Avoid the “car mechanic syndrome” with these three questions
I think the person best qualified to manage your money is you. That’s the philosophy behind Stansberry Churchouse Publishing: To help give you — our readers> READ MORE
I think the person best qualified to manage your money is you. That’s the philosophy behind Stansberry Churchouse Publishing: To help give you — our readers> READ MORE
When was the last time you learned something new? Did it make you richer, happier or more productive? If the answer is no, you could be an information junkie.> READ MORE
Jim Rogers is an investment legend… and we’ve shared his thoughts before (like here and here… and here). He’s one of the most successful investors in the> READ MORE
If one man had followed basic portfolio management principles in 2008, there might be a different American president today. Steve Bannon, Donald Trump’s> READ MORE
If an investment opportunity seems too good to be true, it probably is. In his latest post, Mark Ford shares some cautionary tales for investors, and the three> READ MORE
As a parent, I often struggle to teach – by example and by word – my kids about money. To set myself straight, I sometimes remind myself of what I learned> READ MORE
This week, Mark Ford passes on a reminder that it’s not your salary that makes you rich – it’s what you do with what you earn. Below are some examples of> READ MORE
Our friends at Dr. Wealth here in Singapore have a unique take on a lot of issues in the world of investing. Below they talk about a theme that we’ve also often> READ MORE
I think the person best qualified to manage your money is you. That’s the philosophy behind Stansberry Churchouse Publishing: To help give you — our readers and subscribers — the tools and insight to make better financial investment decisions.
And as part of this, we want to help you avoid the car mechanic syndrome.
The car mechanic syndrome
The financial-industrial complex is my name for the vast web of interests eager to get their hands on your cash and “help” you invest it, from the mainstream financial media to private bankers and “financial advisors” to policymakers who let those guys have their way with your money. Its purpose is to separate you from your money. An important part of that is to make finance and investing sound more complicated than it really is. I call this the car mechanic syndrome.
The car mechanic syndrome is what happens when someone who knows nothing about cars (like me) goes to a mechanic when the car is making a funny noise.
“Can you tell me what’s wrong with it?” you ask.
You want to be sure that your car isn’t going to self-destruct. You want it fixed quickly, and you want to be on your way.
After popping the hood and casting his master eye over its contents for a few seconds, the car mechanic tut-tuts.
“When was the last time you brought this in for a checkup?” he asks with an arched brow. “Umm, I’m not sure,” you stutter back. “Well, it looks like your carburetor lower incisor has a myocardial fibrillation, and we’ll have to drain the accelerator abscess and replace the dynamical half plug,” he says.
Well, he doesn’t say that, of course, but he says something that means about as much as that to you.
You nod glumly. And $2,000 later, you’re on your way, with a severe case of car mechanic syndrome: You’ve been fooled by an “expert” into overpaying for a service that’s should be a lot simpler, and less expensive, than you’ve been led to believe. But because you don’t have the time/money/inclination/desire to learn more about that service to be able to have a conversation “as equals” with the “expert,” you continue to not understand, pay up, and move on. That’s a recipe for a lifetime of being ripped off by car mechanics — and financial advisors.
The only person who will protect you is…
You. In brief, this is how the financial-industrial complex operates… first they confuse you, then they concern you, and then they overcharge you. Every penny that you give to a private banker or asset manager — in the form of fees and expenses and loads and wraps and other fancy-sounding structures that the financial industry comes up with — is one less penny that can work the magic of compounding for you. And it’s one less penny that can go towards your retirement or your kids’ education or that new flat.
Some people think that their financial advisor is duty-bound to recommend only the best and most appropriate financial instruments or investments. But that’s generally not the case. Financial advisors in most markets are only required to offer you products that are “suitable” — but they’re not legally required to put your interests first (read more about this important distinction here). And as I’ve written before, the best person to take care of your money — the only person who will look after your financial interests as if it were their own money — is, well, you.
Three questions to ask
That’s not to say that there’s no role for others to help you with figuring out what to do with your money, and how to make it grow. The best source of insight is people who know what they’re talking about, provide unbiased and honest insight, and who have no incentive to guide you toward any one vehicle or another — and who are interested only in helping you make better financial decisions. (Like us, for example.)
There may, in fact, be a role for a financial advisor or private banker in your financial life — if for no other reason than to listen to what they have to say. Many of them are smart, experienced people with real insight on investing. The problem is that they make money when they take some of yours.
So the decision to let someone else — whether it’s a private banker or investment advisor or someone similar — is a big one. (Again… I firmly believe that it’s a far better idea to figure out your own finances. But I know that isn’t an option for everyone.) So to cut the chances that you suffer from car mechanic syndrome, I’d suggest you ask these three questions of him or her:
Of course, this is the story of finance… it’s a hugely broad question. It’s like asking a religious person to dis/prove the existence of a greater being. But the point is to see how she or he responds — and, most importantly, whether you understand the response. Remember how my car mechanic’s insight about what ailed my car sounded to me? It sounded like verbal garbage. If your potential financial advisor sounds like that, you should take your money elsewhere. If you don’t understand him now, you’re not going to understand him later… and if you don’t understand him, you’ll wind up paying dearly for your ignorance. (Similarly, if your financial advisor ever pitches you an investment idea that doesn’t meet the crayon test, walk away.)
Would you take advice from a marriage counselor who’s never been married? Or be the first patient of a just-out-of-school dentist? Or listen to a lawyer who’s never practiced law? Of course not. For the same reason, you should think long and hard before letting someone who’s never experienced the violence of different market environments manage your money. Stressful situations involving money — yours and especially others’ — can bring emotions into play in a way that can be destructive to your personal wealth (get our free report about how to keep your emotions out your money here). If you’ve never been through a real bear market before, you don’t know what to expect. You don’t want your money to be in the hands of the financial equivalent of a surgeon who’s never operated on someone before.
At Stansberry Churchouse Research, my colleague Peter Churchouse and I have plenty of battle scars between us. Peter has worked in finance and real estate in Hong Kong since the early 1980’s. He had a front row seat to countless regional booms and busts, the Asian Financial Crisis, SARS… you name it. Me? I had a front row for the 1998 financial crisis at a bank in Moscow when the market fell 93 percent… and a decade later, I was running a hedge fund right into the global economic crisis.
Many investment advisors are paid — either directly or indirectly — on a commission basis. That means that they make money only if you buy or sell (and, in particular, if you buy high-priced specialised vehicles called by a fancy acronym — see below). But as we’ve written before, often doing nothing is the best thing to do. If your financial advisor — who after all also has to put chicken rice on the table — only makes money if you do something, you’ll wind up buying and selling a lot more than you should. Instead, find a financial advisor who is paid based on your total assets, or a flat fee. That means s/he won’t be incentivised to put you into vehicles that don’t make sense for you (but which generate lots of fees for him), or to buy and sell a lot more than you should.
(Here at Stansberry Churchouse Research, we take no commissions for anything and we get no kickbacks from anyone. We’re here to serve our readers and no one else. If we recommend a service, it’s because we believe it will make you money – not because we’re making money for recommending it to you!)
If your financial advisor ever recommends an asset that’s described with some kind of fancy acronym (like, for example, BCTTLIHIRSSN, which stands for Bermudan Callable Three Times Leveraged Inverse HIBOR in-arrears Resettable Step-up Snowball Note), run away, fast. (Tama recently wrote about this in the derivatives world, here.) No matter how good it sounds, you can bet that it’s designed to separate you from more of your money, faster, than anything that isn’t described by some kind of new acronym (which you can bet was devised by a well-paid team of marketers).
Taking your car into the repair shop is much like investing; the more you know about the topic, the less money you’ll likely spend. One of the key objectives of Stansberry Churchouse Publishing is to help individual investors help themselves. For example, see our personal finance section, and our investment glossary.
If you’re ready to step up, click here to become a charter subscriber to our exclusive investment research product, the Churchouse Letter. Our subscribers pay less than the price of a couple bottles of decent wine for their year-long subscription to The Churchouse Letter. If they don’t like what they see they can have their money back, no questions asked, in the first 30 days.
When was the last time you learned something new? Did it make you richer, happier or more productive? If the answer is no, you could be an information junkie. This week, Mark Ford reminds us that acquiring knowledge is only half the battle… and shares his two simple rules to becoming more successful.
By Mark Ford
I hadn’t seen Dave in almost 20 years.
He had been my dentist for a number of years and had later continued to care for my family. Dave contacted me when he discovered that I was the man behind the “Michael Masterson” pen name.
“How about lunch?” he wrote. “I’ve got a bunch of things I need to ask you.”
The anxious dentist
Several weeks later, we were eating chopped chicken salads together. Dave seemed nervous. It was as if he were intimidated by the Michael Masterson persona. I did my best to assure him I was the same person who used to wince in pain when he cleaned my teeth.
We talked a bit about family news, but it was clear he had something else on his mind.
Eventually, he mentioned a decision he was trying to make: Should he spend $100,000 on the highest level of an internet marketing program he had been looking at?
“I’ve been studying their stuff,” he told me. “It’s really good. But I’m not sure it makes sense for me to invest that kind of money.”
“A hundred grand is a lot of money,” I said.
“But you get an awful lot for your money,” Dave explained. “They do all the technical stuff for you, which I’m not very good at. All I’d have to do is come up with the ideas.”
“Well,” I said, “what ideas do you have?”
Dave didn’t have a single one. “All I know is that I am in the wrong business,” he said. “I took this self-test online — and I found out I’m in the worst business in the world for me.”
What does Dave want to do?
At nearly 50 years of age, Dave had just concluded that his entire career had been a waste.
“I’ve wanted to be a dentist since I was 8 years old,” he told me. “If I had known then what a bad business it was for me, I would have done something else.”
“Like what?” I asked.
“Like what you do,” he said. He was smiling, but he looked serious.
“Look,” I told him. “My business is a great business — but I don’t think you should conclude that your life has been wasted simply because you took some pop quiz that was probably designed to sell you something.”
“But it was right,” he insisted. “It proved something I had always known but was afraid to admit.”
The waitress filled our drinks. We ate in silence for a while.
“So, what I’m thinking is that, since I’m not into the technical stuff, this internet marketing program would be very good for me.”
“How much time have you invested in learning about internet marketing?” I asked.
“About three years,” he answered.
“And how many information products on the subject have you bought in that three-year period?” I asked.
Dave laughed. “I can’t even count that high,” he said.
“How much money have you spent?”
“Tens of thousands. Probably more.”
“And yet, you haven’t actually started an internet marketing business,” I said.
He nodded, then rattled off the names of every internet marketing program he’d bought — all the ones that I knew and others I had never heard of.
“That’s a lot of buying,” I told him.
“Tell me about it,” he said.
Dave explained that when he reads an advertising promotion pitching a new internet marketing product, he is “totally taken in by it,” even though he realizes he is just reading “a sales pitch.”
“But even though I know that I’m being seduced by a professional wordsmith, I can’t stop myself from buying.”
The (information) junkie dentist
“I hear you,” I said. “You are an information junkie.”
“What about you?” he said. “I read that you read a lot of informational books — about one every week.”
“I do,” I said, “but I’m not an information junkie. I’m an information user.”
“So what’s the difference?”
I explained that the difference is huge. An information junkie is addicted to the process of buying information. Although he may delude himself into thinking otherwise, he has no intention of ever using the information he buys.
An information user is very practical about his purchases. He buys information for specific, pragmatic purposes. He uses the information he buys to achieve specific goals — to start or grow a business, to learn a new language or to improve his negotiating skills.
An information junkie is happiest at the moment he is buying the information. His enthusiasm soon wanes, however. Within hours or days of receiving it, the information junkie is on to other things. The new product goes up on the shelf with the old products. He’s excited about the next new one.
An information user makes progress. See him reading a book about nutrition, and there’s a very good chance (if he likes the book) that his eating habits will change in the immediate future. The information junkie, in contrast, may have 26 books about nutrition in his living room. He may even have read them all — while he was lying on the couch eating potato chips.
An information user is someone who consumes information to profit from it. If he invests $100 in learning about a subject, he expects to see a substantial return on that investment — perhaps a thousand dollars’ worth of value, either material or spiritual. An information junkie consumes information like drugs or candy bars. It gives him an immediate rush and then nothing afterward. That’s why he needs to buy more.
The information user has long-term expectations when it comes to knowledge. He believes the knowledge he acquires now will compound over time as he learns more and is in a better position to leverage what he has learned for a greater benefit. The information junkie is in it for the here-and-now. He doesn’t believe in saving. He’s always on to the next hot thing.
What about you?
Are you an information junkie? Take this test and see.
Answer “Yes” if you agree with the statement below, or “No” if you don’t:
1. In the past year, I’ve purchased more than 12 books that I haven’t read. (If your answer is Yes, give yourself 2 points.)
2. In the past year, I’ve purchased:
3. In the past year, I’ve purchased at least one $1,000 information product that I didn’t use. (Yes = 5 points)
4. I am most excited about the information that I buy:
5. When I read a book, I feel compelled to read it from cover to cover. (Yes = 2 points)
6. I generally take notes when I read something. (Yes = 1 point, No = 2 points)
Well… how did you score?
If you scored 8 or above, you are indeed an information junkie.
If this is the case, don’t despair. You can convert yourself into an information user simply by following two rules:
That’s all there is to it. Obey these two rules, and you’ll not only break your addiction, you will radically improve your life.
Jim Rogers is an investment legend… and we’ve shared his thoughts before (like here and here… and here). He’s one of the most successful investors in the world and has unique insight on the world of investing.
I’ve had the privilege to sit down and pick his brain about global markets several times. (It helps that we both live in Singapore.) Below are excerpts from a recent conversation (you can learn how to see the entire exclusive interview here).
During that discussion, I asked Jim about his investment process and what he thinks about when deciding where to invest. I’m happy to share his insight below.
Jim’s investment process
Jim likes to look at the big picture when making investment decisions (some of his best big picture ideas are found here. Below, he explains what he does after he sees the big picture.
Me: So, would it be fair to say that you start off from a macro level and then work down to micro? [In economics, the big picture is also called the “macro”, as in macroeconomics. The smaller details are the “micro.”]
Jim Rogers: Well, normally, yes. As I say, the Chinese government is spending a lot of money cleaning up China [more about this big picture can be found here]. That’s a pretty big macro approach. And then I see what’s going on. So then I say, “Okay, now how do I do something about it?”
I guess it could be a micro if I happen to run into a product or a company or something that seems to be exciting and promising. That too can lead to ideas. I don’t have any simple way to find ideas. I wish I did. Life would be a lot simpler. I guess I could just sit at my desk and wait for Morgan Stanley [the global financial services firm] to send me something, but I don’t normally talk to brokers or investors.
Me: So you have the idea. And then what are some of the steps in doing the actual research and converting the concept into something to buy?
Jim Rogers: Well, when trees grow to the sky [when everyone is excited about a stock or investment], you’re selling short [a strategy to profit from falling stock prices]. So, it’s not just buying, it’s selling. It depends on what you’re pursuing.
Annual reports, obviously you have to read the financial statements of companies. You have to do spreadsheets of numbers of the companies to see what’s going on. Do they have a lot of debt? High margins? Low margins? High return on equity? That sort of thing.
And then you talk to competitors, you talk to customers, you talk to everybody, suppliers. You talk to everybody you can to find out if this is right or wrong, and I still make plenty of mistakes.
Some of Jim’s biggest mistakes
Me: What’s an example of a mistake or two that you’ve made?
Jim Rogers: Very early in my career, I knew that the markets were going to collapse and so I sold short, everything [selling short is a way to make money when markets, or stocks, fall in value]. And low and behold the markets five months later, total collapse, chaos. Never been anything like it since 1938. People all around were going bankrupt. And, here I was making a fortune. You know, I couldn’t believe it. Triple my money in five months. And so I said, “This is so easy. I’m going to be so rich. This is just amazing how easy this game is.”
I sold my puts on the day it hit bottom. [Puts give you the option to sell a stock at a certain price on a certain date and they’re used by investors that think the price of a stock is going to fall.] Astonishingly enough, I mean this is an amazing story as I look back on it. I said, “Okay now I’m going to wait for the market to rally,” because I knew it would after that kind of collapse. And then I’ll really make a lot of money.
And this time I’m not going to pay the premium to buy puts, I’m just going to sell short. So, I went and sold six companies short. And, two months later I was wiped out. I lost everything. Almost had to sell my motorcycle. It was that bad.
And interestingly enough, within two years, all six of those companies were bankrupt. All of them. But I lost everything first because I didn’t know about markets. I didn’t know about timing. I didn’t know that markets could do really strange things. I just assumed that everybody knew what I knew.
Lesson learned: Don’t invest in the heat of the moment
Jim Rogers: One of the first lessons I learned, have learned is, people don’t know what I know, or think I know, so I have to learn. And my timing is horrible. I am the world’s worst market timer, world’s worst short-term trader, so I know that when I say it’s time to do something, I have to wait because I know I’m going to be early. And even then I get early sometimes.
So I made plenty of mistakes, but thank goodness I’m not married to that woman anymore. What a wretched life I would’ve had.
Me: So what you just said, when you think it’s time to buy, you wait. So how does an investor figure out what is a good buy and is it within 20 percent of…
Jim Rogers: I don’t know. I don’t know how to do it. If I were that smart, I’d be rich. Boy, everything would be great. One thing I do… I usually put in limit orders because I don’t trust myself for the timing. So I put in the limit order to buy or to sell [we explained limit orders here], and then, the market can do it for me… rather than sitting there in the heat of the moment, because I know I’ll get it wrong in the heat of the moment.
See the full interview
Jim shared a lot of his investing and life experience with me during this conversation, including where he’s investing now, where he’d like to visit again and why we should all be learning Mandarin.
You can find out how to see the entire video, Jim Rogers unplugged, by clicking here.
If one man had followed basic portfolio management principles in 2008, there might be a different American president today.
Steve Bannon, Donald Trump’s right-hand man and one of the most influential (and controversial) members of the new U.S. government, points to a single defining moment that he says lit the fuse of his burning economic nationalism.
It was the day his father capitulated, in the depths of the global economic crisis in 2008, and sold his entire stake in telecommunications company AT&T.
When Marty sold
According to the Wall Street Journal, Steve’s father Marty had his entire nest egg in AT&T stock. He spent a 50-year career with the company, and over decades he accumulated a life’s worth of savings in the stock.
As financial markets collapsed in the midst of the crisis, he watched the value of his retirement fund plummet.
And right then, at the worst possible moment… he sold.
His son, White House strategist Steve Bannon said, “The only net worth my father had beside his tiny little house was that AT&T stock. And nobody is held accountable?”
There are many reasons why Steve Bannon is where he is today. But his firebrand rejection of globalisation and the institutions that operate within it stems from that one moment… when his father gave up and sold.
In Steve Bannon’s own words… “Everything since then has come from there. All of it.”
When I read about Steve Bannon’s father, I didn’t think “politics”… I thought “portfolio”.
The mistakes he made
Marty Bannon made two typical – and damaging – investor mistakes.
First, he wasn’t diversified.
He invested everything he had into a single stock. Everything. He put all his “eggs” into that one AT&T basket.
This is the exact opposite of diversification.
A man nearing retirement age shouldn’t have his entire net worth just in equity… let alone a single stock!
Even the simplest diversification into bonds would have been enough to help weather the economic storm. U.S. treasuries rallied strongly during the global economic crisis as investors flooded to safety and the Fed dropped interest rates. (In late 2008 for example, the iShares 7-10 Year Treasury Bond ETF rallied by 15 percent.)
Secondly, Marty Bannon didn’t use a stop loss.
From peak to trough, AT&T stock fell by 50 percent during the crisis. He could have saved a lot of money and stress by using a standard 25 percent stop loss.
It’s a simple fail-safe technique to stop bad losses turning into terrible ones. And it removes all the stress from your decision making.
Plenty of investors don’t use a stop loss. They hold the stock, come rain or shine, bull or bear market.
That’s also fine!…
… if you can stomach sitting on a 50 percent beating when the world is falling down around you. If you can resist every natural instinct that tells you to panic and sell. If you have the courage of your convictions to watch everything you’ve spent a lifetime working for fade away because you know deep down that it’ll eventually come good… then great!
But most people can’t.
Instead, most investors do what Marty Bannon did. They sell at the worst possible time. They give in to that awful fear and they suffer huge losses.
And the worst part? If he’d just held on, he would have been fine.
AT&T’s share price today is exactly where it peaked at in late 2007.
One result of Marty Bannon’s poorly timed sale…
Steve Bannon is Trump’s chief strategist and ideologue.
He ran Trump’s successful presidential campaign.
I think it’s fair to say that without Steve Bannon, Donald Trump wouldn’t be sitting in the White House today.
Steve Bannon stated that his father’s AT&T stock whitewash is what sparked, in his own words, “everything”…
So ask yourself… If Marty Bannon had owned a diversified portfolio with stop losses, would Donald Trump be the president of the United States today?
P.S. We’ve written about how to prevent your emotions from getting the better of you when it comes to making investment decisions…you can download your free copy here.)
If an investment opportunity seems too good to be true, it probably is. In his latest post, Mark Ford shares some cautionary tales for investors, and the three essential rules for rational, profitable investing.
Are investors no better than lab monkeys?
By Mark Ford
It’s because you are “one of his favorite people” that Melvin, your broker, is telling you about it.
It’s AgriCorp, a little-known company that has developed a new natural herbicide that’s 150 percent better than the chemical treatments currently used.
“But get this,” he whispers furtively into the phone. “In three months, a bill goes to Congress banning most of the herbicidal chemicals currently used. When that passes, AgriCorp’s revenues will skyrocket.”
“Where do you see the share price going if that happens?” you ask.
“Based on projected P/E ratios,” Melvin says, “our analysts figure 3,000 percent. Every thousand invested will become $30,000!”
“But I can only give you 500 shares,” Melvin says apologetically.
Some primitive part of your brain is upset to hear about this scarcity. It fears starvation. But another part, the rational part, is saying, “Be cautious.”
You double-check the story. Melvin’s account of both the product and the pending legislation are accurate.
“What did I tell you?!” your greedy, primitive brain shouts. You buy 500 shares at $10.
Three months later, Melvin calls to tell you that “some big chemical companies have temporarily held up the bill.” There is frustration in his voice. “But it’s going to happen.”
But the share price drops to $5. So your $5,000 investment is now worth $2,500.
“You should double down,” Melvin tells you.
“I can get you another 1,000 shares. Invest another five Gs. It will bring down your average cost from $10 to about $6.65. It’s safer, don’t you see?”
“Plus, with three times as many shares at $6.65, you stand to make more than three times the money!”
“Go for it!” your greedy brain is screaming. “Take caution,” another part of your brain whispers.
“This law,” you say. “You’re sure it’s going to happen?”
“It’s a lock,” Melvin says confidently.
Your primitive, greedy brain likes the sound of “lock.” You write Melvin a check for another $5,000.
Two years later the bill finally passes.
No. In the meantime, another company, AgriStar, has developed a similar product that is better and cheaper.
You call Melvin for advice.
“Just to be safe, put five Gs in AgriStar,” he says.
Great. Your $10,000 investment is now worth $800 and sinking. Melvin wants you to invest more. But you have no more. Life sucks. You consider selling but the $800 won’t exactly change your life. You decide to hold on to those shares and hope for the best. But you know, deep down inside, that you’ve lost a small fortune. You can’t figure out whether you are angry or embarrassed. Probably both.
Picking up pennies in front of steamrollers
There’s a moral to this story, and it’s one thing every wealth builder should know:
When the outcome of an investment depends heavily on some expected future event, it is inherently risky. When that anticipated event comes with a time frame, the risk is exponentially greater.
The good news: You can shorten those odds by being rational.
The bad news: It will be hard for you to do this because your brain is wired to respond to investment opportunities in non-rational ways. (We’ve written about this here).
Many studies have shown this. One of my favorites was conducted at the UNSW Australia Business School by Elise Payzan-LeNestour.
She tracked the decisions of investors given speculative opportunities. And then she compared their behavior with the responses of lab monkeys.
The monkeys were presented with two levers. One always dispensed a small amount of sugar. Another sometimes provided double the sugar and other times gave an electric shock.
Time and time again, the monkeys took the gamble and ended up with lots of shocks and less sugar than they would have received from the safe lever.
The same pattern was evident with the investors. When given the choice between risky investments that offered high returns and safer investments with lower returns, they favored the risk. As Payzan-LeNestour put it, “Investors pick pennies in front of steamrollers because they overlook the possibility of a loss.”
When it comes to choosing safe versus risky investments, Payzan-LeNestour concluded that investors are no better than lab monkeys.
Trust me… I know. I’ve done it. And it’s embarrassing…
I’ve made my share of monkey-brained investments in my life. And almost every one of them involved speculation—the anticipation of some future event with a specific time frame.
My first real estate investment is one that comes to mind. When I was starting our family in Washington, D.C., our landlord came to my wife and me with a “fantastic” moneymaking opportunity.
She showed us charts and graphs illustrating how local real estate prices had been rising for years with lines projected into the future. She also gave us lists of facts that seemed to prove a continuing bull market in property.
According to her calculations, I would double my money in less than three years by buying one of her properties. Knowing nothing about real estate at the time, I acquiesced. I invested about five grand, which was the entirety of our savings at the time, and waited expectantly.
You can guess what happened.
The market went the other way. I quickly lost my $5,000 and continued to lose money as property values tanked. It took me several years and $30,000 to dig myself out of that hole.
I have a recent example and this one is particularly embarrassing. On the advice of a colleague (a very well-known and respected investment guru), I met with a businessman who spent an hour telling me about how much money his business was going to make. He pitched to me based on deals he was making with people—very influential people in our industry that I knew were “good.” He showed me the numbers. They looked promising. So I had one of my businesses lend him a hundred grand.
A month later I learned he was a serial con artist—that he made his living suckering wealthy, successful business people (like me and the guy that recommended him), taking their money, spending it, and then declaring personal bankruptcy. He did it two or three times before he did it to us. Now I’m spending money trying to put him in jail.
What was my mistake?
I collateralized the loan on his business. But the valuation I gave it was not based on its then-current income but on what he persuasively argued it would become.
Had I obeyed my rule about sticking to the present and not betting on the future, I would have asked for some other form of collateral or said no.
Shame on me.
And here’s one final example: I was a member of an informal group of investors for about a dozen years. These were all investment insiders and experts—business owners and specialists and analysts and several financial gurus.
Every so often, one of us would bring something to the table. They were always speculations. But they were within the scope of the expert’s knowledge, so they all seemed like good bets.
How did we do?
I like to say that our track record was “perfect.” We lost 100 percent of our money on every deal.
Rules for rational investors
I said before that when it comes to investment opportunities, most of us do not act rationally, however much we tell ourselves that we do.
Here’s why: Neurobiologists say the human brain is really an organic network. Some parts of the brain do the rational thinking, others facilitate our emotional and primitive instincts.
Emotional intelligence can be extremely useful. And good decisions are made when our rational conclusions, emotional impulses, and primitive instincts line up.
But to make good decisions consistently, we must control our primitive instincts. The part of us that always goes for more sugar and ignores the possibility of loss.
We must tether our impulses to some rational thinking and emotional constraint. As Seth Godin put it, “The amygdala isn’t going away. Your [primitive] brain is here to stay, and your job is to figure out how to quiet it and ignore it.”
And the best way to do this, when it comes to investing, is to adhere to rules of engagement that reduce risk.
I’ve developed three such rules:
Don’t invest in anything you don’t understand. This one is probably the most important, but also the easiest to ignore. The challenge here being that it’s sometimes easy to convince yourself that you understand something when you don’t. When I say you should “understand” a business, I mean you must know it inside and out. You must know how it makes its money, which products are most profitable, what particular problems it faces, what sort of financing it needs, etc.
Never invest a lot of money in any single asset. When it comes to stocks, this is called “position sizing.” You might say, for example, that you will not spend more than 5 percent of the money you have allocated for stocks on any particular stock or no more than 1 percent of your net worth on any particular stock.
To reduce risk further, always diversify your investing across a broad range of asset classes. This is called asset allocation, and some studies suggest it is the single most important factor in long-term wealth acquisition.
These rules are what will prevent my monkey-brained instincts from getting the better of me.
(We’ve written a free report about how to prevent your emotions from getting in the way of your investment decisions… click here to learn more.)
As a parent, I often struggle to teach – by example and by word – my kids about money. To set myself straight, I sometimes remind myself of what I learned about money as a child from my parents…
This is my father’s catchall advice. Going to Mexico with a backpack on your back and a whiff of a job in a town you’ve never heard of? Think before you do anything stupid. Plunging down a new career path with no safety net where you’ll be doing something completely new? Think about where it takes you. Have some cash burning a hole in your pocket? Think about the best possible way you can use it – for today and for tomorrow. It sounds obvious, but thinking (especially about money) is actually quite hard for most people – so they don’t do it when they really should.
2. What money is… and what it isn’t
I learned to believe a few things about money…
A. Money is a way of keeping score. But it’s only one way of keeping score – and it’s one of the less important ways of keeping score. Other things matter a lot more.
B. Money is a tool. It’s a way of getting what you want – whether that’s time, travel, space, or a diamond-encrusted chess set from the Gobi Desert. And usually it helps to have money to make more of it.
C. Money means options. If you have money, the range of opportunities available to you – what you can do with your time – expands dramatically.
D. Conversely, no money equals fewer options. If you’re struggling to make ends meet, your menu of opportunities is limited because you’re focused on making rent or the car payment tomorrow. You can’t choose what to do, because your money requirements are dictating to you what you have to do.
But money is not an end in itself. The day that the number in your bank or brokerage account defines you, is the day that you need a money enema to straighten your head. Hearses don’t have luggage racks.
3. Spend – on things that matter
My mother always did – still does – religiously check prices. Whether it’s for a litre of milk or for a flight to Johannesburg, she’s always wanted to get the best value for her money. So as a kid, I was never wanting for clothing or shoes. But lots of kids had far nicer wardrobes and went on fancier holidays, and their parents drove flashier cars.
However, when it came to education – and to spending on other things that mattered – no expense was spared. My sister and I went to the best schools we could get into – and we escaped (unlike many kids in the west) the millstone of student debt.
4. Have patience
It’s easy – especially when you’re younger – to crave instant gratification. But patience is one of the most under-appreciated, and important, traits that you can instill in a child. Patience is the main ingredient of self-control… and its kissing cousin, delayed gratification – which is one of the best indicators of success later in life. (If you’re not familiar with the Marshmallow Test, you should read this.)
Chances are, if you don’t have patience, you’ll be bad at managing your money. I learned early on about compounding, the most powerful force in finance – which is based on time and patience.
My parents also taught me that it’s OK to have money – and to do nothing with it. A lot of investors feel like they have to use their cash, and they’re compelled to buybuybuy or sellsellsell. As I’ve written before, cash is the best hedge there is: It’s cheap and it’s liquid. At least as importantly, cash represents potential, and options (see above).
5. Talk about it
Most people feel that if you ask someone how much money they earn, what they owe, or how much they’ve saved, it’s like asking them about their deepest and darkest secrets. But in my family, talking about money was normal. That helped take money and financial matters out of the closet for me – and it helped me develop reasonable expectations about my own money life. If it’s a hush-hush secret, money can become part of a twisted psychology of guilt and shame. Air and light from an early age removes that.
6. No one cares about your finances more than you
My parents always told me that the only person you should rely on to look after your money and your financial future is yourself. (This is one of the reasons I started Truewealth Publishing in the first place.)
The financial-industrial complex – the financial media, private bankers, so-called trading gurus, and all the rest of them – wants to “help” you take care of your money. But their “help” often enriches them, far more than it enriches you.
So if you want to make sure your finances are well looked after, then by all means do get input from a professional. But remember that it’s you who is accountable for your own money – and you should be overseeing everything about your own money.
Maybe you learned very different money lessons — and maybe you’re imparting different lessons to your children, if you have them. But these six teachings have served me well.
This week, Mark Ford passes on a reminder that it’s not your salary that makes you rich – it’s what you do with what you earn. Below are some examples of the out-of-control spending habits that have brought some of America’s wealthiest athletes to their financial knees – and how you can avoid a similar fate.
How to spend yourself poor
By Mark Ford
Making more income is the best way to build wealth. So long as you don’t spend it as fast as you make it.
In other words, the short-cut secret to getting wealthy quickly and efficiently is to:
What do I mean by “the lion’s share”? Between 70 percent and 90 percent depending on how close you are to your Magic Number.
(Net investable wealth is the term I use what you have after you deduct two asset classes from your net worth. One includes the money you have set aside in your “start-over fund” (cash, coins, etc.). Another includes the value of your house and any other tangible assets (such as jewelry or family heirlooms) that you want to keep for the rest of your life.)
(Your “magic number” is the amount of money you need to have saved and invested in order to quit work and enjoy retirement. That is, a lump sum of money that can provide enough interest income to live off of.)
Most people don’t do this. As their income rises, so too does their spending. Some actually spend more than the extra money they make.
Why? Because having extra things—a bigger house, a newer car and assorted luxury toys—is what we’ve all been told wealth is about. We work hard to buy this stuff. And then we are happy. The more stuff we buy, the happier we are.
That’s true in Hollywoodland, but in real life the truth is very different. Spending more on “happy” stuff is a junkie’s habit: to get the same thrill (in this case, ego thrill) you need to take bigger hits.
I like to use Mike Tyson as an example. He had career earnings of over US$400 million. And yet, amazingly to me, he ended up tens of millions of dollars in debt. He accomplished this financial feat by spending his money on US$2 million bathtubs, US$3.4 million worth of clothes and jewelry, and two Bengal tigers that cost more than US$10,000 per month to feed, train, and insure. Iron Mike also made some bad “investments” and ran up a multimillion-dollar bill with the IRS.
Recently a friend sent me an article from Sports Chew that provided other amusing examples of out-of-control spending habits. Although these are examples of American sports stars who seem to want to spend themselves poor, there are dozens of similar stories from the rest of the world too:
These are not isolated examples. In fact, according to Wyatt Investment Research, 78 percent of NFL (American professional football) players and 60 percent of NBA (professional basketball in the U.S.) players file for bankruptcy within their first five years of retirement.
Lest you write this off as a “poor dumb jock” problem, consider this: The average American has more than US$200,000 in total debt and less than US$1,000 in savings.
There are several lessons to be drawn from this:
Wealth acquisition, as I said in the beginning, has everything to do with increasing your net investable income and saving an increasingly larger percentage of it. When you boost your income, give yourself a reward. Buy or do something fun. But don’t spend more than a small fraction of that extra income. The rest you should put into savings.
Our friends at Dr. Wealth here in Singapore have a unique take on a lot of issues in the world of investing. Below they talk about a theme that we’ve also often touched upon: The role of emotions in investing. (Here you can download a free special report about how to avoid some of the biggest investment pitfalls that lurk when your emotions get the best of you in investing.)
By Dr. Wealth
Most people think that investing is about making rational decisions. But the reality is that many – if not most – investment decisions are governed by emotion.
Below we take a look at 6 of the most common investing mistakes that happen when you let your emotions get the best of you.
1. Buying high, selling low
Although most people understand the logic of buying low and selling high in the stock market, many investors are actually doing the exact opposite.
There are two reasons why this happens:
Most investors are uncomfortable with risk. As a result, many investors buy when prices are high (when others are – and thus it feels safe), and selling when the market drops (due to fear).
But the bandwagon effect can be lethal to your returns. Doing what everyone else is doing is a recipe for disaster. Often, the best investment decisions are those that go against the grain – this is called contrarian investing.
One specific type of contrarian investing is known as turnaround investing. Turnaround investing focuses on what happens when companies announce results. If bad news about a company causes its stock price to plummet, the crowd will “jump on the bandwagon” and sell the stock. That often means the true value of the stock is higher than the current market price. The majority ignore the true value, however, because they’re focused on the bad news associated with the company.
So avoid being part of the herd. If everyone you know is talking stocks and the newspapers are publishing overly optimistic news, it may be time to consider the contrarian view and be conservative.
b. Not tracking your portfolio
Most investors only realize that they are buying high and selling low when they start looking after their investments. If you think you’re buying low and selling high, but don’t have the numbers to show it, you should start keeping better track of your investments. It might sound obvious… but it’s not.
And stop trying to time the market for the best entry point. Instead, you should focus on time in the market. Otherwise, you might miss out on the best weeks of market performance. (We wrote more about why you should stay invested, here.)
2. Becoming emotionally attached to their investments
It’s a bad idea to let your emotions lead you to hold investments that are falling in value.
Maybe the asset (whether it’s a stock or a property or something else) was given to you when a family member passed away… or they are shares from a company you once worked for… or it’s the first stock you ever bought.
Whatever the reason, make sure you’re holding onto it for one reason: profit. You should never allow your emotional attachment to an investment keep you from selling and reinvesting into a better performer. Sentimental value never made anyone rich. (And in fact, it’s done a lot to make people less rich.)
3. Having a short-term investment horizon
American economist Paul Samuelson said, “Investing should be like watching paint dry or watching grass grow. If you want excitement… go to Las Vegas.” If you view your investments as a way to get rich quick, like Las Vegas (or, closer to home, Macau), you’ll just wind up enriching the house – not yourself.
Investment decisions should only be made with the aim of growing your wealth over the long term. While short-term performance is exciting, and trying to get the timing right can be fun, it’s difficult and time consuming to replicate. And you’ll probably get it wrong more often than you get it right.
What’s more, your investment horizon can make a huge difference to your returns.
Historical data have shown that over 1 month, major indices reported losses 40 percent of the time. When you stretch that time period to over 5 years, the losses drop to 15 percent of the time. And if you extend it even further, say, to over 20 years, it drops to a negligible percentage value.
If you focus solely on what an investment could do in the short term, then you are missing out on what it could potentially do in the long term – and that leads to a potential drop in the gains you could make.
4. Being too active in the stock market
It’s easy to get caught up with constantly tinkering with your portfolio.
This is especially easy to do when markets are volatile. Investors tend to feel that they need to be doing something to maximize their profits, or protect themselves if things look shaky.
But if you have an investment portfolio that is structured and follows a clear strategy, there really is no need to make a change just for change’s sake.
Sometimes, the best thing you can do is… nothing.
5. Not managing your money efficiently
When it comes to thinking about money, many people compartmentalize different financial needs.
They mentally allocate money to daily expenses, savings, holiday needs, and the like. But while it may be easier to mentally account for money this way, it’s usually an inefficient way of dealing with finances.
For example, some people put more money in their savings account than they use to pay off credit cards. But savings accounts have low interest rates – while credit cards have high rates. Often, it’s better to use your savings to reduce your credit card balance, as you’ll save money not paying high interest.
Don’t put your money in a silo. Put it where it works best.
6. Not viewing investments in the context of a portfolio
It is easy to focus only on the individual stocks. However, without an overall plan, you could be missing out on the bigger picture, and on making bigger gains.
When you look at your investments as a portfolio, something that looks like a bad decision, on its own, could actually be a positive one. Taking a small loss on a bad investment may allow you to shift capital to a better-performing investment.
Share prices are always fluid, especially when markets are volatile. To protect your wealth against individual stock movements within your portfolio, try to diversify, that is, make sure your assets aren’t correlated. (Read more about how to do this… here.)
While you can’t fully control what your investments will do in the future, at least you should prepare yourself by avoiding mistakes.
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Legal disclaimer: The insight, recommendations and analysis presented here are based on corporate filings, current events, interviews, corporate press releases, and what we've learned as financial journalists. They are presented for the purposes of general information only. These may contain errors and we make no promises as to the accuracy or usefulness of the information we present. You should not make any investment decision based solely on what you read here.