samerwriter

My wife brought home an article last night that she had torn out of the United in-flight magazine, and suggested I read it.

The article was on something called “Donor-Advised Funds”. I read the article, and found myself intrigued both from a charitable giving perspective, and from a tax perspective. Donor-Advised funds are somewhat similar to the way that Bill Gates or Warren Buffett give money. They give appreciated assets to an intermediary, then use that intermediary to distribute assets to charitable organizations.

Tell Me More!

I’ve been aware of the existence of these programs for about 12 hours now, so I won’t claim to be an expert. But best I can tell, here’s roughly how a donor-advised fund works:

1. You open an account at a investment firm like Vanguard, Fidelity, or whatever.
2. You give money directly to the account.
3. You make recommendations for how the investment firm distributes the funds to other charities.

Benefits

There are a couple advantages to giving this way.

First, if you normally give to many charities, you wind up with many tax receipts. That’s a real pain to deal with. By giving to a donor-advised fund you wind up with a single tax receipt. Last year I had a large charitable contribution for which I was never sent a receipt. I reported the contribution anyway, and hopefully it won’t come back to bite me. But if I had a DAF, I wouldn’t have to worry about that.

Second, this makes it much easier to give appreciated assets. If you plan to give money to charity, giving appreciated assets is a great way to do it. It will save you money. Let’s look at an example.

Let’s say you bought $1000 worth of the mutual fund VMFOO (it’s not a real fund). Over the years the value of your investment grew to $10,000. You now have an unrealized capital gain of $10,000. Depending on your tax bracket, you may owe thousands of dollars in capital gains tax on that investment.

You decide that you want to give $10,000 to a charity. Normally you might either sell your VMFOO, or just write a check from your checking account. Let’s say you sell your VMFOO and give it away. Come tax time, you’ll get a nasty surprise in the form of capital gains tax due on your VMFOO. Now let’s say you write the check from your checking account instead. No surprise come tax-time, but you still have that pesky unrealized gain in VMFOO. That’s going to bite you someday.

But wait! There’s a better way. You can contribute your VMFOO to charity without selling it. You still get the charitable deduction, and you don’t have to pay the capital gains tax. Then you could take the $10,000 and buy more VMFOO. See how that works? You were able to give $10,000 of VMFOO (which you can deduct from your taxes) and you reset your basis in VMFOO. Everybody but the taxman wins.

The problem with this technique is that it’s not real easy to give a small amount of VMFOO to a charity. Many small charities will have a difficult time working with non-cash contributions. But by using a donor-advised fund it is easy for you to give an asset, and the charity still receives cash.

There Must Be Some Drawbacks..

Well of course. The main drawback in my opinion is that you do not directly control the funds. The words “Donor Advised” are important; you can make advice about how the funds will be distributed, but if the administrator of the account decided to give it all to the ACLU, there is presumably not much you could do about it. Therefore, it is probably best to go with a reputable form.

Further, there are restrictions about how you can give. Vanguard has a minimum contribution size of $500, and that’s probably pretty typical. So it’s not really appropriate for $50 gifts here and there.

There are also fees associated. At Vanguard, for balances above $15000 the fee is 0.57% annually, or about $85. For accounts smaller than $15000 there is an additional $100 fee. That doesn’t seem too terrible to me.

Additional Reading

I need to read quite a bit more about these to understand if they are right for my wife and me. Here are some links to get started:
Donor Advised Funds at Wikipedia
Details of Vanguard’s program
Fidelity’s Program

Last year my company started phasing out its broad-based stock option program in favor of RSUs, or “Restricted Stock Units”. Employees below a particular level of seniority (myself included) now receive RSUs only. Employees above a particular level of seniority (my wife is in this group) receive both RSUs and stock options.

RSUs are basically a stock grant, rather than a stock option grant. Each year employees get a new set of RSUs that vest over four years.

This month our first set of RSUs vested. This means that employees now own these shares of stock.

I was shocked…

To hear some of my fellow employees’ plans regarding their RSUs. Several people planned not to sell their RSUs, because “they might go up” or “I want to hold on for long-term capital gains.”

Now I’m not an accountant or a financial advisor, and I don’t have an MBA or anything, but here’s my take on all this.

Yes, the stock might go up, but so what?

Of course the stock might go up. Or it might go down. That could be said about any stock. But more than likely, the company stock is fairly valued. I’ve read internal message boards at my company and it is clear that even a group of well educated math loving engineers don’t understand what constitutes a fair valuation for company stock, so I have little faith in general in insiders’ ability to predict company stock prices.

And here’s the kicker. The RSUs are compensation. Just like cash, but in the form of stock. So it’s simple: if you wouldn’t use cash compensation to buy company stock (and I sincerely hope you wouldn’t), then you shouldn’t forego cash compensation in favor of company stock. Holding onto company stock rather than selling it for cash is the exact same thing as using cash to buy company stock.

There is not any special tax treatment

When we purchase stock through our employee stock purchase plan, there are tax advantages to holding onto the stock for a period. Basically holding onto the stock lets us treat the premium, which by all rights ought to be counted as income, as long-term capital gains instead.

But no such benefit applies to RSUs. RSUs are taxed on the day they vest. So your basis in the stock is reset to the current market price, and the holding period for long term capital gains is reset as well. From the day your RSUs vest, you would have to hold the RSU for a year for long-term capital gains to kick in, and the long-term capital gains would apply only to the increased value from your reset basis.

You are already heavily invested in your company

This is the one that really gets me. A lot of people don’t see it as a problem to have 3%, or 5%, 10%, or more of their net worth tied up in company stock. Haven’t these people heard of Worldcom? Or Enron? For every Microsoft millionaire there are hundreds who watched their company skyrocket, and then plummet without ever diversifying. I work with many of them.

And really net worth is not a very useful number when determining your investment in your company. Net worth is instantaneous and is a reflection of what occurred in the past, but the value you derive from your company continues into the future. Your future net worth depends on your employer paying your salary, providing benefits, and supporting the local economy. Which in turn impacts important things like the value of your home, the resale value of your car, and your future employment prospects should you lose your job.

Yes, many of those things are secondary effects that are hard to quantify. But just because one can’t easily quantify something doesn’t mean one should deny its existence. Repeat after me: Your investment in your employer far surpasses your equity compensation.

So what’s an RSU recipient to do?

Do whatever the heck you want. As for me, my RSUs vested this morning and I sold them a few minutes later. That’s cash in the bank!

I hope no one’s already coined this term, I like to be the first to make up new words.

Today’s word is “obliviot”. It’s a nice juxtaposition of people’s behavior (oblivious) and the way it makes me regard them (idiot). In fairness, idiot probably isn’t the right word, but oblivirritated doesn’t quite roll off the tongue. So obliviot it is.

What is an obliviot? An obliviot is someone who is so caught up in his own little world that he’s oblivious to the irritation he’s causing someone else.

Here are a few examples I see on a daily basis.

Three obliviots walking, side by side, slowly down the hallway. I’m a fast walker, which perhaps aggravates the situation. But we have wide hallways at work. Why can’t these obliviots use up half the hallway so I have room to pass them? Three obliviots I was following today were completely unaware of a guy walking straight toward them carrying a tray of food.

And then there’s the elevator obliviot. This is the guy who insists on getting on the elevator on the second floor, and getting off at the third floor. Even though there’s a staircase just 30 feet away. Nearly without exception this obliviot is either fit, in which case he is certainly capable of walking up a flight of stairs, or not fit in which case he should be walking up the stairs. A guy on crutches who does this doesn’t qualify as an obliviot.

The other class of elevator obliviot is the guy who, while getting on the elevator, holds the door open while he finishes a conversation with a friend in the hallway. This idiot is either oblivious to the fact that he’s holding up an entire elevator full of people, or he just doesn’t care. I guess that would make him an assidiot.

Today an obliviot nearly walked into me because she was punching buttons on her cellphone while weaving down the hall. When I dodged, she dodged. It’s like gravity was pulling us together. Other typical obliviots walk around corners without first checking the ceiling mirrors that my employer nicely installs to help avoid corner collisions. Fortunately you can usually avoid these obliviots by spotting them in the mirrors.

You see a lot of obliviots driving cars, especially when you’re riding a bicycle. A typical obliviot will roll out of his driveway without stopping, slow enough that he could see any cars coming but fast enough that he probably won’t see a bicycle. Of course as a driver, you see a lot of obliviot cyclists (obliviolists?) as well. Like the group that insists on riding three abreast in the middle of the lane even when there’s a shoulder. Actually, I’ve met some of those guys. They’re generally assidiots, not obliviots. They know exactly how pissed off people are getting at them.

One time I saw an obliviot driving at 55mph in the fast-lane on the highway talking on a cellphone. There was a police car directly behind her (trying to get around her) with his siren on. The obliviot didn’t even notice the officer.

We taller folk are all too familiar with obliviots on airplanes. You know the type; as soon as the plane takes off they put their seat all the way back. Hey obliviot? Did you notice how hard it is for you to lean your seat back? That’s because my knee is embedded in the seatback.

Of course the problem with obliviocy is that the obliviot generally doesn’t know he’s an obliviot. The unfortunate result of that is that we’re likely all obliviots at various times, including me. So to anyone to whom I’ve acted obliviotically, I hereby apologize.

Yesterday I rode my first 300K of the year with the local randonneuring outfit.

The forecast called for rain and wind, so I rode my new touring bike and brought along a rack with a change of clothes (in case the weather improved), along with the usual complement of four tubes, pump, tools, and candy. There are frequent services along this route, so I took off my third water bottle.

We left at 6:00 AM from Forest Grove, and made our way out to Highway 6 and about 5 miles toward Timber on Timber Rd. As is usual, I struck out on my own at the start. Not because I’m trying to race anybody (I’d certainly lose!). Rather, on a cold morning picking the pace up for a few miles gets my blood flowing. The first control was about 22 wet miles from the start, and I made it there in a little over an hour. This was a staffed control; those are always nice because you can get your card signed quickly, and the volunteers are always friendly. Literally about a minute after I got there, the lead group arrived including all the usual suspects; Del, Mike, Craig, Phil, and several others whom I didn’t recognize. I waited for them, and returned to Highway 6 with the group.

The climb up Highway 6 isn’t steep, but it’s reasonably sustained. I’m not sure what the elevation gain is, but I’d guess maybe 1000 feet over perhaps 10 miles. Mike and another rider sped off the front, and I hung back with Del, Phil, and Craig maybe half a mile behind. The top of Highway 6 is Rogers Camp. This is where I staged an unintentional breakaway last year, which resulted in me covering the next 50 miles solo. This year, however, it was Mike and the mystery rider that were already in the lead. At the top of the climb I sprinted out ahead, assuming the others were right behind me, but it turned out they weren’t.

5 miles or so down the descent I caught up with Mike, and continued chasing until we caught the other rider. Note to self: If you see a rider on a single-speed with a RAAM fender, you probably can’t hang with him. The other rider turned out to be John, one of the local long-distance racers. The three of us rode on to Tillamook, but a few hundred yards before the Three Capes scenic turnoff, Mike flatted. Twice. While we waited for him to fix the flat Del, Craig, and Phil raced on by. That was the last I would see of Del, but I’m used to that.

With Mike’s tubes replaced the three of us turned onto the scenic drive to the first real climb of the day. It’s a gorgeous ride, but for a bike route the roads sure are terrible! Starting the climb I could see that Del and gang didn’t have much of a lead on us, but since I’m fat and slow everyone eventually biked on out of sight. Mike and I were left pretty much alone, until I flatted on one of the descents perhaps a mile before the Netarts control. Drat.

A few more riders passed me as I fixed my flat tire, and I rolled in to the Netarts control solo. I had a cup of chocolate milk (thanks Bert!), refilled my water bottles, then headed on down the road. A few miles past Netarts there’s a sudden 600′ climb over Cape Lookout. The elevation gain is deceiving — it feels bigger than it is. The weather had been going from merely “pretty nice” to “absolutely gorgeous”, so I took a break halfway up at Andersons Point to take off my raincoat, and eat a handful of chocolate covered raisins. A year into my randonneuring experiment, I’m still trying to figure out what kind of food works for me; I’m not sure the raisins did the trick. Last year at this point in the climb there were hang-gliders launching from here over the ocean, but this year the pulloff was deserted.

Last year I rode this section with Mike, and we maintained a fairly torrid pace until Grand Ronde, at which point I bonked and rode the remaining 60 miles or so in complete pain. This year I kept the pace considerably slower riding into Pacific City, where I stopped at a Shell station for an open control. The station had a few baked goodies, so I bought a mini pepperoni pizza, a 32 oz. Pepsi, and 32oz. of Gatorade to top up my bottles. The pizza really hit the spot.

The route at this point became somewhat like Reach The Beach in reverse. From Pacific City there’s a long but gradual climb up to Sourgrass Summit, then a pleasant downhill through farm country to Grande Ronde. Dick passed me about halfway up the climb, but I caught up in Grande Ronde thanks to the wonders of gravity and my superior girth. Last year we ended up with an uncharacteristic headwind at this point in the ride, but fortunately that was not in the cards this time. Dick and I bounced back and forth a bit, never riding together but always within about 50 yards of each other, up through Amity. The route at this point changed from last year, with a lot less riding on highway 18 in favor of some more backroads.

Notably, there was a 6 mile stretch into Ballston which was utterly fantastic. The tailwind made for an effortless 30mph section for the majority of this leg. In Ballston I picked up a half-melted ice-cream sandwich from the general store while Dick headed out on his own. I ate the sandwich on the bike, and eventually got Dick in my sights again right around Amity. Either the Ballston tailwind or the ice-cream sandwich motivated me on the way out of Amity, and I was able to maintain 25mph for quite a stretch. About 10 miles out of Amity, I chanced to look behind me right as I was being swept up by Mike, Craig, and Phil! I had assumed they were way out in front, but it turns out they’d taken a break in Amity, and presumably hopped back on their bikes and chased on when they saw Dick and me riding through town.

When we hit Lafayette the tailwind became a headwind, and it started to sprinkle again (though the sky was still mostly clear). The group wasn’t really working “well” together and I was getting hungry again, so when we hit North Valley Road, I stopped for a few minutes to eat some Mike & Ikes, and drink some water. The ride back to Forest Grove is scenic, but there was a stiff headwind and rolling hills, so I slowed way down here. In hindsight I probably should have hung on to the group, but in a way I’m kind of glad that I rode most of this ride solo.

I rolled into Forest Grove at 5:58 PM, 11 hours and 54 minutes after the start of the ride. For 186 miles I had 10 hours 45 minutes of saddle time, for an average speed of 17.3mph.

Overall I’m pretty pleased with the result. I had set an arbitrary goal to finish under 12 hours, and I wanted at least to beat my last year’s time of 12 hours 30 minutes. Better yet, last year’s time included riding with Mike quite a bit, and this year I had probably 25 minutes of unplanned stops to deal with flat tires. I’m committed in a few weeks to riding a 360K fleche, and the 400K (~250 miles) is on May 19.

Estimate calories burned: 10,000
Sustenance:
1 cup chocolate milk
1 cup V8
1 handful chocolate covered raisins
1 32 oz. Pepsi
1 mini-pizza
1 ice-cream sandwich
1/2 box Mike & Ikes
~100 oz. Gatorade

As I mentioned, I’m still trying to figure out the nutrition thing. The pizza I had on this ride is the most substantial food I’ve eaten on any of the longer single-day rides, and I’m sure that’s partly what leads to me running out of gas with a lot of riding left.

I recently read a post over on greencapitalism about investing in socially responsible funds (well, to be honest, the post was about Fidelity’s inability to screen for socially responsible funds).

This reminded me of an interesting question I’ve been thinking about.

Is there any social benefit to investing in socially responsible companies?

I don’t think so, but I’m willing to be proven wrong.

To understand my reasoning, you have to ask what it means to invest in a company. Companies generally make money by selling products, not by selling stock. Buying stock in a “socially responsible company” does nothing to improve that company’s prospects.

Likewise, avoiding buying stock in a socially irresponsible company does nothing to hurt that company’s prospects. In fact, an argument could be made that the biggest benefit of socially responsible investment would come from buying shares of an irresponsible company, and then working from that ownership position to change how the company operates.

In fact, buying a socially responsible company’s stock probably doesn’t even impact the company’s stock price much. This is easy to understand; a company’s value is precisely the net present value of its anticipated future cash flow. If an investor buys stock in a company because of its business practices rather than its expected future cash flow, that stock becomes overvalued and its value will be brought back into line by others selling their shares.

Then why do socially responsible funds exist?

Just a reminder, I’m willing to be proven wrong here. And I don’t mean to offend anyone. But I’m a cynic and as such, here’s my take on this.

There are a lot of people in this world who want to be socially responsible. These people want to think that they are behaving in a socially responsible way, even if they’re participating in a system that does not reward socially responsible behavior. Mutual fund companies aren’t dumb. They recognize a market exists for funds that invest in socially responsible companies. Mutual fund companies want to make money. They make money by attracting investors. That’s why socially responsible funds exist.

Is it hopeless? Is there any way to encourage socially responsible corporate behavior?

Of course there is. You can boycott companies that behave in a manner of which you don’t approve. You can reward companies that behave in a manner of which you do approve.

It would also be interesting if there were angel-investor groups that specialize in helping companies that behave responsibly. I’m sure these exist. But they are likely not very accessible to the general public.

Ignoring the social implications, mightn’t there be a benefit to investing in a socially responsible company

Sure. There is nothing saying that a socially responsible company cannot be more profitable than an irresponsible company. The market rewards profits. It’s entirely possible that investing in a socially responsible company will yield superior returns. But one must remember that those returns come from higher profits, not socially responsible behavior.

Conclusion

Unfortunately it seems to me that for an individual investing in mutual funds, there is not much social benefit to investing in socially responsible mutual funds. Worse, by doing so one is lining the pockets of opportunistic mutual fund managers who are more interested in taking a cut of the investors money than in helping the world. When swimming with sharks, the sharks are likely to win.

Anyone have another take on this? I’d love to hear that I’m wrong on this one…

Or, I waste money on books so you don’t have to!

Over the years I’ve read a lot of personal finance books. Inspirational books, uninspirational books, technical books, non-technical books.. Some of them really stretch the definition of “personal finance”. Heck, some could hardly even be called “non-fiction”.

Our bookshelves are filling up, so I thought it might be good to take a load of books into the library. But if I’m going to all that trouble anyway, I figured I may as well go through each book and write a brief blurb about what I thought. Several of these books I haven’t read in many, many years.

So without further ado, here are some of the personal finance books that are occupying my shelves. Some I like, and will be keeping. Others I don’t like, and will be getting rid of.

I reviewed this book over a year ago. This is the only book I’ve read that I consider a must read for anyone who has gotten past the initial stages of personal finance planning. The target audience is the investor with a solid start on his nest-egg, and who finds himself confused about where to invest. The author, David Swensen, has a proven track record of investment success and, in a very methodical way clearly lays out the investments available to the individual investor and which ones he recommends.

This is a good book to keep handy for anytime you feel like dabbling with exotic investments or hot stock tips.

What can I say.. It’s a dictionary. I wouldn’t recommend bringing this on an airplane for light reading. But I would recommend keeping it next to your computer. When you happen on a webpage that has a financial term you don’t understand, you’ll almost certainly find it defined in this book.

It’s one of the two finance books I have that I consider truly useful.

In the mid 1990s, a group of really smart guys started a hedge fund called “Long Term Capital Management”. After a few years of absolutely phenomenal returns, the fund went under.

This book isn’t about personal finance or how to invest, it’s the story of these smart guys and their fund. I found it to be an absolutely fascinating read. After the first couple chapters I started trying to imagine how I could take advantage of arbitrage in my financial life, and I haven’t stopped since. I’d recommend this book for the reasonably savvy investor who doesn’t have any problems understanding complex financial transactions and likes a good financial thriller.

If I had a child, or a friend, or a sibling who was just getting started in life and didn’t know much about finances, this is the book I’d get him or her. It’s a long book, but it’s intended to be used as a reference. The book goes through topics relevant to everyone, from opening a checking and savings account to buying a house, getting insurance, and saving for retirement.

Each of these topics is covered in depth. This probably isn’t the right book if you have a specific specialized need. But for the vast majority of the population, this single book is probably all that’s needed.

I don’t know if this was the first of the “Millionaire” books, but it’s the first one I read. While I’ve been annoyed over the last decade with the torrent of books claiming they’ll make you a millionaire, I have a soft spot for this one.

I’m not sure why, I guess because I think it’s a good level-setting book for developing the right attitudes about living frugally. I’m curious if I reread it now, after all these years, if I would still have the same affection for it. Regardless, this is one I’ll keep on my shelf.

Like the Encyclopedia Of Technical Market Indicators, this book isn’t for everyone. I bought it perhaps 5 years ago when I was interested in learning about buying and selling options. Stock options are simple in concept, but can be somewhat complex in practice. Notably, determining the fair price for an option can be a real chore, and the penalty for getting it wrong may be high (since options can be a highly leveraged investment).

This book does a good job walking you through the process of learning about options. I’m not an expert (I only trade a few times per year), but whenever I need to brush up, this book has the information I need.

I’m not a big Ed Slott fan. Like the Motley Dorks, he’s a shameless self-promoter. And I get the distinct impression that his books are an integral part of a money-making scheme for him. Financial Advisors pay him a lot of money to attent his seminar, and in return he mentions their names in books he sells. Meanwhile the advisors recommend his books to their clients. Further, I find the title vaguely derogatory, for reasons that I can’t explain.

Anyway, cynicism aside, once you get past the self promotion aspect this book is a pretty useful read. I bought this after I inherited a small IRA a couple years ago. There are various things you have to be sure you get right when inheriting an IRA, so I figured paying $20 or so for a book was a lot easier than transferring the IRA to me, then somehow screwing up and having to go back to fix my mistake.

There were only about 20 pages of the book that applied to me, but those 20 pages were worth the cost of the book. If you’re in the process of inheriting an IRA, or want to ensure that your IRAs are set up correctly to pass on to heirs with minimum fuss, this is an extremely useful book.