my life, the short-sale of my home, was terrifying. In hindsight, I’m glad I did it because of what I learned. Here are a few of those lessons and answers to some of the questions that readers raised:

I told myself stories: As David Brooks recently pointed out, “people are really good at self-deception,” and I’m no exception. Real people are notoriously good at gathering information, data and “facts” to support the conclusion we want to hear. Often we even call that research.

We are even better at ignoring information that we don’t want to hear. Have you ever noticed how you avoid the scale when you’ve been eating garbage and seek it out when you are eating well? I have wondered if I rationalized my behavior, and the answer is, of course I did. I made mistakes and then looked for a way to make sense of them.

Short sales: A short sale is a negotiated settlement between a borrower and a lender. I worked closely with the bank to explain my situation. The bank reviewed it very carefully, and in the end, we worked something out that both parties felt was better than the other available options.

My wife and I found a buyer for the house at a price the bank agreed to accept. It accepted a loss on the risk it took, and we accepted the consequences on our side of the deal. We lost our home and trashed our credit. Both parties agreed to the deal, but neither party escaped without consequence.

Obligation to society: While I don’t have a debt to the bank, I do feel like I have an obligation to society. This is one part of the experience that I still really struggle with. I know that my decisions had an impact on society as a whole. My individual impact was small, but just like everyone tossing a small piece of trash, it adds up. I’m not sure how I will fulfill that obligation, but I’m pretty sure that it’s part of my life’s work.

That obligation is also a large part of why I do what I do for a living. We have to change the way we deal with money if we’re going to avoid repeating the same mistakes over and over. I have recently found myself really interested in learning from others who have both succeeded and failed because it’s incredible what you can learn from people who have already been there. Maybe, just maybe, sharing my story can help someone avoid the same mistakes.

Security versus securities: One of the things in my story that got the strongest response was how I got into the financial world by applying for what I thought was a security job.

I recently had a meeting with a senior executive at a large research company who told me that he remembered applying for a job after college. It was a window sales job. He thought he would be selling Microsoft Windows software. It turns out it was actually the kind of windows you look through.

I guess I should have included the fact that it started as a part-time job when I was still a full-time college student. I also delivered flowers and worked at Subway. But what followed were years of some of the best training in the industry, a degree in finance and one of the more rigorous industry designations there is.

The point I was trying to make was that life is a journey, and most of the time the path we thought we were on will take a twist, often for the better.

Why I told the story: There’s no good way to address the claim that I wrote the story to sell books. It reminded me of the press conference after Lance Armstrong won his first Tour de France. He was asked how he would respond to people who claimed that his chemotherapy was performance enhancing. As I recall, he said something like, “Let them try it!”

There would be far better ways to sell books than to take your family through three years of hell and then, just as things were starting to feel normal, share it with the whole world.

I decided to tell the story after people I knew asked me for over a year to tell it. These were people who genuinely felt that it needed to be told because it might help others make sense of their situation. Based on the overwhelming number of gracious e-mails I’ve received from people sharing their stories, I think telling my own was the right thing to do.

Getting a second opinion: As my friend Tim Maurer, also a financial planner, says, “Personal finance is more personal than it is finance.”

Because it’s so personal, it’s very hard to stay objective. We are just too close to it to think clearly. Doctors routinely avoid operating on or treating family members and really close friends. After all, that emotional connection could very easily cloud their judgment should something go wrong and require a critical decision during a stressful situation.

When you think about what money represents, it’s easy to see that it’s emotionally charged. Money is about more than spreadsheets. It’s about our most cherished dreams and often our greatest fears. With those stakes on the line, why is it so hard for us to recognize that we shouldn’t be “operating” on ourselves?

Unless you wake up in the morning and see Warren Buffett in the mirror, chances are you need help. Finding someone to act as a sounding board, an objective third party, is worth the effort.

Now I realize that as soon as I say that we have another issue – who? The traditional financial services industry has a well-earned reputation of being untrustworthy. It’s still really hard to determine who is a real financial adviser or even what they do that makes them worth the cost.

But it’s crucial to try. We can seek out a trusted friend, parent, C.P.A. or our lawyer. Our family hired a real financial planner and after working with him for just a few months, I’m convinced we would have avoided many of our mistakes had we hired him five years ago. Just having a rule that before making major decisions you will walk some objective third party through your thinking would be a step in the right direction.

Co-pilot: Getting advice is different from abdicating responsibility. In the end, after all the advice in the world, there is only one person that can make the best financial decision for you. It’s you.

I like to think of this objective third party as playing the role of an experienced co-pilot. This person is there to point things out and to make sure you have thought of alternatives, but ultimately the decision and responsibility is yours. So while I take full responsibility for my decisions, it does help to know that my family now has a trusted third party to help us, hopefully, avoid bad decisions in the future.

Moving forward: No matter what we do, the reality is we all make mistakes. When we make these mistakes, it seems like we should face the consequences, glean the lesson and then move on. We all have a choice. We can wallow in self-pity, blame others and complain, or we can move forward. I’m not sure what role talking about it plays in moving on, but I do know that hiding from the past never seems to help.

One of the things I did learn from my experience is that until you walk in someone else’s shoes it’s impossible to understand what they’re going through and the motives for their actions. I have found myself a bit kinder, a little slower to judge and maybe even looking for ways to give others the benefit of the doubt.

I had zero expectations that sharing my story would change anyone’s mind about what I did. I did hope that it would help people struggling under the crushing weight of financial mistakes. I also had a teeny, tiny hope that those people who vehemently disagree with me would maybe see the other side of the story and understand.

Not agree, just understand.

Article source: http://feeds.nytimes.com/click.phdo?i=3661c980ce946529fcdd2759794a540b

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Economic View: The Annuity Puzzle

June 4, 2011 by Leave a Comment

Dave can count on a traditional pension, paying $4,000 a month for the rest of his life. Ron, on the other hand, will receive his benefits in a lump sum that he must manage himself. Ron has a lot of choices, but all have consequences. For example, he could put the money into a conservative bond portfolio and by spending the interest and drawing down the principle he could also spend $4,000 a month. If Ron does that, though, he can expect to run out of money sometime around the age of 85, which the actuarial tables tell him he has a 30 percent chance of reaching. Or he could draw down only $3,000 a month. He wouldn’t have as much to live on each month, but his money should last until he reached 100.

Who is likely to be happier right now? Dave or Ron?

If this question seems a no-brainer, welcome to the club. Nearly everyone seems to prefer the certainty of Dave’s pension to Ron’s complex options.

But here’s the rub: Although people like Dave who have them tend to love them, old-fashioned “defined benefit” pensions are a vanishing breed. On the other hand, people like Ron — with defined-contribution plans like 401(k)s — can transform their uncertainty into a guaranteed monthly income stream that mirrors the payouts of a traditional pension plan. They can do so by buying an annuity — but when offered the chance, nearly everyone declines.

Economists call this the “annuity puzzle.” Using standard assumptions, economists have shown that buyers of annuities are assured more annual income for the rest of their lives, compared with people who self-manage their portfolios. One reason is that those who buy annuities and die early end up subsidizing those who die later.

So, why don’t more people buy annuities with their 401(k) dollars?

Here’s one part of the answer: Some people think that buying an annuity is in some way a bad deal for their heirs. But that need not be true. First of all, a retiree can decide to set aside some portion of a retirement nest egg for bequests, either immediately or at a later date. Second, if a retiree chooses to manage his or her own money, the heirs may face the following possibilities: Either they get financially “lucky” and the parent dies young, leaving a bequest, or they are financially “unlucky,” meaning that the parent lives a long life, and the heirs take on the burden of support. If you have aging parents, you might ask yourself how much you’d be willing to pay to insure that you will never have to figure out how to explain to your spouse, or whomever you may be living with, that your mother is moving in.

There are other explanations for the unpopularity of annuities, but I think two are especially important. The first is that buying one can be scary and complicated. Workers have become accustomed to having their employers narrow their set of choices to a manageable few, whether in their 401(k) plans or in their choice of health and life insurance providers. By contrast, very few 401(k)’s offer a specific annuity option that has been blessed by the company’s human resources department. Shopping for an annuity with hundreds of thousands of dollars at stake can be daunting, even for an economist.

The second problem is more psychological. Rather than viewing an annuity as providing insurance in the event that one lives past 85 or 90, most people seem to consider buying an annuity as a gamble, in which one has to live a certain number of years just to break even. But, as the example of Dave and Ron shows, it’s is the decision to self-manage your retirement wealth that is the risky one.

The most complex and unknowable part of that risk is in predicting how long you will live. Even if there are no medical advances in the coming years, according to the Social Security Administration, a man turning 65 now has almost a 20 percent chance of living to 90, and a woman at this age has nearly a one-third chance. This means that a husband who retires when his wife is 65 ought to include in his plans a one-third chance that his wife will live for 25 more years. (A “joint and survivor” annuity that pays until both members of a couple die is the only way I know for those who are not wealthy to confidently solve this problem.)

An annuity can also help people with another important decision: when to retire. It’s hard to have any idea of how much money is enough to finance an appropriate lifestyle in retirement. But if a lump sum is translated into a monthly income, it’s much easier to determine whether you have enough put away to afford to stop working. If you decide, for example, that you can get by on 70 percent of preretirement income, you can just keep working until you have accrued that level of benefits.

IN the absence of annuities, there is reason to worry that many workers are having trouble with this decision. Over the last 60 years, the Bureau of Labor Statistics reports that the average age at which Americans retire has trended downward by more than five years, from 66.9 to 61.6. Of course, there is nothing wrong with choosing to retire a bit earlier, but over the same period, live expectancy has risen by four years and will likely continue to climb, meaning that retirees have to fund at least an additional nine years of retirement. Those who manage their own retirement assets can only hope that they have saved enough.

Annuities may make some of these issues easier to solve, but few Americans actually choose to buy them. Whether the cause is a possibly rational fear of the viability of insurance companies, or misconceptions about whether annuities increase rather than decrease risk, the market hasn’t figured out how to sell these products successfully. Might there be a role for government? Tune in next time for some thoughts on that question.

Richard H. Thaler is a professor of economics and behavioral science at the Booth School of Business at the University of Chicago. He is also an academic adviser to the Allianz Global Investors Center for Behavioral Finance, a part of Allianz, which sells financial products including annuities. The company was not consulted for this column.  

Article source: http://feeds.nytimes.com/click.phdo?i=842544fea03ae4ac1b92114fb3b72365

Filed Under: Economy News Tagged With: , ,

DealBook: Philanthropy Given Focus by Brain Cancer

May 24, 2011 by Leave a Comment

Theodore Forstmann has been dating  Padma Lakshmi, the host of the reality television cooking show “Top Chef.”Hiroko Masuike for The New York TimesTheodore Forstmann has been dating Padma Lakshmi, the host of the reality television cooking show “Top Chef.”

Theodore J. Forstmann is tired.

Sitting on a couch last week in his office on the 45th floor of the General Motors building, he apologized for his lack of energy.

“Thinking and talking and responding is so tiring, I can’t tell you,” he said.

Mr. Forstmann — the billionaire financier who helped create the leveraged buyout industry in the 1970s and who coined the phrase “Barbarians at the Gate” — has brain cancer. After the removal of a tumor last month, he is now undergoing radiation therapy and taking a cocktail of steroids and other prescription drugs.

When I went to visit him, he was particularly drained, a function of the treatment as much as the cancer itself.

“You feel kind of a little bit like a guinea pig,” he said. “What you have to understand is that what they’re doing to you is ultimately the only thing they can do to save you, but the unintended bad consequences along the way are what you actually have to fight against. It’s very strange mentally.” He added: “The steroids kind of take over for your normal emotions so right now I could be crying, I could be laughing, I could be fighting.”

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He doesn’t know how much time he has to live — the doctors “don’t really tell you the truth about anything,” he lamented. But he is in the office because he says he still has work to do.

“This is not how I want to end,” Mr. Forstmann said. “It’s a bend in the road for me. It’s kind of arrogant to put it that way, but that’s the way I want it to be.”

Leaning back as he tried to get comfortable, he said he did not want his obituary to read, “He did this, he did that, and he died of brain cancer. No way.”

Actually, between the words “no” and “way,” an expletive punctuated his point. But then he remembered this is a family newspaper.

At 71, Mr. Forstmann is on a mission. He wants to complete one last corporate turnaround as the grand finale of his storied career. It’s already an extensive list. There was Gulfstream Aerospace, Dr Pepper and General Instrument. He famously railed against his peers’ use of junk bonds, deriding them as “wampum.”

His other exploits are almost as legendary. Over the years, he has been linked in the gossip pages to Elizabeth Hurley, Diana, Princess of Wales, and he is now dating Padma Lakshmi, the host of the reality cooking show “Top Chef.”

Mr. Forstmann is now focused on the transformation of the talent agency IMG, which he bought in 2004 for $750 million and which represents the likes of Tiger Woods and Roger Federer. He considers it unfinished business.

“What I want to do is build IMG,” he said, “and I’d like to do it quicker than I was going to.”

He says he is in a rush for a reason: “I want to make a bunch of money now, stick it in a charitable trust and give it away.”

Mr. Forstmann, who has long eschewed the traditional Manhattan charity circuit, has for years been a quiet donor to children’s groups throughout Africa, and the world. He adopted two young boys from South Africa over a decade ago after being invited there to speak by Nelson Mandela. One of his adopted sons now works at his firm, Forstmann Little Company.

When I asked him why he took an interest in African children, he looked at me with a blank stare as if the question was ridiculous. “They’re helpless,” he said.

Last year, at the request of his friend Michael Bloomberg, the mayor of New York, Mr. Forstmann attended a dinner for billionaires hosted by Warren Buffett and Bill Gates. He agreed to sign “the Giving Pledge” — a vow to give away more than 50 percent of his wealth to philanthropy. But after the dinner, he said he told Mr. Bloomberg, “Mike, I already do this. I don’t need any formal pledge.” (He made the pledge anyway.)

Mr. Forstmann said he acquired IMG to “make a bunch of money, get it out of this thing and spend it on kids in the world. That was the reason.”

He says he is still haunted by articles that said he acquired IMG to simply fraternize “with the golfers or the models or whatever it is.” When he bought the company, he was also roundly criticized for overpaying for the trophy business, a point he now says was true.

“I hugely overpaid for it,” he said. “It was a piece of” — yes, he used an expletive there, too.

But over the last six years, he has transformed the company from a traditional talent agency to a global media entertainment and licensing business. IMG, which was barely break-even when he bought it, made $110 million last year, is expected to earn $140 million in 2011 and $200 million within the next two years.

After realizing that the talent business was “unscalable,” he decided to move the firm into other, more profitable businesses and into fast-growing countries.

IMG is now the dominant licensing company for colleges, propelled by a series of acquisitions — Host Communications and the Collegiate Licensing Company, both licensing companies; and, most recently, ISP Sports, a marketing firm. He formed an exclusive joint venture with CCTV, the national television network of China, to create sports programming.

In India, IMG helped develop the Indian Premier Cricket League through a joint venture with Mukesh Ambani, the chairman of Reliance Industries, and it owns rights to two soccer leagues and a basketball league. He has formed a joint venture in Brazil with Eike Batista, the chairman of the conglomerate EBX.

Although the partnerships are still in their infancies, Mr. Forstmann is hoping they prove valuable.

“My stake is probably worth a couple hundred million,” if sold today, he said, although he doesn’t seem ready to do that just yet.

As he reflected on his career and on modern Wall Street, he seemed befuddled.

“I don’t recognize it. They’re all a bunch of traders. Instead of trading thousands they’re trading trillions,” he said. “There are no more John Whiteheads or anything like that,” referring to the former co-chairman of Goldman Sachs.

Mr. Forstmann has always been outspoken about the financial industry, but this time he went a little further. “It is a pretty greed-driven business, the whole thing,” he said.

While he is proud of the life he has lived — and hopes to conquer the cancer and live many more years — he is not so enamored of the industry he pioneered, he says.

“I’m not very proud of how it’s turned out.”

Article source: http://feeds.nytimes.com/click.phdo?i=95525ecafd532701522b0703f25ba519

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