I went to Panda Express for lunch today. Inside the cookie, I found the following fortune:

“A financial investment will yield returns beyond your hopes.”

I think I’m gonna carry that one around in my wallet or tape it to the top of my computer monitor to cheer me up.

In options trading, there are now two kinds of publicly traded options - “puts” and “calls.”

I’ve talked about calls before. Relatively speaking, calls are easy. They are a little like “stocks on steroids.” Except their price is based on several variables besides the price of the underlying stock. But, in general, if the stock price is going up, the price of its call (with enough time left on it) will also be going up.

Puts are the ones that can take some time to get your brain around. At least they were for me.

A call is an option to buy shares of stock or other equity at X price. A put is an option to SELL shares of an equity at X price.

So, let’s say a stock is selling at $40 / share. I buy a $35 “put” contract from you. This means that, at any time between now and expiration, I can sell you 100 shares of that stock for $35 per share.

Naturally, if the price doesn’t go below $35, the option goes to waste. Why would I sell you my stock at $35 if I can get $40 for it on the open market? That would be silly.

But, if the price of the stock nosedives down to half price (and, as we’ve all discovered over the last decade, that can happen easily enough), then I can sell it to you for a good deal more than its market value.

Now, if I already own shares of the stock, this is a handy way of buying an insurance policy in case things fall too far. I know that no matter how far the stock drops, I can get at least $35 for it. Big relief!

On the other hand, if I don’t own the stock in the first place, I could buy the stock at market price ($20 in this example), and then exercise the option and sell it to you for $35, making a tidy $15/ share profit. Or - forget exercising it - I could sell the option to somebody else for at LEAST $15 / share (since that’s guaranteed profit).

So there are three important things to remember about puts:

#1 - Their price moves in the opposite direction of their underlying equity - so as the equity loses value, the put gains value, and vice versa.

#2 - Your risk is limited to the price you paid for the option. If the stock price suddenly goes parabolic and goes up to $120 / share, your option is worthless - but that’s all. This can be safer than “shorting” the stock directly.

#3 - Like calls, puts give you a highly leveraged position - which means they can move against you very quickly. A $40 stock is unlikely to become almost worthless overnight. However, an option on a $40 stock may very easily do that.  (On the flip side, making 100% - or more - on an option in relatively short order isn’t too uncommon, either).

#4 - And, like calls, there are always two sides of any contract. While buying a put is bearish (or at least an act to protect yourself from the bears), selling a put (being “short a put”) is bullish or at least neutral.

Besides betting on a stock going down with a straight put, one of my favorite uses of puts is to write “naked puts.” If I find a stock that I like at a price where I’d like to buy it, I can sell a put on it instead at that price (or a little below). If the option is exercised, I get paid to buy the stock for the price I wanted to buy it anyway. If not, I get to keep the premium I was paid when I sold the option, and use it somewhere else.

It seems tremendously ironic (and amusing) to me that the Government is arguably bypassing rule of law to force a sale of Chrysler to … Fiat.

Just sayin’.

Seems like “secured debt” doesn’t mean what it used to mean anymore.

Great guest post at Get Rich Slowly:

Why I Love the Roth IRA

Well worth readin’. It has some great stuff on the advantages of a Roth IRA over the traditional, what potential hazards there are, and even some stuff I didn’t know about inheriting an IRA (while still subject to estate taxes, the Roth remains tax-free as far as income is concerned).

Shortly after finishing Scratch Beginnings, I read Barbara Ehrenreich’s best-selling book, Nickel and Dimed: On (Not) Getting By in America. I guess I really read them out of order, because Scratch Beginnings is actually more of a response to Ehrenreich’s book. So maybe I’m tainted. But like both authors, I’m going to just embrace my bias and push forward.

In this book, the author chronicles her experience as an “undercover journalist” taking on an entry-level, blue-collar lifestyle. She has to find a place to live and a job, in three different cities over the course of one month each. She fails each time to achieve a sustainable lifestyle, even when taking on two jobs at a time. She provides a vivid picture of near-squalid living conditions, horrible bosses, unreasonable hiring processes, back-breaking and degrading labor, physical and emotional exhaustion, and the overwhelming difficulty of meeting the costs of living with her meager earnings.

It paints a very dim picture of life in the lower class of American society, and follows up with a bit of a socialist manifesto refuting the belief that the poor ‘bring it upon themselves’ and even suggests that the wealthy and middle-class effectively live off the (usually unwitting) charity of the working class. The system is rigged against them, and it is not by hard work but more by the whims of fate that one could expect to rise out of that caste.

Moving On Up… or Not

Ehrenreich makes some solid arguments, and brings up a lot of very good points. Unfortunately, like Adam Shepherd, my feeling is that - in spite of elements she claims gave her an advantage - her experiment was deeply flawed and she really set herself up to fail. As she is a political activist and socialist, one would expect a bias, but I didn’t want my own bias to make me blind to the points she makes.

And she is not wrong in many areas. Her conclusions on the causes and solutions to these problems may be flawed, but she is correct in noting that these are problems that need assistance. Her viewpoint coming from the upper-middle-class is probably not too unlike my own. My own recollection of my mother’s climb from near the bottom as an unskilled single mother in West Virginia to a fairly nice upper-middle-class lifestyle that I enjoyed as a teenager is a bit hazy, and I didn’t have a great vantage point. But I remember how we lived, and as an adult I now understand what a struggle it was.

I definitely got some amusement out of her attempts to start a union at Wal-Mart within her first two weeks of employment (not to mention her struggles to hide her recent recreational marijuana use from a drug test). Of all her jobs, her work with the maid service definitely seemed the most harsh and demeaning. Her struggles to find adequate and affordable housing are probably the most painful of the economic woes, especially considering the quality (or lack thereof) of what she could find, and the cost relative to her paycheck.

Ultimately, I agree with her that the poor in America aren’t simply there by choice. More could and should be done to help provide them with opportunity, education, and a chance to ease their burdens. But at this point, my opinion diverges from her own.

Criticism of Methodology

If Adam Shepherd had adopted Ehrenreich’s methodology, I have little doubt his story would have ended with far less optimism.

First of all, Ehrenreich only gives herself a one-month window. Starting over three times from scratch, she takes on her task with no contacts (with one exception, where she bird-sits at an aquaintance’s apartment for the first few days), no place to live, no job prospects, and no use of her existing background to put things together. Certain equipment or clothes for jobs - and certainly deposits on housing - have ugly start-up costs that have a significant impact at the beginning.

Starting out is undoubtedly the most difficult part, and certainly many people suffer setbacks and have to start over several times in her life.  But she does not allow herself time to succeed. Shepherd took several weeks to get out of the shelter.  But Ehrenreich is sometimes almost 25% of the way into her experiment before even getting hired. Her complaints about the difficulty of finding employment even in a great job market notwithstanding, picking up a job within a single week seems fairly reasonable - and she often gets two. But with only a 30-day horizon, the week’s impact is crippling.

As a side effect of her limited time horizon, Ehrenreich’s housing needs call for fully furnished living quarters. She doesn’t make this point that I recall in the course of her discussions on the unfairness and lack of adequate supply of cheap housing, but I believe this severely limited her choices and heavily impacted her price range. Granted, the start-up cost of picking up second-hand furniture and kitchenware and toilet paper - even in a piecemeal fashion - is a significant hardship, but would probably have saved money over three or more months or so.

I mean, I’ve been there, done that - slept on a bad, in sheets bought from a secondhand store (hopefully clean - I never suffered any ill effects), ate off of mismatched plates, food cooked in pots and pans acquired from the same thrift store, eaten food picked up at the $1 store. My apartments at least included a stove (occasionally even a microwave) and a refridgerator, so I didn’t need to fork over big bucks for working major appliances. It was a suck, and I accumulated a bit of junk (I think at this point in our married life we may STILL have a few pieces of junk from those early years…), but in the long run it was more cost-effective.

I’m not certain if Ehrenreich’s car was actually a benefit or a liability in her efforts. Certainly the convenience of being able to go on her own schedule saved her some valiable time, but it’s unclear whether or not the costs associated with owning a car outweighed the benefits.

Ehrenreich did at times use discount stores and secondhand shops to take care of her needs, but initial failures included shelling out $40 for a pair of pants for a waitressing job. She admits that to have been a mistake in her closing chapter, but there were a number of similar purchasing decisions - particularly with respect to food - that lead me to believe she hadn’t gotten into the frugal mindset necesary for success.

In fact, in a large part of the book it is clear that she constantly considers herself an outsider, not quite one of the people she’s studying. Ehrenreich demonizes her managers even before they offer her a position, obviously resenting having to accept their social position above her, even though (or perhaps because) they, too, usually come from the ranks of the working class. She is ever a prince masquerading as a pauper, even as she befriends suffering coworkers. She seems to alternate between being bitchy and snarky at one point towards those she comes into contact with who obviously don’t “get it” (and often take it out on her), to being more of a mother-hen, certain that she understands their plight better than they do and trying in her own way to help. Nowhere is her outsider-hood more clear than her subversive calls for unionization within days of taking a job at Wal-Mart. For her, it is a lark, a chance to be subversive and strike a blow for the workers of the world while she, as a citizen of a different class, need endure zero consequences for her actions.

Ehrenreich also misses several opportunities to improve her conditions. In one case, a coworker offers to bring her on as a roommate. Ehrenreich declines, as her experiment is nearly over. But this was a no-brainer opportunity to cut her living expenses by - I would guess - 25% - 33%. This is how it is DONE, but she is not in a position to take advantage of the strategies that real people take to make it.

My Take

The author illustrates some real problems we face - in America as well as other countries - among the working class. I believe the most valuable point that she makes in the story is how the belief that the poor simply need to “work hard” to improve their state is at the very least an oversimplification.

Of course, Ehrenreich tries to portray it as more than an exaggeration, but an outright lie, using her extremely limited and - in my opinion - flawed and biased experiences as evidence.

Henry Ford said, “Whether you believe you can do a thing or not, you are right.” Adam Shepherd contends that Ehrenreich wanted to fail, and to write a book about it. She countered by calling this an unfair characterization, and defends her book by saying it is merely sharing her own experiences, but she certainly advertises her experiences in the book as an everyman’s struggle in a silent class war in America.

I tend to side with Shepherd in this analysis. I don’t think his experiences are characteristic of the average, either, but I do believe they represent the opposite sides of Henry Ford’s coin.

I read these kinds of books to learn things that I can apply to my own life. I feel Ehrenreich’s experiences provide some excellent insight in budgeting, management, employment, and getting ahead - even if only to provide examples of what not to do. I think that she also does a great job of putting a human face on the psychological and emotional impact working at this level, especially during the critical first few days of a transition.

But beyond that - I question the value of this relatively defeatist look at the working class. Ehrenreich’s perspective seems to be that we’re ultimately doomed and there’s nothing we, individually, can do about it - other than petition the government to take better care of our poor. This is a striking contrast to Shepherd’s book - which also includes suggestions for how the government and charities could better serve the needs of the poor in our country - which is much more of a story of how an individual can overcome these adversitites.

Ultimately, if everything went to hell, and I had to start again at the bottom, who would I rather have as a roommate? On the one hand, I might get into a fistfight with Shepherd, and he’d also be less inclined to loan me his truck. On the other, Ehrenreich might treat me condescendingly and play passive-aggressive mind games with me. But for improving my own chances of long-term success, I think I’d choose the author of Scratch Beginnings. He has the attitude of success, and that’s the kind of person I’d rather associate with.

Six months ago - on literally the last few hours of the opportunity - I found out about a $500 sign-up bonus with Options Xpress. I came up with dozens of reasons to dismiss the idea - there wasn’t enough time to fully investigate it, there had to be more of a catch, it was “too good to be true,” etc.

However, I convinced myself that I need to stay open to these opportunities, and it’s not like Options Xpress is a fly-by-night operation. They are a very legitimate and well-known brokerage. So in the end, I went for it. I hit pretty close to the minimum criteria - I funded the account to $600, entered and exited a small position. I had about a $40 loss, plus $30 in commissions - Options Xpress it unfortunately not priced for people with small account sizes who only trade a few contracts at a time. And then left it alone.

True to their word, my account has grown by $500. It was a nice investment that paid off 83% in only six months. Now I have over a thousand dollars sitting in Options Xpress.

So what am I going to do with it?

As I said before, Options Xpress does not serve people who deal in a small number of contracts at a time. Instead, their pricing is more of a “bulk discount” offer for those who are trading several contracts in a single order. If I had $100,000 in the account, I’d feel pretty comfortable with that, but not with $1000.

I’m going to keep the money in there, for now. Because of the commission structure, I can’t feel comfortable trading frequently there, but I may seek out some good, long-term positions, probably stock instead of options. We’ll see what I find.

But the most important take-away from this was that I fought inertia on this thing - the mental barriers that were working to prevent me from taking advantage of a relatively easy $500 - and won. There are lots of opportunities out there, and even of the few that I hear about, I often dismiss them as being “too good to be true” or “not worth my time.” While this may be true in many situations, I have been overusing this as a cognitive shortcut - an excuse not to take action. That’s a behavior I have to get rid of in my life.

Wall Street Journal: Millionaires Go Missing

Baltimore Sun: Maryland Plan to Tax Millionaires Backfires

Fox Business News: Maryland Millionaires Cashing Out?

Now, naturally this can be attributed in part to the economy. There are a lot fewer people making that kind of money now than there used to be. But there is apparently evidence that some of that top-earning 0.3% is going John Galt. Maybe this is not quite as dramatic as Ayn Rand’s yarn. But the thing is, as we live in a free society, where people live, what they do, and where they work is a pretty fluid thing.

Going in after-the-fact and trying to punish workers at a company for the misdeeds of people who have long since left isn’t productive. The poor and middle class may not have any options when it comes to getting hit with tax hikes, but the rich and intelligent money managers can and will alter their behavior to minimize their tax liability. The assumption that the top income earners are going to not even notice a 1% increase in their taxes flies in the face of a very large body of evidence. Sure, there has been and always will be a percentage of the top earners who don’t care. If you’ve read “The Millionaire Next Door,” these are the big-spending top earners who somehow have a tough time making ends meet when they are taking on a quarter-million or more per year.

But I believe those who get into that category and stay there usually don’t do so by being spendthrifts, or by ignoring major costs like taxes. Maybe getting charged an extra $10,000 a year for the privilege of staying where you are isn’t enough to drive the ultra-wealthy to find new digs all by itself. There are many other factors involved, which can and should be more important. But if were riding the fence or even just within walking distance, that may be enough to send you over to the other side.

In a fluid system, if you apply pressure in one area, the material doesn’t just “grin and bear it.” The system seeks equilibrium by the material flowing to other areas. The pressure applied to one area instead gets distributed across the entire system.

Bottom line: Tax hikes on the rich end up being passed on to you and me, one way or another.

I would love to hear more stories like this one.

No matter how you slice it, the only way to get richer is to have more money coming in than is going out. Now, maybe for some people that happens because they get a big lump-sum inheritance or something. For most of us - it’s a case of living within our means. And that usually means *cough cough* some kind of budget. Yeah. The B-word. Even if you come up with ways to increase your inflow of money, you still need to keep tight reigns on what’s going out.

We’ve been pretty aggressive with our budget. And so far, it’s been showing. I’ve been watching our net worth steadily climb upwards in spite of the recession.

But man - it can get painful. We’re doing the “pay yourself first” thing, but with various surprise expenses and just things that happen in life, our “living” budget has been awfully tight. It reminds me a bit of our college days, when some weeks we’d find ourselves with as little as $25 to last the week. There were times that our “date night” involved buying milkshakes from a fast food place with our last couple of bucks and some change we found in the couch.

I’m not too anxious to return to that lifestyle. Hopefully it won’t come to that. But some weeks are worse than others. I am just trying to keep my eye on the goal. Fortunately, we have a little bit of a buffer. I may need to formalize that and make sure the buffer is part of the budget.

We just had a host change. If you can see this, then everything is working fine.