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August 16, 2011

The Wealth Gap: The False Promise of Home Ownership

The Wealth Gap
source: Nick Bastian

The Pew Study reports a stark contrast in the wealth of households by racial group. The median wealth of white households is 20 times that of black households. The study very quickly points to differences in home ownership (non-investment real estate) as the main culprit in explaining the differences in wealth. (Because blacks and Hispanics have very similar financial characteristics and those characteristics highly contrast those of whites and Asians, I will use the stats from the black and white populations for these illustrations.) For instance:

  • Only 46% of black households owned their own home, while
  • Among white households, 74% owned a home.

So right off we can see black households far behind in the primary asset that contributes to wealth – a home. Owning a home is a pervasive and deep seeded American dream. It has been promoted as the sure way to wealth, by our government, our financial advisors, our ministers and any number of late night infomercials. And the above statistic seems to support this idea. Own a home, get rich.

But I am here to say this idea is misguided. It represents one of the biggest fallacies of wealth accumulation in existence. Home ownership is not a panacea. In fact, if pursued to the exclusion of other assets, especially financial assets, it can be an albatross.

To explain what I mean, let’s look deeper into the stats and include those from wealthy households regardless of race. For blacks and whites alike, home equity made up the lion’s share of net worth. For blacks however, owning this asset (or not owning it), proved much more contributory to the rise, fall or existence of net worth. For example:

  • For black households that owned a home, home equity made up 56% of its net worth.
  • For white households that owned a home, home equity made up 38% of its net worth.

White households tend to be more diversified than black households. Thus they were able to better withstand the downturn in the real estate market experienced of the last few years. In fact, many black households bought at the peak of the real estate bubble during the days of 110% financing and easy credit. Another study conducted by Pew tells us that 35% of black home owners are under water on their mortgage, meaning they owe more on their mortgage than their home is worth. “Only” 18% of white home owners are in this situation.

Being a little more diversified (not too much) protects wealth. Something the very wealthy, regardless of race, have figured out. According to the latest Survey of Consumer Finances:

  • Of households in the top 5 percent of wealth (usually $1.5 million or more in net worth), 98% own their own home, however, home equity makes up only 15% of their net worth.

Blacks who are financially upwardly mobile, for lack of a better term, have caught on that home ownership is a great tool for wealth accumulation. But somehow, the forest was missed for the trees. Home ownership if all goes well can be a financial benefit, but in comparison to other assets available in the marketplace, real estate falls way way short on delivering functional (read: spendable) wealth. That usually comes in the form of stock, bonds, cash and business ownership. I will explore those differences in a later post. The next post however, I will look at the differences among racial groups in unsecured debts and ownership of other tangible assets like cars.


Market:

"Tax My Fortune! Please! Why Warren Buffett Should Volunteer to Pay Higher Taxes" by Daniel Gross, Contrary Indicator; Yahoo! Finance

Paying a few billion dollars in taxes that it isn't required to would allow General Electric, and any other company that follows suit, to do what most Fortune 500 firms haven't been able to do since the 1990s: claim the moral high ground. Just as a self-taxing Buffett would, a self-taxing company would garner a huge amount of publicity and positive reputation-building.

"That market plunge was so last week" by Bloomberg; Pensions and Investments


Portfolio:

"Coffee Wars: Is Dunkin’ Donuts More Valuable Than Starbucks?" by Stacy Curtain, Daily Ticker; Yahoo Finance

"Dunkin' Launches K-Cups; Starbucks Soon to Follow" by Karlene Lukovitz; Mediapost

"Starbucks CEO to DC: You've been cut off" by Charles Riley: CNN Money


Life:

"7 Tips for Writing E-mails That Won't Get Deleted" by Jill Konrath; Inc Magazine

"How to Talk with Your Children About Sex" by Planned Parenthood


"I ain't talking 'bout rich, I'm talking 'bout wealth. Wealth is passed down from generation to generation. You can't get rid of wealth. Rich is some shit you can lose with a crazy summer and a drug habit." - Chris Rock

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August 15, 2011

The Wealth Gap Continues

A few weeks ago researchers at Pew Research Center released a study on the wealth disparity among racial groups in the U.S. Here are the highlights from the study:

  • The median wealth of white households is 20 times that of black households and 18 times that of Hispanic households.
  • The net worth of Hispanic households decreased from $18,359 in 2005 to $6,325 in 2009. The percentage drop—66%—was the largest among all groups.
  • The net worth of black households fell from $12,124 in 2005 to $5,677 in 2009, a decline of 53%.
  • The drop in the wealth of white households was modest in comparison, falling 16% from $134,992 in 2005 to $113,149 in 2009.

While these statistics are nothing new, they should be of concern to all of us. There is a large portion of our population whose wealth is not substantial enough to participate fully in all our country has to offer. But instead of lamenting the political structure or the legacy of American racism and their role in “the gap”, starting tomorrow I want to take the next few posts to look at things we can control using the Pew study as a guide. For example, I want to examine the differences in the approach to wealth accumulation among ethnic/racial groups. What works, what doesn't. Stay tuned.


Market:

Stop Coddling the Super-Rich by Warren E. Buffett; New York Times

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks.

Portfolio:

Supercharging Android: Google to Acquire Motorola Mobility by Larry Page, Google CEO; The Official Google Blog


Life:

Wealth Gaps Rise to Record Highs Between Whites, Blacks, Hispanics by Rakesh Kochhar, Richard Fry and Paul Taylor; Pew Research Center

"Back-to-School Special: 5 Tips on Picking a Good School" by Andrew J. Rotherham; Time

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February 13, 2009

"You Ought To Be Rich" at the Tao of Talani

Tao of Talani
Source: Tao of Talani

I would like to make you aware of a great new blog I think will be of interest to many of you who read The Third Pig. It is the Tao of Talani. In the About section of the blog you'll find Talani's story. He writes:

How does a skinny New York City kid grow up to rub elbows with Will Smith, Magic Johnson, Denzel Washington, CEO's, Politicians and other prominent figures? Simply, never define anything as IMPOSSIBLE. I didn't mention high profile names to impress but to impress upon you that anyone can create there reality.

He goes on to tell us his purpose for the blog:

In The TAO OF TALANI blog I share my experiences as a humble student, emphasizing there is no wrong or right way to achieve your goals. The blog is specifically designed for self-empowerment, entrepreneurs and lifehackers seeking to create a productive new reality. My objective is to be an asset to the collective by sharing knowledge from leading thinkers and doers.

Tuesday I contributing a post to the Tao of Talani titled, "You Ought To Be Rich". The post provides 10 simple but admittedly not easy steps to follow toward wealth. Please visit the blog and leave a comment there, or here, and let me know what you think.

Disclosure: none

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January 20, 2009

Congratulations President Barack Obama

Our New President: Barack Obama
Source: Flickr by Cloganese

I just wanted to take a moment away from writing about personal finances and investment to simply be an American today.

The inauguration of Barack Obama as our 44th president is a monumental event. I feel proud grateful to have witnessed an event that gives people the feeling of inclusion, possibilities and hopefulness. Those are the exact elements the country needs to move forward in this difficult time and in difficult times to come.

I want to congratulate President Obama on what he has achieved. I want to wish him luck on what lies before him. And I want to thank him for having the fortitude and the courage to take on the task of the Presidency of the United States of America.

Today I am very proud to be an American and I hope you who are reading this feel as I do.

Disclosure: none

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November 27, 2008

5 Things To Be Thankful For In This Market (Part 4)

Source: Flickr by Egan Snow; http://www.flickr.com/photos/egansnow/343535886/

Over the last week or so I have been listing things to be thankful for in this market. So far I have covered three things. They are:

1. The Teachings of Benjamin Graham

2. Low P/E Ratios

3. The Inevitable Market Rebound

And now I am listing numbers 4 and 5:

4.     Black Eyed Peas, and
5.     Collard Greens

Seriously, do I really need to say more? There are few things in life that beat mom’s collard greens and pop’s black eyed peas thrown in with a little Jamaican corn bread. And with today's economy and the burden it is putting on the pocket book, a cheap meal is hard to come by. In fact, with Americans on food stamps reaching an all-time high, a cheap nutritious meal is just what the doctor ordered.

Southern folklore suggests, that a meal of black eyed peas and collard greens will bring with it good luck and financial prosperity. The peas represent coins and the greens represent folding money. Both foods are dependable sources of nutrients and antioxidants that protect your heart and maybe prevent cancer and both are great sources of folic acid.

So in the spirit of Thanksgiving and my hope we can all get a little more luck and wealth in our lives, I have decided to share a recipe from the Homesick Texan for black eyed peas:

http://homesicktexan.blogspot.com/2006/12/black-eyed-peas-for-new-years-day.html

And another for collard greens from Ms. Financial Savvy:

http://www.msfinancialsavvy.com/article.php?aId=141 

Good eats and Happy Thanksgiving!

Disclosure: I do not, nor do the clients of Brick Financial Management, LLC, own any securities mentioned in this article. But positions may change at any time.

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November 07, 2008

Obamanomics and The Stock Market: Part II

Source: Getty Images

We Can All Relax… Maybe Not

Today President-Elect Barack Obama held his first press conference since the election on November 4th. This followed a meeting with his economic advisors the purpose of which was to solidify a strategy to right the U.S. economic ship.

Ah! Now that Obama is on the job we can all relax. Well, not quite. In Obama’s opening statement he said, “We are facing the greatest economic challenge of our lifetime.” Although Obama’s statements were strong, his speech seemed mainly aimed to temper expectations of what he can do as the incoming President. In answering a reporter’s question, Obama said as President his chief goal will be to restore confidence in the market and get people working. Unfortunately, in the President-Elect’s first time out, he fell short of calming the markets. The Dow Jones fell 100 points during his 18-minute press conference. [video]

 

Are Democrats Good For The Market?

The market’s drop was understandable. The bi-partisan rhetoric dubs Obama “the-most-liberal-senator”. According to Karl Rove, he out-Democrats most Democrats. John McCain picked up this “too liberal” stance at the end of his campaign. The purpose of which was to equate Democrats as being bad for the economy and the stock market. Of course there are those who buy into this, but is it true?

In a recent New York Time article, the returns of the stock market are plotted over an 80-year period, according to the political party in office. The results? The market does better under Democratic Presidents. Under Democratic administrations the average return for the S&P 500 since 1929 was 8.9% and 0.4% under Republican administrations. [click image for larger view]

Source: New York Times

Party Power

Obama will be coming into office with a Democratic House and Senate as well. I have heard the talking heads on stock market television shows say this too is bad for returns. Again, the evidence does not support this view. According to the research conducted by Wharton professor, and stock market historian, Jeremy Siegel,

“…a Democratic president and a Democratic Congress? Well, Siegel's research shows that such a combination has generated annualized returns of nearly 14% since 1948. That's more than 4 percentage points better than under a GOP president and GOP Congress, and more than 3 percentage points better than under a GOP president/Democrat-controlled Congress.”

Here is the dirty little secret. The party that is in power probably has only a slight effect, if any at all, on the trajectory of stock market returns. Stock markets are like living organisms and are affected by many interlacing influences. So the best an investor can do is to invest consistently no matter who sits in the oval office.

Diclosure: none

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November 04, 2008

Obamanomics And The Stock Market

Source: http://www.flickr.com/photos/digitalparadox/2992094285/ 

Meet Joe-The-Dentist

Joe-The-Dentist earns over $600,000 per year. Although he earns a high income from his dental practice he also earns a good bit of income from capital gains from his stock holdings of publicly traded companies. Most of Joe’s holdings are in consumer oriented businesses. His largest holding is Walmart stock.

Unfortunately, Joe has seen his passive income from stock holdings decrease during the Bush administration – a period of low tax rates. Gone were the days of the Clinton era bull market – a period of high taxes. So Joe hasn’t paid much in capital gains as of late, because Joe’s passive income hasn’t been much to brag about.

Joe has an epiphany. Obama’s tax plan is very Clintonesque and middle-class oriented while the McCain plan is an aggressive version of the Bush tax policy which heavily favors the wealthiest Americans.

Joe contemplates if the middle-class had more income to spend, they might spend it at Walmart. Which means Walmart’s revenues would go up, which would increase the value of the stock, which would in turn allow Joe to have more passive income. Joe also realizes the even though he might pay a higher tax rate under an Obama/Clinton tax policy, it would mean little as his take-home-income would be at its peak. Under the McCain/Bush plan, middle-class incomes would be relatively lower, not allowing them to spend as much thus stalling the economic recovery, depressing Joe’s stock holdings.

Joe-The-Dentist as well as the average American need only look back at the last 16 years. Paying lower taxes will not necessarily, as smart people like Warren Buffett have pointed out, hurt economic decision making. Thus an Obama/Clinton tax policy will help all Americans by helping the middle-class. The following chart shows how the stock market performed during the Clinton administration (from the time of the election in 1992) to how it performed during the Bush administration. Under Clinton, the stock market nearly quadrupled while under Bush the market stood still.  [Click chart for larger view.]

Source: Tax Policy Center 

Implications for the National Debt

Much of the argument from the John McCain camp against voting for Barack Obama is that Obama will raise taxes. The truth of the matter is Obama simply wishes to return to the modified Clinton administration tax policy. Under such a plan very few of us will see a rise in our overall tax rate and most will see an increase in their take-home-income.

According to the Tax Policy Center (TPC), the wealthiest among us, the top 1% of households with incomes of $600,000 per year or more, would see their after-tax income decrease under the Obama/Clinton plan by about $19,000 representing a mere 1.5% decrease in after-tax income. The next 4% of households would see their after-tax incomes remain about the same. Most Americans, about 95% of households, would see their after-tax income increase by about $2,200 per year.

McCain espouses a Bush-like “trickle down” tax plan which aims to cut taxes across the board. His plan leaves most American with an increase in after-tax income of about $1,400. But his plan most favorable to the wealthiest Americans. The top 1% under the McCain plan would see their after-tax incomes rise by $125,000, according to TPC. [Click chart for larger view.]

Source: Wilshire Associates 

Each of the candidates’ tax plans has implications for national debt. It can certainly be argued the McCain/Bush tax plan will cost the nation more in the long run. According to the Tax Policy Institute (TPC),  

“The main differences are two: first, McCain’s plans would reduce revenues by significantly more than Obama’s; and second, McCain’s would be substantially less progressive, especially among very high income taxpayers.”

The McCain/Bush policies would cost (reduce tax revenue) $4.2 trillion over 10 years while the Obama/Clinton plan would cost $2.9 trillion during that time. If interest costs are included, McCain’s plan would boost the national debt by $5.1 trillion and Obama’s would increase it by $3.6 trillion. 

However, as the above anecdote suggests income for everyone, even the government, will potentially be higher under an Obama/Clinton tax policy. Even though both candidates’ tax plans will be expensive, the Obama/Clinton plan has relatively more upside for the economy than the McCain/Bush plan. Basically, under the Obama/Clinton plan, all boats will rise.

Disclosure: none

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April 15, 2008

Charity (Should) Begin at Home

Charity

A few years ago the Center on Wealth and Philanthropy conducted a study examining trends on wealth and wealth transfer within the African-American community. What CWP found was not astonishing – African-Americans are generous with their money. This finding in right in line with a 2003 study reported in the Chronicle of Philanthropy that African Americans typically donate up to 25% more of their discretionary income than do whites.

CWP turned up some other some other not-so-surprising but all-to-disappointing statistics as well – African Americans have less money to go around than other racial groups. According to the study (2001 figures), African Americans made up 13.2 million U.S. households, about 12.4% of all households. Yet they only earned 7.1% of aggregate household income and only owned 2.5% of household wealth.

It’s a little self defeating to give more when you have less to give. Altruism has its place. But so does rational selfishness. I am not saying one should not be generous. What I’m saying is charity should start at home. Most millionaires agree. I am in wholehearted agreement with Warren Buffett who said:

“…I always had the idea that philanthropy was important today, but would be equally important in one year, ten years, 20 years, and the future generally. And someone who was compounding money at a high rate, I thought, was the better party to be taking care of the philanthropy that was to be done 20 years out, while the people compounding at a lower rate should logically take care of the current philanthropy.”

The African American community should take note. Invest for the long term in the stock market, accumulate wealth and then give it away. There’ll be more of it to give in the end.

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March 25, 2008

When Buffett Speaks, Obama Listens

Buffett & ObamaIn a recent interview with CNBC, "Money Honey" Maria Bartiromo asked Barack Obama, "How do you plan to change the tax code when it comes to capital gains? How high will that 15 percent rate go?" Obama answered with the following:

"Well, you know, I haven't given a firm number. Here's my belief, that we can't go back to some of the, you know, confiscatory rates that existed in the past that distorted sound economics. And I certainly would not go above what existed under Bill Clinton, which was the 28 percent. I would — and my guess would be it would be significantly lower than that. I think that we can have a capital gains rate that is higher than 15 percent. If it — and if it, you know — when I talk to people like Warren Buffet or others and I ask them, you know, what's — how much of a difference is it going to be if it's 20 or 25 percent, they say, look, if it's within that range then it's not going to distort, I think, economic decision making.

On the other hand, what it will also do is first of all help out the federal treasury, which is running a credit card up with the bank of China and other countries. What it will also do, I think, is allow us to make investments in basic scientific research, in infrastructure, in broadband lines, in green energy and will allow us to give us — give some relief to middle class and working class families who have been driving this economy as consumers but have been doing it through credit cards and home equity loans. They're not going to be able to do that. And if we want the economy to continue to go strong, then we've got to make sure that they're getting a little relief as well."

Obama went on to further state that he'd be open to some sort of exemption for people making under a certain amount of money. I'm sure the Republican party will shout, "Obama will raise your taxes!" But at least Obama is listening to the right advisor.

 

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September 12, 2007

Fear Not

Sean "P. Diddy" Combs"Scared money don't make none."

 - Sean "P. Diddy" Combs

 

 

 

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May 20, 2007

Chris Rock on "Black" Wealth

Chris Rock

''We got no wealthy black people. We got rich people. Shaq is rich. The guy who signs his check is wealthy. Here you go Shaq! Go buy yourself a bouncin' car. Bling Bling!"

"If Bill Gates woke up with Oprah's money, he'd throw himself out the mother-bleeping-ing window.''

"Wealth will set us bleep-ing free, okay? 'Cause wealth is empowering, wealth can uplift communities from poverty, okay? A white man gets wealthy, he builds Wal-Marts and makes other white people have some mother-bleep-ing money. A brother gets rich, he buys some mother-bleep-ing jewelry."

 - Chris Rock

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May 03, 2006

Please DON'T See "Akeelah and the Bee"!

I saw a great movie this past weekend. Akeelah and the Bee, is about an gifted 11 year-old whom finds her way to the National Spelling Bee Championship. Along the way she finds that she has people in her corner who help her conquer her demons and want to see her succeed.

I liked the movie because it addressed a little known phenomenon in the African-American community in which academic achievement is considered a white people thing. There were several references to large and complicated words as being white words. Akeelah is torn between fitting in and reaching her true potential. I won’t give away the ending but let me provide a hint. It’s an inspirational story with a moral and a happy ending.

Even though I enjoyed the movie, the plot wasn’t the most interesting facet of Akeelah. What most interested me about the movie was the way in which it was marketed. You didn’t see the typical deluge of trailers and movie posters plastered every which where. Instead, what you saw were green and yellow neon coasters, coffee sleeves, and signs placed strategically around your local Starbucks [SBUX].

Long the number one purveyor of your favorite java concoction, Starbucks has been expanding its reach into other, seemingly unrelated businesses. The company has seen success in satellite radio, production and sales of CDs, and is now getting into the marketing of movies. Recognizing its power as a place where “communities meet” and “word-of-mouth” is created, Starbucks is making an effort in earnest to capitalize on that unique position.

As a frequent customer of Starbucks [Full disclosure: I’m currently drinking a caramel macchiato and writing this blog in a New Jersey based Starbucks. So I’m a little biased toward the company.] I’m all for the long-term success of the chain in these non-caffeinated aspects of its business. I emphasized long-term because I need this company to slip up somehow. The business is so excellent and execution so on point that the market has rarely priced the stock to a level where I felt comfortable buying it. [Click graph to view a larger image.]



Akeelah is a great movie. Critics (namely my favorites Ebert & Roeper) are already calling this movie an Oscar contender. Which is actually a little disappointing. I’m glad Starbucks and Ken Lombard, the head of Starbucks Entertainment, picked a great movie – one that falls right into line with their culture. I’m confident they will continue to pick great films. But can’t they mess up at least once so the market can depress the stock? I want to buy!

Maybe this weekend’s box-office is a good sign as Akeelah came in eigth-place. Well behind the critically unacclaimed [Two thumbs down from E&R] Robin Williams’ film RV. I hope this is the slip up I’ve been waiting for. As a value investor I wait for disappointing news that is temporary and then wait to see how the stock reacts. Akeelah is a great movie (and a great product) that I’m hopeful will not do well. This would be a perfect example of a good company with a temporary setback. If that happens let’s hope that the manic depressive market punishes the stock, and at that point I’ll probably be a buyer.

We’ll see what the stock does after today’s conference call.

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About Brick Financial Management, LLC

Blogged by Brick Financial

51 JFK Pkwy, 1st Fl. West
Short Hills, NJ 07078
973-486-9860
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Brick Financial Management, LLC is a Registered Investment Advisor specializing in providing investment management services to individuals, families, organizations and institutions. We implement highly focused stock, bond, and balanced portfolios using an investment approach commonly referred to as value investing. Disclosure

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