President’s Corner – Earnings

Growing up, John Houseman was one of my favorite actors. His most famous role in which he won the Academy Award for Best Supporting Actor was playing the gruff but fair law school professor in the 1973 film The Paper Chase and accompanying TV series by the same name.

What is not well-known about Mr. Houseman is that he amassed a fortune in the international grain market before losing it all after the 1929 stock market crash. It was then he turned to Broadway and a successful acting career. I don’t know much about the grain market, except that according to M. M. Kostecki’s 1982 book State Trading in International Markets – Theory and Practice of Industrialized and Developing Countries, only a few multinational companies handle 90% of domestic exports and 70% of world exports.

However, Mr. Houseman will forever be known as the pitchman for the now-defunct investment banking firm Smith Barney with his famous last line in every commercial, “We make money the old fashioned way. We earn it.” That got me thinking about how the word earn is interpreted today. Workers earn a paycheck, retirees earn a pension check, and investors earn interest from their savings and investments.

What is disturbing is that homeowners brag about how much equity they’ve earned from their homes. Yes, as principal balances decline and property value increase, equity accumulates. And yes, when the home is sold, the owner receives the benefit of the equity in cash. But some homeowners today, as many did in 2006, are using their home’s earnings as an ATM and are withdrawing the equity just because it’s there. We routinely ask members who request unusually large amounts of their equity what they’re planning on doing with the money. One member, who apparently was caught off guard by that question, verbally fumferred but finally replied, “I’m putting it in my savings account.”

Economically, that makes no sense. Why cash out of a home appreciating at an average annual rate of 3% to put it in a savings account earning barely over zero? The most likely scenario was that this member wanted to spend the money which would have left much less when the home is subsequently sold.

I look at my house as a long-term investment. There’s no way to know how much my house will be worth when we sell our house, but the cashed-out equity will be there as a supplement to my retirement. Not knowing what will happen to Social Security has added to the need to ensure as much money as possible has been accumulated prior to retiring. The key is to invest for the long-term and forget about the short-term gains which just encourage spending for stuff that yields only short-term pleasure.

I’d like to think that’s the way to make money the old fashioned way – I earned it.

David M. Green
President/CEO
(925) 335-3802