Understanding Financial Leverage

Recently, friends mentioned that their periodic meeting with their investment advisor happened to coincide with their decision to purchase a new car. The investment advisor recommended that they take the dealer’s 0.9% financing because “our portfolio is doing a lot better than that.”

Which ignores the point that taking out the loan will leverage their portfolio. If levering up portfolio returns was such a good thing, why had they not discussed that as a strategy before? Investments exist that can provide leverage without the portfolio itself borrowing money.

So, back to my friends’ situation.

Looking only at long-term averages, borrowing at 0.9% to invest in the markets is a winner. After all, any reasonable mix of stocks and bonds has done much better than that over the last few years, and is expected to earn more than 0.9% for any given future year. Unfortunately every year is unique; averages are only the place from which standard deviations start, not the actual results.

For discussion purposes only, and not to reflect my friends’ actual finances (of which I have no knowledge), let’s assume a balanced portfolio of 60% stocks and 40% bonds, and that the price of the car is equal to 5% of the portfolio value. Here are two alternatives:

1. Sell off 5% of the portfolio and buy the car in cash.
2. Borrow 5% of the portfolio from the dealer at 0.9% and each month sell enough of the portfolio to make the car payment.

The actual car loan in this case was for three years. For simplicity, let’s look instead at a 1-year loan with a lump sum payment due at the end of 2014. This changes the actual facts, but does not affect an understanding of how this leveraging will work. The actual return of the portfolio in 2014 as a percentage of assets can be designated as R.

The value of the portfolio at the end of 2014 using the pay-in cash-approach will be  P₁ = [.95 *P₀ * (1+R)]

And taking the 0.9% car loan the value of the portfolio at the end of 2014 will be:    P₁ = P₀ * (1+R) - .05 * P₀ * (1.009) = .95 * P₀ * (1+R) + .05 * P₀ * (1+R - 1.009)  = [.95 * P₀ * (1+R)] + .05 * P₀ * (R - .009)

Comparing these two scenarios, we see mathematically what we logically knew all along: as long as the actual return (R) beats the 0.9% financing cost of the loan, we’re ahead. Mathematically, this shows as difference between the two formulae: .05 * P₀ * (R - .009)

Paying cash and eschewing the car loan, my friends were going to have a portfolio that went up or down solely based on their asset mix. By taking the loan, my friends now changed their results. If the portfolio earned more than 0.9% for the year, they would end up with more money at the end of the year. Conversely, if the portfolio did not earn the 0.9% threshold, they would have a lower portfolio value than would have been the case without the loan.

This is what leveraging does. Given the loan is equal to 5% of the portfolio, by taking the loan rather than paying in cash, we have (1.00/.95) = 1.0526 times the earning power before we have to pay off the loan.

What are the chances that 2014 won’t provide an investment return of at least 0.9%? I’ll tell you for sure on December 31, 2014. In the meantime we can look at past results as an indication of what 2014 may bring. According to dshort.com [http://advisorperspectives.com/dshort/guest/BP-130220-Keeping-It-Real.php] there is a 35% chance of a balanced portfolio losing value in any given year. The maximum one-year loss on a balanced portfolio (so far) has been 35%. That would feel terrible, but after taking the loan we’ll actually lose closer to 37%.

Of course the best year in the past produced a gain of 89%, which with the leverage would increase to almost 93.6%.

In most years, the investment return will range between plus or minus 10%, which with leverage translate to a range of -10.6% to +10.5%. The loan/no loan difference is hardly earth shattering. Due to the law of diminishing returns, the extra gain caused by increased leverage won’t make us feel much better. If the markets went up 89%, we would only feel marginally better earning 94%. However, if we lose more money than we otherwise would have—especially those of us who are retired and don’t have the ability to replace lost investments through earnings, that can hurt. It hurts a bit monetarily, but even more psychologically. We tend to beat ourselves up about bad decisions much more than we give ourselves credit for good decisions.

Everyone can make their own choice about leverage. As a retiree with a sufficient portfolio to live in a manner that is acceptable to me, my risk concerns revolve around bad things happening to my portfolio, not whether someone else made more money than I did in the market.

It won’t surprise you that I paid cash for my car.

~ Jim

Delaying Social Security Benefits Revisited

Roughly a year and a half ago, I wrote about my decision to delay the start of my Social Security benefits. http://blog.jamesmjackson.com/2012/07/delaying-start-of-social-security.html In that article I argued that for those of us fortunate enough not to have to live off Social Security payments, we should  concentrate more on our risk of outliving our money rather than on the risk of dying too early and not spending all we could have. In the intervening months between the first article and this one a lot has happened politically and in the financial markets that make some question whether my decision to delay payments is still valid.

I think it is.

Politically, we are another eighteen months closer to running out of money in the Social Security Trust Fund with no hope of Congress acting in a manner to avert the problem. Many Republicans are back to ballyhooing their flawed idea of individual retirement accounts replacing traditional Social Security benefits (after all, the stock markets are hitting new highs) and Democrats are on this issue the “party of no”—as in they want no change, regardless of expert testimony that the current approach is unsustainable.

As each day passes, more Baby Boomers hit retirement age, making it harder to change their benefits. As a large demographic that votes, they can throw their weight around with targeted lobbying by organizations such as AARP. Given the demographics, it will take significant political will to make changes in Social Security. The 113^th Congress has shown no political will or wisdom, and there is no reason to think the 114^th will be better.

Congressional inaction continues to increase the risk of the Social Security Trust Fund running out of money. So with all that, why shouldn’t you do the Boomer thing of take the money and run.

Without Congressional action, the Social Security actuaries project the retirement Trust Fund will be empty around 2033. That does not mean Social Security benefits must stop. However, it does mean the benefits will become strictly pay-as-you-go: total payments (the benefit checks) can’t be more than the total income (the retirement portion of FICA taxes).

As I illustrated in the earlier blog, by deferring the start of Social Security payments until normal retirement age (66 for me, 67 for those born after 1959 and something in between for those born in 1955-1959) you maximize the portion of your assets indexed to inflation. Let’s say your Social Security normal retirement benefit starting at age 66 is $1,000 a month. If you begin payments at age 62, you will receive only $750 a month. Assume inflation runs at 3% every year (that won’t happen, but it could average out to about that). Here’s what you would get at various ages:

Age	With Age 62 Retirement	With Age 66 Retirement		Age	With Age 62 Retirement	With Age 66 Retirement
62	750	0		80	1,277	1,702
65	820	0		85	1,480	1,941
66	844	1,126		90	1,716	2,288
70	950	1,267		95	1,989	2,652
75	1,101	1,469		100	2,306	3,074

During the first four years you are unambiguously better off if you start your Social Security benefits at age 62. Over those four years you will receive around $37,500 in benefits. Assuming a risk-free return equal to the inflation rate, those payments would have an accumulated value of approximately $39,000. You’ll need that money to reimburse yourself for the greater normal retirement benefits you could have been receiving had you delayed your Social Security retirement. Your accumulated pot of money (continuing to grow with interest but shrinking with the make-up payouts) runs out around age 77. From then on you are less well-off compared to deferring Social Security retirement.

Because the Trust Fund will not run out of money until 2033, anyone born before 1956 who delays payments will have already reached their break-even point and thus be ahead of the game before the Trust Fund hits zero. Once the Trust Fund runs dry, and if there is no other change in Social Security, benefits must be cut by roughly 25% to balance benefit payments with FICA taxes. Note that if you delayed the start of benefits, you will continue to receive considerably more from Social Security each month compared to what you would get if you started benefits as early as possible because the cuts are proportional. Using Age 85 from the table above, if you took your benefits early a 25% cut reduces your monthly benefit from $1,480 to $1,110. The benefit those who deferred receive declines from $1,941 to $1,456.

Does that mean you can best hedge all political risk by deferring the start of Social Security retirement? Not necessarily. The scenario above assumes an across-the-board 25% haircut. While that’s what people are currently discussing, it is possible that the cuts could come from the top down by imposing a cap on the monthly benefit. Even in this take-from-the-rich-and-give-to-the-poor scenario, those my age are still better off delaying the start of retirement because the cut occurs after we have reached our break-even point. Younger folks will need to evaluate when it’s time for them to make the take early/defer decision. Also, Congress could enact this type of benefit cut earlier. It’s not likely, but it is possible, and if they did, it could delay the breakeven date, making it less attractive.

From my perspective at the end of 2013, the politics of the last year and a half have not changed my decision to continue to delay the start of my Social Security retirement benefits.

Recently someone smirked that if I had only taken early Social Security and invested those payments (after-tax) in the stock market, I would be monetarily far ahead. Investment gains would defer the break-even point—maybe even to eternity.

There are two problems with this argument. First, it uses an ex post facto analysis. When I made the decision to defer I did not know what the stock market would do. This looking at what actually happened and saying what I should have done is similar to saying that in December 2002, I should have sold my house, borrowed to the hilt, and invested it all in Apple at $14 bucks a share. Then, in perfect market timing, I should have sold the stock on December 17, 2012 at $700. [And even sold it short that day if I were so prescient.]

Social Security provides an almost risk-free investment. (It used to be risk-free until some Tea Party advocates decided having the US government default on its debt was acceptable.) Since my reason for delaying Social Security benefits is to insure against running out of money if I live too long, I should not then foul the comparison of a risk-free return and one investing early payments in a risky proposition such as equities. Doing so defeats the strategy of taking out longevity insurance. This faulty thinking is the same that caused many defined pension benefit plans to invest heavily in equities to “hedge” against morality risk. While stock markets rose, it looked brilliant, but in the recent past it proved disastrous for companies and governments alike. Some plan sponsors have frozen future benefits, and eliminated non-guaranteed benefits—not an option for an individual.

So unless I learn that I am suffering from a disease that significantly decreases my life expectancy, I plan to stick with my decision and defer the start of my Social Security benefits until I turn 70.

~ Jim

Technology Changes Stories

I recently reread Ant Farm, what would now be a prequel to Bad Policy, the current start of the Seamus McCree series. Several readers were interested in the origins of various characters and this early work provides the answers. So, I read it through to determine how much work it would take to fix the problems that made Ant Farm unpublishable.

What I learned about story and writing style problems may be material for another blog, but one of the things I discovered in this reread is how quickly technology can force story changes if they are set in “recent” times. I last worked on this story in early 2006. If I do the rewrite, I’ll need to update it to around 2010-11 to fit in with the rest of the series. In those short five years:

Fax machines for personal use did not become extinct, but they might as well be. I’ll need to change fax usage to sending pdf files that can be digitally signed. I’ll miss the mating call of two fax machines linking.

Using phone booths. They still exist, but they are rarer than hens’ teeth—well, I’m not sure that’s accurate because I’m not sure how rare hens’ teeth are, but nowadays I only see phone booths in rural areas where cell coverage is still spotty.

Speaking of cell coverage, have you seen the commercials for Verizon’s coverage map? Fewer and fewer places are without cell coverage. Fortunately for me, some of the rural areas my stories deal with are still white (empty) on the map—for now.

And how about those phone calling cards we used to use. Anyone, other than characters in the current version of my story, still using one? Didn’t think so.

I used driving a hybrid Prius as an indicator of an environmentally conscious early adopter. I need to find another indicator now.

In 2006, few people used their cell phones for detailed internet searches on the road. Now, it’s second nature.

In 2006, none of my characters texted each other. I need to think through how communication might change.

In 2006 “everyone” had home phones. Now, many people only have cell phones.

Wow! That’s a lot of changes for only five years. Mostly they relate to the way we communicate, and I haven’t even covered social networking, such as Facebook, Twitter, Instagram, etc., etc., etc.

Writers, have you ever picked up one of your old stories and discovered it was dated? If so, what did you do? Readers, how much slack do you cut writers if their story seems dated?

~ Jim

Seven Characteristics of a Great Panel Moderator

Last weekend Jan and I attended Magna cum Murder in Indianapolis. I found most of the panels well run and the panelists thoughtful and interesting. Two panels stuck out from the rest. One was extremely well moderated; the other, not so much.

Here are six things the exemplary moderator did well:

   1 .       Before the panel started, the moderator had clearly done his homework. He was familiar with each of the panelist’s writing. Before the conference he provided the panelists a list of areas he planned for them to discuss.

   2.       He began the discussion with a description of the panel and a very brief introduction of himself.

   3.       He provided a short introduction to each of the four panelists (the conference provided longer bios in the conference book).

   4.       He varied which panelist discussed each question first. His introduction of the topic often included specific reference to the panelist’s work (the advantage of homework).

   5.       He asked other panelists to comment on interesting observations one of them had made, often choosing a panelist with a different perspective (another advantage of doing his homework).

   6.       He never interjected himself into the conversations, except to provide transitions between panelists or to introduce a new topic for discussion.

   7.       He never provided his opinions, disagreed with the panelists, or offered elaboration on their answers.

The exemplary moderator acted as a lubricant for the discussion. He did his job so well, one of the panelists commented on it and audience gave the moderator an ovation. In contrast, the less-than-satisfactory moderator failed on a number of accounts.

   1.       The moderator surprised the panelists by asking them to introduce themselves, when the previously announced game plan had been for the moderator to make all the introductions.

   2.       The moderator’s introduction of himself lasted longer than the introduction of the panelists.

   3.       For each topic discussed, the moderator provided his own answer after the four panelists had talked, and used each answer to self-promote.

   4.       The moderator read each of ten items on a handout he had already provided the audience.

   5.       When it came time for questions from the floor, the moderator answered questions directly.

A moderator’s objective should be to make the panel run smoothly and help make the panelists look good. Solely based on their performance as moderators, I’ll be buying the first person’s newest mystery, and never buy the other moderator’s books, no matter how good they might be, based on their hijack of the panel. I suspect most of the audience feels the same way.

~ Jim

How to Choose Continuing Characters

Every novelist who writes a sequel or series has to choose which characters from the first (or second or third) should have a continuing role and which should fade into history. The main character is an obvious choice for a continuing role. Can you imagine Sue Grafton’s “Alphabet Series” without Kinsey Milhone? Neither can I. However, Clive Cussler managed over time to supplant his aging protagonist, Dirk Pitt, with his son, Dirk Pitt, Jr. But I digress; let’s assume your protagonist will continue to have the lead role. Who else do we keep, and why?

If the novels are cozy mysteries set in a small town or village, the author can keep everyone—until the author chooses to kill them off, that is, because the mortality rate in these places is pretty darn high. Fortunately, authors can easily replace the dead in the next volume in the series.

I don’t plot in advance; I’m a pantser. As I started writing the second in the Seamus McCree series (Bad Policy, which turned out to be the first published), I faced the question of who should get pink slips and whose contracts I should extend. Seamus’s son, Paddy, was a favorite of many readers. They enjoyed the father-son banter and occasional head-butting. I started with the premise I wanted to keep Paddy and he, of course, still had his cats, Cheech and Chong, so they got a free pass.

I wanted to write about insurance fraud, and I had introduced as a side character a man who owned an insurance agency. I killed him off. Because he was living in a town fifty miles from where Seamus lived, I had the opportunity to retain a number of local characters who readers enjoyed or would likely remember. First was Charlene—a sassy waitress. Next was her now boyfriend, Bear—a sheriff’s deputy. Charlene was perfect to fill in the local gossip, and Bear provided the local police angle. As a bonus, readers would see their relationship advance. Perfect, said the pantser.

The insurance agency had a secretary who Seamus thought of as Miss Smiles. Since her boss died early that allowed her space for a bigger role. The insurance fraud involved annuities, which allowed me to return a couple of folks from the local insurance company.

All these reflections allowed me to better understand why people like cozies: all those characters they get to know and love, or dislike, or whatever the author wants the reader to feel.

In the first manuscript I had introduced a nosy neighbor, Mrs. Keenan, and her wonderful Golden Retriever, Alice. When I needed someone to report on strange happenings while Seamus was away from home, I thought “who better than Mrs. Keenan?” I even gave Alice a larger role as an alert watchdog.

The first book introduced a love interest for Seamus, who had been divorced for many years. Abigail Hancock got a return role, but as often happens with love interests, not everything went as Seamus planned.

What I quickly discovered was that if I had a particular role to fill and I already had a character from the first book, there was no reason to create a new character as long as the first one made sense.

In the next book (Cabin Fever 3/2014) I changed locales. I cut loose all the now non-locals with small roles; those roles I needed to fill with new characters. I knew I wanted Paddy to participate in the story and sure enough found a way to involve him. The same thing happened with Abigail Hancock, the main love interest (the situation worsened—or did it?). As I wrote, I found ways to bring back a few of the previous characters for cameo roles. Readers liked that.

I just finished writing the first draft of the next in the series. I’ve developed some rules I now use.

1. Readers expect Paddy to have a significant role. Seamus would not be Seamus without Paddy. They want to see how the two of them deal with each other as father and son and as colleagues in solving problems.

2. Readers want Seamus to have a love interest—they don’t necessarily agree on who that should be.

3. A certain group of readers strongly appreciated Seamus’s mother in BAD POLICY. They were disappointed to discover the CABIN FEVER story did not lend itself to including her. However, in the edits I was able to include a closing bit to remind those people of Trudy McCree. She even gets the last word, which is what you would expect from her.

4. Don’t create a new persona when you already have someone at the ready to fill a role. People are always saying, “It’s a small world.” In my fiction, I want readers to smile when someone they’ve met before reappears. However, I must clue in new readers into the prior relationship is such a way that they feel comfortable (not a deus ex machina event) and continuing readers aren’t bored.

5. Some roles are useful to have. The gossip who knows everything that’s happening is one, but when changing locales, it’s important to find new kinds of players to fit the same role. Much better when I changed location from Chillicothe, Ohio to the Upper Peninsula Northwoods to replace Charlene, the sassy waitress, with Owen, the octogenarian woodsman, than to find another sassy waitress in the new town.

Those of you who are ahead of me in this writing game can let me know what I’ve missed. Readers, what do you like or not like about continuing side characters?

~ Jim
(A form of this blog first appeared on Writers Who Kill)

Persistence

“No great achievement is accomplished without persistent work.”

~ Bertrand Russell

Jan and I are in the midst of a trip around Lake Superior. Trips are wonderful for learning new things and for providing ample opportunities to people-watch. Last week we spent a night in Wawa, Ontario. My bird-watching friends may already know that wawa is the Anishinaabe word for Canada Goose. While the goose statue outside of town was worth a couple of photos, Jan and I will continue to think of Wawa more for the short walk we took there.

The path starts at the edge of town, works quickly up a hill using concrete and wooden steps, wanders through a drained marshy area and ends up on a bluff overlooking undeveloped Anderson Lake. The trail to the lake is less than a half-mile long (although we followed an extension for the better part of another mile before turning around.)

Mr. Valle (always referred to as Mister Valle, never by his first name) after his retirement had a vision of a path from town to Anderson Lake. Accompanied by his dog, Mr. Valle singlehandedly built the path. He hand-carried the timber and buckets of cement for the steps. Using a bow saw, pick and shovel, he dug a 1,000-foot long ditch that drains the marshy area. He built a picnic table at Anderson Lake where he loved to spend time. The project took him years to complete, but his work is remembered long after his death in 1994 through Mr. Valle Park and the “Friends of Mr. Valle Park,” who maintain it.

Mr. Valle had persistence. It paid off because he had a vision, the tools to carry it out and the time to make it successful. Bertrand Russell would recognize and applaud this kind of persistence.

“The definition of insanity is doing the same thing over and over again and expecting different results.”

 ~ Albert Einstein

A number of years ago I attended the weekly sessions of a fiction-writing critique group. One of the members submitted material every week for critique. I eventually gave up spending my time developing critiques for this individual because he never changed anything based on our feedback. He maintained his “style,” making the same egregious mistakes again, and again and again. Years later I read something new he had written. Same old, same old. It wasn’t that he had a vision of literature that we lesser mortals of writing could not appreciate. His basic writing was deeply flawed. Albert Einstein would recognize his form of insanity, because no amount of persistence would achieve that writer’s goals.

It is easy to determine whether or not you are persistent.

Sometimes it can be much more difficult to know whether your persistent efforts are of the Bertrand Russell variety or whether they involve the insanity incorporated in Albert Einstein’s definition. If you really want to know where you stand, ask several very knowledgeable people in your field to evaluate your work. Make sure not to use family or friends – they’ll lie to make you feel good.

However, even if all the experts point to your efforts as bordering on insanity, you can’t know for sure if they are right. Van Gogh sold only one picture during his lifetime; Emily Dickenson only had a few poems published during hers, and the publishers altered many of those because they were unconventional.

Which brings us back to persistency. If you are not persistent nothing great will result. So, get back to it.

~ Jim

Who Deserves a Quality Life?

The fifteen dollar minimum wage: over the last month pundits on every side of the economic icosahedron have put forth their arguments, couched in terms of effects on job creation, inflationary pressures, global competition and the like. It’s either great, terrible, probably okay or not.

I’m a number geek so the numbers side of things is interesting to me, BUT all the economic back-and-forths miss the real question: Who deserves a quality life? Keep that in mind as we look at the general pros and cons of a minimum wage.

Most economists agree that establishing a minimum wage decreases the number of jobs that economy produces. Well, no kidding. If we had no minimum wage and paid less than any other country in the world, we could have all the jobs we wanted—assuming people would take them.

So let’s get real. We have a minimum wage now and we’re not going to abolish it. The only real argument is about the level of the minimum wage. Minor changes to the minimum wage have not had the deleterious effect to jobs that opponents have suggested. That means a bit of an increase can be had with little economic dislocation. As evidenced by the current lack of jobs, decreasing the minimum wage by letting inflation wear away its real economic value hasn’t produced a plethora of new jobs either.

A little change is not what is needed. Measured against inflation, the minimum wage is considerably less than it was when I graduated from high school in 1968. 

Chart taken from CNN.com

To get back to the same real value as the 1968 minimum wage would require us to increase today’s $7.25 by almost 50%.

But that’s not enough. Why should I, and why should you, be willing to pay someone so little they cannot live decently?

Assuming you have a job that pays decent wages, imagine with me what it must be like to try to live on $15,000 a year. With rounding, that’s the result of working forty hours a week, fifty-two weeks a year at the minimum wage. Also imagine you have one child to support. You have no benefits, other that perhaps a 401(k) plan you can’t possibly afford to contribute to in order to earn the company match and the opportunity to purchase a family medical plan, for maybe a third of your income—not likely.

In the U.S. this level of income for a family of two is just below the published poverty line. It is well below the impoverished line. Some unions are calling for a $15 minimum living wage. At that level, a full-time job will earn $31,200. That’s not exactly rolling in money, but it is closer to the amount needed to take care of basic necessities including healthcare.

Others have gone to great lengths to try to figure what a living wage means. I’ll rely on the results posted on http://livingwage.mit.edu/ . Half the year I live in Chatham County, Georgia (Savannah area). According to this calculator, the living wage for an adult and child, the adult working a 40-hour week, is $18.30. That is 22% above the level demanded by the $15 minimum wage proponents. Imagine how far away from a living wage $15 would be for this hypothetical family of two in New York City or San Francisco.

Okay, I know some of you are mentally griping about my single parent family. Let’s look at a family of two parents, both of whom work at minimum wage, and two children. As reported by the folks at MIT the poverty level wage is $10.60, and the living wage is $18.82—higher than for a single parent with one child.

Okay, I convinced you and everyone else and, we’ve increased our minimum wage to a living wage. What are the consequences of that action?

Overnight millions of families will be more economically secure. The money we pay these workers will be recycled back into the economy because although these workers are now being paid up to twice as much as they used to earn, they will not be saving much of this money. It will be used to purchase living necessities. The psychological health of affected families will certainly improve. Government programs to support the working poor will be less needed.

Bad news will arrive as well. All economists agree that with such a dramatic increase in wage rates, we will surely lose jobs—and many proclaim that is the reason for not making such a change.

Heck, we lost a lot of jobs when we abolished slavery too. We abolished slavery because it was the right thing to do. Counting jobs lost is a mathematical argument. Economists disagree on how many fewer. There will be increased costs for things that currently utilize “cheap” labor. Food crops will cost more to harvest. Fast food will be more expensive. The list is long.

By not paying people fair, living wages we hide the true cost of the items and services their labor produces. The extra costs show up elsewhere: in the Earned Income Credit, in emergency room costs when people without insurance get routine care, in higher medical expenses because people cannot afford relatively inexpensive preventative care, and as a society we collectively pay for expensive restorative care.

We cannot use the fear of higher unemployment to argue against treating people fairly. A significant portion of our long-term unemployment problem (as opposed to that caused by the most recent recession) is caused by the very poverty a living wage would diminish.

Despite the fact that paying living wages will not solve all our economic problems, it is morally the right thing to do.

~ Jim

A Discussion About Obamacare

During a recent bridge tournament I enjoyed dinner with several of my teammates and friends. I have no idea exactly how it happened, but the talk turned to Obamacare. The initial statement tossed out to the table was something to the effect that “Obamacare will bankrupt the country.” Since at least two of the seven sharing dinner did not agree at all with that statement (including yours truly) the result could have been (1) a heated argument between opposing sides, (2) those who did not agree chose to remain silent, or (3) an interesting discussion where both sides might learn from the other.

I stepped into the breach and asked why the person thought that was true. His answer included the current deficits and health care costs that continue to increase uncontrollably. I agreed those issues were major problems, but suggested they were attributable much more to Medicare and Medicaid than to the Affordable Care Act, aka Obamacare.

I suspect it was in part the fact that I agreed there was a problem that allowed us to explore the sources of the problem and solutions that might work. It also allowed those who were small business owners to educate the rest of us on how they will have to respond to the law.

The first charge against Obamacare was that more people would be insured and therefore the costs would increase. I used my own situation as an example to suggest why that wasn’t quite accurate. I carry a high-deductible policy, which, unless I become very ill, will never pay me a cent. The benefit I reap even if no medical catastrophe arises is that the insurance company negotiates the cost of my medical care. I am not stuck paying the full “sticker” price for the services I use.

There are three major systemic problems with the roughly 1 in 7 Americans who are uninsured. First, partly because they have no insurance, they skimp on preventative care. They roll the dice and hope they don’t come up snake-eyes. Second, if they do get a bad roll of the dice, they tend to utilize the most expensive medical care option, the emergency room, because they will not be turned away. Lastly, because they are uninsured, they are charged “full-rates.” That is, they do not have an insurance company between them and the provider to negotiate fees.

Obamacare addresses two of the three problems. People currently uninsured will be able to obtain insurance that provides preventative care, and the insurance companies will negotiate on behalf of their policyholders. These are serious problems. Over 60% of personal bankruptcies are caused by medical issues (that includes medical costs and loss of work). Unfortunately, because universal coverage is not provided under the Affordable Care Act, not all uninsured will choose coverage. However, even if only half become covered, it will make a significant improvement.

The Affordable Care Act does not solve the problem of insufficient providers. Over the short term, it probably exacerbates the situation. Newly insured, just like people who become eligible for Medicare, have accumulated health issues that they want to immediately take care of. The provider shortage, I said, was largely caused by state licensing requirements issued by boards run by doctors. They act as a semi-closed society to keep out lots of qualified foreign-trained doctors, in order to keep fees high. Doctors are not unique; every profession does this, including my own: actuaries had a series of difficult exams, and I didn’t ever use most of the information covered by the exams, but it was a barrier to entry.

Someone objected that Obamacare would ration healthcare similar to the problems in Canada that cause Canadians to come to the U.S. for treatments. I said that if we were to control healthcare costs we would need to ration it. In my opinion we spend too much on extension of life without quality and too little on preventative care. Until we as a country have a serious discussion about those issues we wouldn’t get to the root of the problem. We could argue about how to make those decisions, but no one would disagree that we need to make them IF we choose to rein in costs.

One of the small-business owners said he had to change his staffing levels because of the costs of Obamacare. To stay competitive, he eliminated several permanent part-time positions and created a small number of full-time positions.

I acknowledged any major change would cause dislocations. Large corporations had already gone through their own staffing changes to reduce costs. Regardless of whether those changes were accomplished in order to maintain competitiveness (the corporate view) or to increase profitability (labor’s perspective), for the last twenty years corporations have moved people from benefit-qualifying positions to those without benefits. The most aggressive were now making many of their workers on-call, and expected them to be available regardless of how many hours they actually got to work.

The great thing about this conversation was it was a conversation. All of us sitting around the table are affected by and concerned about healthcare, but none of us were experts. (I had the most comprehensive background in healthcare costs and financing from my years of creating and determining costs of health care plans; the small-business owners knew what they were doing to accommodate changes.) At the end of the discussion we had all learned something we didn’t know before, and we did it through civil discussion.

If seven people from various economic and cultural backgrounds can accomplish that much over dinner, why can’t Congress?

~ Jim

Services for Writers - Caveat Emptor

I recently came across two entities that want to sell their services to writers with payment models I found interesting.

the new online bookstore

The first is Bookstore Without Borders (http://www.bookstorewithoutborders.com/). They correctly note that to make a sale one needs product, platform and exposure. An author’s e-book is the product; they propose to provide the platform (an online bookstore) and exposure.

The question I always like to address when it comes to services for writers is whether the value proposition is a good deal for the author. (I assume it’s good for the provider; otherwise, why are they doing it?)

Bookstore Without Borders (BWB from now on) offers an array of services; the only one I’ll address now is their platform for selling e-books. An author can list up to five e-books for the startup price of $395. There’s an introductory offer of $295 if you sign up before October 2013. Listing an extra book costs another $55. Annual renewals run $29.95.

BWB states that it only takes 80 books at $4.99 each to earn back your $395 cost. Their math is fine—as far as it goes, but it doesn't go far enough. The open question is how many extra sales their platform will drive. If all of the 80 sales are ones you would not have gotten except for the exposure they provide, then the math is fine—for a $4.99 book. If, for example, your book is priced at $2.99, it takes 133 new books before you’re in the plus column.

If they would guarantee brand new traffic for your book at least this large, it’s a clear winner. Of course they provide no guarantees. Even the testimonials on their website refer to the wonderful design and are silent about sales and profits.

They do have another selling point, however: they pay 100% royalties.

If you can sell someone your book through BWB instead of Amazon, B&N or wherever, you’ll make more money on that book because the royalty rate is higher. However, if you plan to pay for your start-up fee through this difference in royalties, you’ll need a lot more sales to break even. You were already going to earn something on those sales, so the net to you from joining BWB is the difference between the 100% royalty BWB pays and whatever royalty your current bookseller pays. E-book royalties keep changing, but let’s assume you can make 60% of list price on e-books you currently sell. Since 100% is better than 60%, you’d be interested in this deal if you sold enough books.

With your $4.99 e-book, you’ll need to sell 198 books before you break even. What happened to the 80-book target? That assumed joining BWB would bring new buyers who would never buy your book no matter where it was sold, because without BWB they’d never have made the purchase. We’re not talking about those people anymore. Now we’re talking about folks who would have bought your book somewhere, but because they prefer to pay money to authors rather than to Amazon and the like, these kind and generous souls now buy your book at BWB. The math works like this: For those 198 books at 60% royalty you would have earned $592.81. After paying BWB’s $395, when you sell 198 books through them, you’ll end up with $593.02, a gain of $0.21. After that, it’s all extra profit: you earn two bucks more a book.

Will your book sell 198+ books if you sign up with BWB? I have no clue. However, even if you tell people that’s the best place to buy your e-book, many potential readers will prefer to buy through Amazon or Barnes & Noble or their indie bookstore. I say this because I experienced a parallel situation. I suggested to someone who wanted to buy an e-book of Bad Policy that they could buy it through the publisher and save 35%. I figured that was a good deal for everyone except for Amazon, who would lose the sale since it was for a Kindle. That wasn’t how the reader saw it. The extra time it would take her to set up an account with the publisher, mess around with downloading the book to her computer and then transferring it to her Kindle was not worth the time and money. Despite the extra cost, she preferred to buy the book on Amazon with one-click, and have it automatically appear on her Kindle the next time she turned it on.

So, as a buyer of BWB’s services you also have to consider that even if people find your book because of BWB not all of them will actually buy the book there. If that assumption is correct, you’ll need even more sales to reach breakeven.

Of course, you may price your book at something other than $4.99. Using $2.99, the 198 threshold rises to 331. At a price of $1.99, you’ll need 497. With a more expensive book, the rewards come sooner.

If you are earning a royalty rate greater than 60%, you’ll need more books to break even; lower than 60% and you’ll need fewer books. As the saying goes, your mileage may vary.

In addition, there is an annual renewal fee – not a major cost ($29.95), but it will require another 15 books each year under the first scenario ($4.99/ book and standard 60% royalty) before you are ahead of the game.

BWB wins as soon as your payment clears. You only win if you can drive lots of sales through this particular bookstore.

Please note, I'm not saying or implying that this is a bad deal -- it's a different deal. For some authors it could be terrific; for others, it’s a waste of money. To fully understand how the proposition works for you, you’ll need to make these types of comparisons. I computed everything using a simple Excel spreadsheet. If you’d like a copy for yourself, send me an email and I’ll get it to you.

EDITOR FOR HIRE

All writers need editors of one sort or another. There are many varieties and it is important to make sure you know what you are getting before making a commitment. Most publishers provide editing as part of their services; others do not. If you are self-published, you need to make sure to get competent assistance.

Some editors specialize in storyline issues, what are frequently referred to as developmental edits; others are copyeditors looking for grammar and spelling errors. Some do it all as was the case for a new provider that I recently ran across. They offered to do a complete edit (developmental, line/copy edit and proofread) for a flat fee of $200 plus $5 per page over 300.

The pricing structure struck me as very odd. The first 300 pages cost $0.67 per page and any pages over that cost $5.00? How does that make sense? For line/copy edit and proofing a page is a page is a page. Reading extra pages in a developmental edit actually is less expensive on a per page basis because that type of edit considers overall story issues, which do not increase linearly. A charge of $0.50 an extra page doesn’t seem out-of-line with the first 300-page pricing. Is this a typo or math error or what? Maybe the editor doesn’t want to work on anything but shortish books and this is a way of discouraging authors of longer works from applying.

Something else bothered me. Unless the story is close to perfect, it does not make sense to do a developmental edit at the same time one proofs. If major sections of the novel must be rewritten or even pitched and replaced, why would one carefully ensure that the deleted material met the Chicago Manual of Style?

I am using this particular Editor website as an example of why thinking carefully about the numbers is necessary before you sign on the bottom line. If this math stuff is all Greek to you, get someone who likes this kind of analysis to help you out.

With any provider, it’s also important to check references. I don’t know much Latin, but caveat emptor never goes out of style.

~ Jim

Coming and Going

One of the “problems” I did not foresee when I took up writing is living in multiple stories at the same time. All fiction writers, perforce, must live in the world they are creating on the page and the actual world. (Although some use alcohol and drugs to try to avoid the actual world.) I understood and had no problems with that phenomenon. The issue I’m currently dealing with is more complex, and I can only imagine what happens to writers with multiple series.

Bad Policy had its debut March of this year. That is the story readers are currently enjoying. When I talk to people, or participate in panels at conferences or in author events at bookstores, it is the Bad Policy story people want to talk about.

My proposed book cover
let me know if you like it

Cabin Fever is being edited. This week I worked through the second set of issues my editor wanted me to address. For much of this week I have been honing the writing of this second book. I enjoy that process because the end result is a stronger book. The Upper Peninsula of Michigan is the setting for this story (which fits with my current real world experience). However the story is set in winter, which is a bit difficult to imagine as the temperatures hover in the high eighties. As I write this, I am taking time out from the final read-through before I send Cabin Fever back to the editor for round three.

So here I am in three worlds: the real world in which I am trying to live, story one that readers want to talk about, and story two that has some of the same characters as story one, but a different locale.

But wait! There’s more!

I am 50,000+ words into the first draft of story three, which I am calling Doubtful Relations. Same protagonist and many characters from Bad Policy re-appear. This story starts in Cincinnati and moves to Savannah and is set in late spring. At least summer weather in the U.P is not dissimilar to spring weather in Savannah.

Real world, story one, story two, and story three to keep straight.

The main character, Seamus McCree, changes as the stories progress. One of the difficulties for me is making sure the changes in book three don’t leak into book two during the editing. Another difficulty for me is that readers of Bad Policy know that story much better than I do. They’ve just read it and my last read was shortly before its publication when I read the final galley proofs. I’m starting to forget minor character names, or refer to them by early versions of their names, forgetting they changed somewhere along the way.

This is when the time I spent entering all of my stories’ characters, locales, businesses, and such into spreadsheets really helps me keep on top of who’s who. I even use a red font for characters now deceased. The more I write, the more red font gets used.

I’ve always been a bit squirrely, but these parallel universes are not making it easier on me. Am I unique, or do other writers have the same problem? And readers, do you ever talk to an author and wonder if you don’t know their worlds better than they do?

~ Jim
(originally appeared in Writers Who Kill blog)

Taking Lessons From Nature

Last week I finally bit the bullet and labeled the pictures I had taken so far in 2013. Well, not all of the pictures, only the ones I had not previously deleted. Without this filing process, it is difficult to find any particular picture when I want it. The use of metadata tags makes searching go much more quickly.

This process also had the benefit that I got to view my pictures with a fresh eye and on a day when my philosophical hat was firmly in place. Here are a few that caught my attention and some of the thoughts I had about them.

I stumbled upon this spider’s web on a morning walk in Savannah with our now-deceased golden retriever, Morgan. What intricate work the spider performed in order to eat.

Some days later I sat and watched another spider construct its web. Similar to writers who spin stories, the spider started with the major frame lines and then filled in the details until the project was complete. It worked diligently until it was nearly finished, and after a short rest added a bit of filament here and there to fill in a few gaps in the story.

Then it got out of the way and let the web do its work. I often forget that part and keep trying to improve something long after it has become fully functional.

How ephemeral the first spider’s work was. A storm came through later that day and the next morning the web was gone.

I was working in my Savannah study one morning when I spotted this male eastern bluebird outside. He flew from one lamp post to another warbling his bubbly song, letting the world know he was there and this was his territory.

Sometimes it is necessary to take a risk and proclaim from a spot exposed to predator attack that this is yours and you are proud of it.

Overdo it and a sharp-shinned hawk has you for lunch. Hide in a bush and you never get the girl.

I wish I could figure out the right proportions when it comes to publicity for my writing.

When we returned to our northern home, we discovered a beaver had decided to change the landscape in front of the house without consulting the local zoning laws and without a permit from the human owners. I suppose his motto was to ask forgiveness rather than permission. In any event, I was not about to go to a nursery and purchase a half-dozen sixty-foot trees, so I had to live with the change.

On this tree, the beaver worked hard, but got nothing because the tree didn’t fall to the ground; it hung up in other trees. The beaver was successful with other trees, but not all work is productive.

From my perspective, this tree was still dead and now represented only prospective firewood and a drop-on-my-head hazard until I completed the beaver’s work and took it to the ground.

Only after I stopped being angry at the beaver’s decimation of my birch stand did I realize that by removing the trees the beaver had opened up my view of the lake (positive), opened up the view of my house from the lake (negative), and changed the amount of light reaching other trees and our house (positive if you are another tree, not so useful as the extra light heats up our house during the summer months). That reminds me of a story I tell on our neighbors across the lake: they took down many of the trees in front of their house to improve their view of the lake and then had to install blinds because of all the extra light they let in.

As summer progresses, I notice the surrounding trees are reaching limbs into the vacated spaces, preferring to grow out rather than up. Most forest trees are lean poles as they grow straight up in their battle for light. These rare holes in the canopy allow for changed behavior.

Humans, too, can experience new growth spurts when something causes an opening in their personal canopy. Unlike the trees, however, we can sometimes be our own beaver.

These two Northern Crescent butterflied gave me pause.

                                                           

The one on the left is freshly minted, whereas the one on the right is scarred with life’s travails. Lefty is more colorful and has its life mostly in front of it. Righty has more experience and to me is more interesting. How did it lose the edge of its left hind wing? Was it always less colorful or did the sun bleach out its colors? Did each of them perceive their own shadow, and what did they think about it if they did?

I resemble Righty more than I usually care to admit.

After the bear arrived two successive evenings and mauled our bird feeders, I now have to take in the hummingbird feeders overnight and put them out again each morning.

The first birds up in the morning are my hummingbirds and an eastern phoebe that never tires of saying his name. Like this male ruby-throated hummingbird, the hummers not so silently wonder why I am sleeping in as they buzz their “flowers” and discover they are not yet there.

As soon as I awake, I put out their feeders; and I can’t go to bed until long after the sun goes down because they’re still being used. Since we are so close to summer solstice and I live above the 46^th parallel, there is a lot of day between dawn and sunset—almost sixteen hours. The hummers arise in the predawn and retire after dusk. For me that requires a nap.

~ Jim

(originally posted on Writers Who Kill 7/14/13)