Low Cost Accounting Lessons

Some good analogies illustrating what some corporate accounting departments did to artificially beef up their balance sheets.

While everyone is expressing shock & surprise at these tricks, I can remember a lot of good coverage of them years ago; especially AOL’s bogus accounting for the millions of freebie disks they were littering the nation with. It was no surprise that eventually they would have to be written off against income.

KMK

Whose Fault Was It?

In hindsight, almost everyone is now admitting that the high values placed on stocks during the dot-com frenzy were wrong. I took a lot of flack for saying just that during the market run-up by people who fell for the con that the old fashioned business & market cycles were permanently extinct.

The cartoon below actually illustrates the situation in that crazy market. However, the blame for the market bubble is a different story. The cartoonist, Ted Rall, is a proud leftist and is trying to give the impression that the evil corporate executives were at fault. As always, I see this from a completely different perspective.

Those stocks couldn’t have been sold if there hadn’t been people willing (stupid enough) to buy them. I have yet to hear a story of a corporate executive sticking a gun to the side of an investor’s head and forcing him to purchase stocks at inflated values. I lay the blame squarely at the feet of the idiot investors. While many of them were simply following the leads of the media and stupid financial advisors, common sense should have alerted them to the folly of their advice.

KMK

Are MBAs Worth The Cost?

Some people are casting doubt on the assumption that an MBA degree will automatically return a much higher salary.

KMK

Back In Fashion

Hopefully, this story is true and the operating style and creative accounting tricks of the new generation of businesses have run their course. I like the idea of bringing back the wisdom & experience of the older veterans who were put out to pasture rather than try to teach new dogs old tricks.

It reminds me of the SCORE program (Service Corp of Retired Executives). My clients and I have found them very useful in giving advice that can’t be found in any book. And the price is right (free).

KMK

Making Money Without A College Degree

One of the commonly held beliefs in this country is that a college degree is essential for a career that will earn a good income. A college degree is required for many occupations; but luckily, there are some that have pretty good hourly & annual pay rates, as shown in this chart.

I haven’t independently verified the figures in this chart. Where the work is being done in an employee (W-2) status, they are probably correct. However, for jobs that are normally handled on an independent contractor (1099-MISC) basis, there really is no such thing as an average. I am specifically referring to real estate brokers, since I have been working with hundreds of them for the past 25+ years.

As I have often said, the real estate profession, while potentially very lucrative, is one of the biggest gambles of any occupation. Because they are only paid if they succeed in making a sale, brokers & agents can work their butts off, spend a ton of their own money, and not earn a dime in income if a deal doesn’t come together. I have seen real estate brokers who go several years with no income, and then have a bonanza year, earning hundreds of thousands of dollars, if they have been able to hold out that long. This feast or famine income stream is most extreme in the world of commercial real estate, which is why most Realtors opt for the slightly more dependable residential side of the industry.

Either way, I could never hazard a guess as to an average income for a Realtor, much less the $47,700 that chart shows.

KMK

Getting To The Bottom Of The Stock Market Problems

Two different analyses of the underlying reasons for the recent drop in the stock market.

A satire, with an element of truth:

Stocks were dropping precipitously last week as investors realized that corporate leaders, thought to be working for the good of humankind, were actually busy trying to make a lot of money for themselves.

The serious truth:

Stock options were not a new development in the early 1990s. However, they became a much more important part of corporate compensation plans as a direct result of the Democrats’ exploitation of class envy by disallowing any tax deduction for salaries of corporate executives of more than one million dollars per year. As always, the Dims exempted this rule from applying to their leftist pals in the entertainment industry.

As always happens when tax laws are changed, people and companies change their behavior in order to minimize their personal pain. Stock options as an alternative to salaries over a million dollars were as natural an answer as any I can think of. Because stock options are worth more based on the market value of the stocks, executives often took shortcuts (aka creative accounting) to give the investment world the false impression of higher profitability than existed. It doesn’t take a rocket scientist to connect these dots.

KMK

Investment Advice

A good friend from the Bay Area, Bruce Howland, who has been an active stock trader for the past few years, passed on this bit of advice.

If you had bought $1000.00 worth of Nortel stock one year ago, it would now be worth $49.00.

Based on the above, my current investment advice is to drink heavily and recycle

Ironically, Bruce’s second avocation, music, is now starting to look like the more dependable and less risky one. His group, The Living Water Band, has its own section on mp3.com. They describe themselves as Christian Country. With Bruce’s mandolin, it also has a touch of good ole bluegrass.

Fortunately, Bruce’s daughter, Catherine has inherited his passion for music instead of gambling in the stock market. I downloaded some songs from her section on mp3.com and was very impressed. Her music is completely original; but does remind me a little of Jewel. Catherine, who also has her own stand alone web site, definitely has a much more dependable and lucrative future ahead of her in the world of music than in stock trading.

KMK

Gambling With Retirement Dollars

With so many people taking it in the shorts with the decline in the stock market, I just wanted to cover a few of the most common questions that come out in times like this. For those of you who are relatively new to stock investing and are experiencing your first big market downturn, welcome to the real world. These cycles of up & down have happened since the beginning of time and if you were under the impression that the stock market was a guaranteed no-lose proposition, consider this to be your lesson in Investing 101. In spite of what our former president & his worshippers claimed, he did not permanently erase business & market cycles.

Retirement Accounts

Whenever market values decline, people want to know how they can deduct the losses for their retirement accounts decreasing in value. I have to break the news that no such immediate tax deduction is allowed. I have never been shy about pointing out unfair aspects of the tax laws; but this one is perfectly legitimate, which I will explain.

Deductible losses are based on the amount of your cost basis in the asset. Pre-tax retirement accounts, such as IRAs and 401Ks have a cost basis of zero for income tax purposes. They are designed to produce taxable income when the funds are withdrawn, normally during your retirement years. If these accounts are heavily invested in risky stocks, you will actually receive a kind of tax deduction later on because there will be less money to withdraw and pay taxes on. This is why I have always advised conservative investments with retirement accounts.

A related subject is the taxation of capital gains in retirement accounts. All withdrawals from retirement accounts are subject to ordinary income tax rates, even if the funds were from long term gains. This is a big difference from investments made with after-tax dollars. In those cases, long term gains (assets held over 12 months) are subject to lower income tax rates. You should keep that in mind when deciding whether an investment should be made with a pre-tax retirement account or with your own money.

Capital Loss Limits

Here is a very big and very unfair double standard in the tax code. If you have an overall net capital gain for a year, it is all added to your other kinds of income and subject to income tax, with no dollar limit. On the other hand, if your capital losses exceed your capital gains for the year, the most you are allowed to deduct on the current year’s 1040 is $3,000 per person or per couple (marriage penalty). The unused losses are carried over to your next year’s Schedule D, where you can use them to offset gains earned during that year. Again, only a maximum net loss of $3,000 can be used to offset other kinds of income per year.

Suppose, you have a net capital loss of $300,000, which I have seen on some actual tax returns. How long will it take to use up all of the extra $297,000 of excess losses? While they can technically be carried forward indefinitely, that really isn’t the case. What if the person passes away before s/he has utilized all of his/her capital losses? Can those unused losses be passed on to his/her heirs? Nope.

If you agree that this is adding insult to injury to investors, I can only encourage you to contact your elected rulers in DC and tell them how you feel.

KMK

One Set of Books

Victor Canto has some good ideas here. Rather than add so many new rules for corporate bookkeepers that they end up needing to maintain three completely different sets of books (for investors, IRS & regulators), he recommends that the figures given to IRS be the sole figures to report a corporation’s finances. Sometimes, the simple approach is the best.

KMK