Leave Them Behind

December 14, 2012

10th Circle, People Who Have “Emergency Funds”

 

Today, financial triage. Adopted mostly as a way to maintain the collective sanity of you people who get value out of this site.

If you’re sentient, you’ve noticed that few very humans even want to know how to control their finances. Most of us would rather ring up credit card debt, earn (and finance) useless college degrees, work for money instead of the other way around, and generally do what our intellectual superiors in Washington are doing, writ small.

What’s worse is that most of these fools are convinced they’re right. That link leads to a story about a positive if deluded woman who’s $61,000 in debt, yet uses the obfuscating phrase “32% debt-free” to describe her financial situation. Why? Because she used to be $90,000 in debt. Hey, the glass is one-third full, right? This is like a murderer who’s 16 years into a 50-year sentence bragging that he’s “32% released”, leaving open the question of whether it might have been better just to not have slashed that guy’s throat in the 1st place.

Surround yourself with enough people like this, whether in real life or online, and you’ll start to question basic assumptions that you know to be true. Maybe we’re supposed to spend our lives owing money, then die. Maybe incurring debt, then spending years attempting to pay it off, builds character that the people who didn’t incur any debt in the first place will never have the opportunity to develop.

See? That last sentence almost makes sense, doesn’t it? Even though it’s absurd. Here’s an acid test for CYC readers: if you can rationalize a lunatic statement about your finances (“I’m thousands in debt, but that didn’t stop me from getting a credit card with a $700 annual fee. YOLO!”), we’ll slow down the bus and let you jump out the window. Roll yourself into a ball before you hit the pavement, it’ll protect your organs and maybe your skull.

It’s not the stupidity that irks us, it’s the stupid people’s insistence that either a) they’re right, b) screw you, you can’t tell me how to live my life or c) both of the above.

Maybe there are credit cardholders who actually enjoy making monthly outlays to VISA, and by extension paying for things twice and 3 times over. Oh, who are we kidding by qualifying that with the word “maybe”? Of course they enjoy doing it, or they wouldn’t do it. Just like terminal lung cancer patients love hoisting their emaciated frames out of the hospice bed to look out the window. If they don’t enjoy being in that position, why are they in it?

Wait, you’re saying it’s because they spent a lifetime making dumb choices?

Thank you.

Control Your Cash exists for one reason – to teach otherwise smart people how to build legitimate and lasting wealth. “Otherwise smart” means that long before you discovered our little site, you were intelligent enough to have known that you don’t borrow money to buy garbage. Or play the lottery. Or clip coupons at an effective rate of 19¢ an hour.

To us, your authors, knowing all of the above seems about as fundamental as knowing that you don’t put your hand on a hot stove element. (Or, continuing the analogy, a stove element whose temperature you’re unsure of.)

But then what? We like to think that you folks are smart enough to understand the basics, and beyond that, inquisitive and discerning. You made it this far without destroying your financial life? Congratulations, and we’re sincere about that. It’s knowing what to do after that that’s the hard part.

Because staying at your job and getting annual 2½% raises may sound good, or at least low-maintenance, but it isn’t. Same goes for some other endeavors, too:

  • Trading in your car to a dealer? Bad idea. You can save yourself thousands if you don’t.
  • Putting your money in a certificate of deposit, because your bank advertised what sounds like a high rate? Also a bad idea, but not as bad as the previous one. There are plenty of similarly low-risk investments that offer bigger rewards.
  • Feeling trepidation over the idea of investing in the stock market yourself, instead of just letting the Ameriprise representative show up at your office and buy everyone lunch, after which you let her pick a mutual fund for your 401(k) to invest in? At best, that’s a neutral idea. You can do so much more.

If you’re curious, want to learn, have even a little ambition regarding this subject matter, and already know not to make the obvious mistakes listed above, then we can help you build wealth.

If you’re convinced that there’s a perfectly legitimate reason for incurring consumer debt, transferring credit card balances, and/or declaring bankruptcy, then we don’t need you. You’re not going to pay attention to what we have to say anyway, and besides we don’t have time to dumb it down for you.

Good. Now it’s just the smart folks in the room.

This stuff isn’t hard, but it isn’t intuitive, either. We figured it out, largely through trial and error, saving you the trouble if you’re willing to just read us. Oh, and buy our book if you’re so inclined. (Link to the right. Dividends paid almost immediately.)

Filed Under: Bad Examples, Book Promotion Tagged With:

What the hell is the Case-Shiller Index? Do I care?

December 12, 2012

 

 

Karl Case and Bob Shiller aren’t much to look at, so here’s a picture of a couple of gorgeous chicks instead.

Let’s answer the 2nd question 1st. (That’s for you, series of English teachers who said that ordinal numbers must be spelled out. Go to hell.)

Yes.

As for the 1st question, it’s a way of comparing prices over time, specifically home prices.

But anyone can create a price index, right? Don’t you just need some raw data and a calculator? Houses in this city cost this much in the baseline year, they cost this much today. Divide the latter by the former, divide that by the rate of inflation and Bob’s your uncle.

Yeah, but there’s more to it than that.

The Case-Shiller index began by comparing repeat sales of the same homes. They also threw out the sales that weren’t “arm’s length” – e.g., parents selling houses to their kids or their limited liability companies. Those excluded transactions would distort the numbers, for obvious reasons.

There are plenty of official indices that track home price movements, most of which are deficient somewhere. For instance, the federal government publishes a home price index. But it’s the branch of the federal government that oversees taxpayer charity cases Fannie Mae and Freddie Mac, which means that the index only accounts for homes with Fannie- and Freddie-approved mortgages, which means that the index excludes all-cash transactions and jumbo mortgage transactions. There’s another index, developed by a private company, that goes out of its way not to restrict itself to repeat sales like Case-Shiller does, the argument being that that limits the number of transactions required to compile the index.

If this sounds deathly boring, of course it is. Even our famed CYC style can’t suscitate a topic as dry as this. What’s so special about the Case-Shiller index, and what’s made it the definitive index for measuring changes in home prices, is that it gives additional weight to repeat sales. That’s supposed to make Case-Shiller a more accurate reflection of the market, in that a house that sells twice should presumably have twice as much impact on the numbers as a house that sells only once (in the given period.)

So does the Case-Shiller index have a purpose beyond giving the news anchors at Fox Business Network a chance to quote it and sound authoritative? Absolutely it does. Because in the same country where 48 states prohibit gambling on sports, and where the Securities and Exchange Commission valiantly defends private citizens from the scourge of markets for future events, yet collateralized debt obligations are not only perfectly legal but backed with the full faith and credit of the United States government (if you happen to be on the right side)…you can wager on the Case-Shiller index!

Yes, the Chicago Mercantile Exchange lets you buy futures contracts and options – which is to say, place bets – on what the index will do. The Exchange calls it “risk transfer”, which is no different than what you do when you buy insurance at the blackjack table. (Assuming you’re playing blackjack. Don’t play blackjack.) If you think the index will rise, and with it home prices, buy a put option at a certain price. If you think the index will fall, buy a call option. If you don’t know what put and call options are, or anything else about the stock market, buy our book.

 

You’ll notice that with one brief hiccup, 2 if you count the current one, home prices have been falling since 2006. Case-Shiller keeps multiple indices, clearly illustrated on the chart. Also clear is that they move in harmony, more or less.

The Case-Shiller Index isn’t usually quoted as an absolute number, as the Dow Jones Industrial Average or the S&P 500 is. Rather, the Case-Shiller Index is quoted as a difference over a prior period, e.g. “The CSI rose 3.4% year-over-year”.

In fact, the national Case-Shiller index rose 3.6% over the index from a year ago. Good news! The housing market is recovering, errr…homes are getting harder to buy. Isn’t that fantastic?

Like every other financial statistic, how “good” or “bad” it is depends on what side of the transaction you’re on. AND…even if you’re a fan of rising home prices, the current 3.6% increase doesn’t account for inflation, which was last measured at 2.16% year-over-year. So home prices have risen about 1.44% in the last year, if you had to throw a single number on it and ratiocinate it to 2 decimal points.

There isn’t a staggering difference between one comprehensive home price index and the next. Nor is there much variation in the information these indices convey. Nor should you pay much heed to news stories that say the housing market is “recovering”.  It’s still a fantastic time to buy a house as opposed to renting, seeing as prices and mortgage rates remain at long-term lows. It just maybe isn’t as good a time to buy as it was a year ago. (A year and 2 months ago actually, factoring in Case-Shiller’s lag time.)

Filed Under: Education Tagged With: ,
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