Each Monday, The Simple Dollar opens up the reader mailbags and answers ten to twenty simple questions offered up by the readers on personal finance topics and many other things. Got a question? Ask it in the comments. You might also enjoy the archive of earlier reader mailbags.
As usual, we’ll start things off with a few links to older articles that directly answer questions I’ve heard recently. These are seven book reviews I’ve already done in the past that readers have suggested that I do in the last few days. I figure if one reader has written in asking for them, there’s probably a few dozen of you interested in each one. The links go straight to my reviews of the books.
The Total Money Makeover by Dave Ramsey
In Defense of Food by Michael Pollan
Unconventional Success by David Swensen
The Ultimate Cheapskate’s Road Map to True Riches by Jeff Yeager
Stay Mad for Life by Jim Cramer
Automatic Wealth for Grads by Michael Masterson
The Money Book for the Young, Fabulous, and Broke by Suze Orman
And now for some great reader questions! This week, I’m going to answer a smaller number than normal, because I think several of these questions are going to set off long discussions by themselves and I want to give them some space to develop on their own.
My dad always told me that you should keep at least a dollar in cash on you for every mile you’re away from home. What do you think of that philosophy?
I can see it being an interesting philosophy in terms of the short range – $100 for being 100 miles away makes some sense – but it quickly gets ludicrous when you look at international travel. It’s 10,306 miles from New York City to Perth, Australia. Does that mean if you live in New York and you’re wandering around in Perth you should have $10,306 in cash on you at all times? That’s insane – you’re asking for disaster.
So what’s a good rule of thumb for how much cash to carry on a trip? I try to keep cash on hand any time I leave the house, but usually a $20 suffices for that. When I leave on a long trip – one where I won’t return home – I carry $200 in cash and replenish it at ATMs if I need to. Aside from that, I rely on cards – carrying cash is a risk itself, as you can’t recover it if you lose it. I usually keep the cash separate from the cards if traveling, and I usually keep one card completely separate from everything else in case a big disaster strikes.
Receipt management: how do you have the discipline to keep track of all of your receipts, reconcile them against multiple credit cards, etc?
I just keep all receipts in a shoebox. What I usually do is read through my statements each month and if I can’t figure out quickly what a charge is, then I go receipt hunting. Most of the time, I can quickly figure out almost all of them, so I don’t have to go hunting very deeply.
In other words, I usually don’t reconcile every receipt against my statements – I didn’t even do that in the past when I was actively budgeting. As long as I knew what everything was, I didn’t feel a need to reconcile every receipt. However, I did use the receipts to help with budgeting, especially because often purchases at Target and other places crossed into multiple categories, so I’d go through the receipt to try to divide things up.
Now, for the most part, I just keep old receipts for a while until I can reconcile them, then I toss the old ones out every once in a while (I usually burn them).
Stock picking strategies, what are your thoughts on the dog of dows strategy?
I don’t think most “rule of thumb” stock picking strategies are very good at all, actually. They almost always rely on a string of anomalies. There are so many potential patterns in the stock market that sheer randomness occasionally produces something that looks like a pattern. The vast majority of the time, it’s not a pattern. Think about it this way – imagine just grabbing handfuls of red, white, and blue poker chips and tossing them in a bucket. At various points, completely randomly, you could look in the bucket and guess that there are more white chips than anything else because randomly you’d see more white chips – that doesn’t mean that white chips are a good bet for the future. (This is basically the premise behind a good part of the excellent Burton Malkiel book A Random Walk Down Wall Street.)
If you’re going to invest, I suggest either investing only in companies you very well or just investing as broadly as possible. That’s basically what Warren Buffett suggests – he encourages 99% of investors to just buy broad-based index funds and call it good enough, because 99% of investors don’t have the time or the available data to properly evaluate a company and determine if it’s really a good investment or not. Buffett is spot on, in my eyes.
Settle the “thaw” versus “unthaw” vocabulary war once and for all!
Unthaw and thaw mean the same thing, even though the “un-” prefix seems to indicate that they would be opposites. Princeton defines unthaw to mean “dissolve: become or cause to become soft or liquid” – the same definition as thaw.
Using “unthaw” in this way is generally considered to be a colloquialism – in other words, it’s considered to be something appropriate in common conversation but not in formal writing. I often choose to use colloquialisms on The Simple Dollar because the point of this site is to be conversational. I’m not writing formally here, nor do I ever want to write in such a fashion – it says “financial talk for the rest of us” right up there on the banner, not “dry essays on the nuances of fiduciary duties.” If you want that, go read a book by William Sharpe.
What is your opinion on the oil situation … with the massive profits by Big Oil, and so much of our money going to the Middle East so they can splurge it on palaces and mile high skyscrapers. Have you gotten to, or where would be, your breaking point for becoming more proactive on becoming less depending on using “oil”?
First of all, I think the “massive Big Oil profits” are overblown. Those businesses are enormous. The investment from individual shareholders in all of the organization, equipment, and effort that it takes to get oil out of the ground, processed into petroleum and other goods, and transported to your local gas station is huge. If you look at the revenue of those large oil companies and then subtract out the unimaginably enormous costs, and then look at their profit as a percentage of the unimaginably huge revenue, oil companies don’t earn that much money. Businesses like McDonalds are far more profitable than Exxon and the like. The profit is huge, but the company is the size of Exxon is unbelievably enormous.
Let’s even compare Exxon and McDonalds. In the first quarter, Exxon brought in $116.854 billion in income, while McDonalds brought in $5.615 billion in income. That means, in terms of raw income, Exxon is the size of 20.81 McDonalds – so it would be reasonable to think that it should earn the profit of 20.81 McDonalds. Exxon reported a profit of $10.89 billion in the first quarter, while McDonalds brought in a profit of $946 million. Exxon only earned the profit of 11.51 Mcdonalds. Per dollar of revenue, McDonalds is almost doubly as profitable as Exxon – for every dollar in income, McDonalds profits 16.8 cents, while Exxon only profits 9.3 cents. Does that mean we should break up McDonalds?
Let’s say that we then put a windfall tax on Exxon and siphon away some of that profit, driving their profit down into the 4 cent range. Investors will look at Exxon and see something that they should pull their money out of. Very quickly, Exxon stops having the money necessary to get fuel to you at all. The infrastructure breaks down, no one has the capacity to pull off that large conversion of oil in the ground to gas at the pump, and gas goes ballistic in price. Since there’s no real alternative available, the United States would be hammered.
A windfall tax on the oil companies is basically foolishness. It’s not even a political question – it’s a dollars and cents question. I wouldn’t put my cash in a business that was only profiting four cents for every dollar of revenue – I’d take my cash to another business, as would most investors. If we did this, the oil companies would go away very quickly – and we don’t have the infrastructure in place to handle such a rapid shift. Imagine America if a year from now there was no gas to be had anywhere.
The solution is to put that support infrastructure in place right now. If you want to break up dependence on oil, look at individual consumer and political action. Buy highly fuel-efficient cars, or even look at all-electric options (yes, there are some). Use public transportation. Work politically to get people elected that will encourage such things – yes, even going so far as to support the Green Party, if need be. Don’t just focus on the presidential race, either – focus on the local race for Congress in your area and also for the state legislature. Who are the candidates and where do they stand on those issues? Work to support the greenest candidates by putting up signs and telling your neighbors. In other words, fight oil dependence at the revenue level, not at the profit level, while building a different transportation infrastructure.
I’m very serious about this. In fact, I’m strongly considering buying a Tesla Whitestar for our next car for most of our driving needs, even at the relatively high cost. Over a reasonable lifetime, no gas cost is potentially huge savings, as is the vastly reduced maintenance costs of having minimal moving parts in a vehicle. Pushing that curve is something that can bring about big change. If five million American families did that instead of griping about gas prices, profound changes would begin occurring very rapidly, as competitors would jump in and drive the price down, making electric cars compete in price with gas cars. When that happens, electric cars win in a landslide.
Got any questions for future mailbags or comments on the above issues? Let your voice be heard in the comments section below.