Bad Examples – Page 25

Less is More. Even Less is Even More.

August 17, 2011

That there’s too much information is obvious. So don’t perpetuate the problem.

If you’re reading this, then presumably you’re financially curious if not financially savvy. As the old saying was supposed to go, curiosity killed the overzealous investor. Here, just this once, resist the temptation to check the market daily. It does you no good to let your moods move in sync with what other people are willing to pay for stocks. If the public is an ass, what does that make the person who lets them dictate his behavior? Instead of exposing yourself to numbers that you’re powerless to do anything about anyway, live your life. Walk your dog. Learn HTML. Take shooting lessons. Floss your teeth, which you probably don’t do enough anyway.

The Wall Street Journal, Yahoo! Finance and every general news outlet’s business section each devote a prominent place to the same particular piece of information, listing the index values and changes from yesterday (or from the previous hour, or sometimes the previous minute.) Every change, no matter how minor, becomes newsworthy by definition: otherwise, CNBC and Fox Business would be reporting on something else.

Even no news is news: “Stocks remained largely unchanged today.”

If you’ve ever obsessed about your weight, and most people have, you’ve stepped on the scale daily. (We’re talking to the normal-sized people in the audience, not the fat ones.) It’s not uncommon to weigh yourself twice or even more times a day; say, immediately before and after a workout. (Note to the fat people who are still reading after specifically being told not to a couple of lines ago: a “workout” is this procedure by which you combine aerobic and anaerobic exercise in order to build muscle and burn lipids. “Exercise” is this…oh, never mind.)

Ever been in a relationship where either you or the other person constantly looked for reinforcement? If it happens often enough, suffocation sets in and the relationship crumbles. If he loved you 6 hours ago, and last week, and last month, and a year ago, chances are pretty good he still loves you now.

The week of August 8-12 was an anomaly among weeks on the New York Stock Exchange, with 400-point swings every day. Given the level of the Dow, that means changes of less than 4% every day. Each of which might be meaningful if every jump hadn’t been followed by a fall of similar magnitude, and vice versa.

400-point swings on an index that sits around 11,000 aren’t as important as you think, especially given how fleeting they are. For a comparison, thank God the ordinary digital bathroom scale only gives readouts to the nearest half-pound. There are people reading this right now who would freak out and discover a new thing to obsess over if there existed a commercial scale that could weigh you at 150.3489 pounds first thing in the morning, 151.9849 after breakfast, 150.6227 before lunch and 150.1452 when you went to bed.

Here’s 12 days’ worth of recent market movement:

And 12 months’ worth, each plot point representing the Dow on the 1st day of the given month (or the 31st day of the previous month if the 1st was a Saturday, etc.)

Note the difference in the heights, but also note the difference in the scale.

Most importantly, note the difference in the progression. The same investors and railbirds who were alternately cheering and cursing the market throughout the time span of the first chart could probably look at the second chart with sober happiness, if they a) wanted prices to rise and b) had the capacity to process information at this more deliberate speed.

Seriously, look at the pretty multihued second chart again. Tell the typical investor in September of 2010 that the market is going to do that over the next year, and she’d have been overjoyed. Unless, of course, she was selling everything short. Granted she’d have preferred to have gotten out of the market back in May, but we humans haven’t been equipped with functional hindsight. All in all, the market has shown a consistent path toward growth over the past year. No, it might not in the future. As usual, that’s not the point.

When you check the market as often as it swings, that makes as much sense as a climatologist duly noting that her geographic region of interest warms up every morning yet gets colder every evening. It’s not that the data means nothing, it’s that it means nothing unless placed in the appropriate context. If you’re a mayfly, or Zsa Zsa Gabor, then go ahead and check stock prices as often as you can. In fact, even that doesn’t make sense because if you’ve only got a short time ahead of you you should be enjoying life, not looking at columns of data.

Most of you are going to check the market tomorrow regardless of what we suggest. If you’re really hungry for information, browse our archives. Or better yet, buy our book and learn what else you should be doing.

**This article is featured in the Yakezie Carnival, The Hurricane Season Edition**

Filed Under: Bad Examples, Investments, Making Smart Choices, Newsflash Tagged With: daily losers, daily winners, dow, index, points, Stock Market

So what does it all mean?   

August 5, 2011

A little caulking, and you can't even tell the difference

UPDATE 7:14 p.m. MDT: AA+, baby! First American downgrade in the 90-year history of ratings! U-S-A! U-S-A! Fortunately, the Obama Administration has unveiled the true culprit: the messenger.

A nation’s credit rating is analogous to your credit score. Pay your bills on time, never carry a balance, and your score will be near the theoretical maximum of 850. Act like the representatives and functionaries of the United States government do, and your credit rating will be closer to the theoretical minimum of 300.

The higher your score, the more credit you’re entitled to, and at lower rates. Your diligence on the front end can result in lower mortgage payments when you apply for a loan. Same goes for car financing, etc. (Not that we encourage car financing, but if you can find a rate so low that it lets you free up your own capital to be invested elsewhere at a higher rate, take it.) It’s hard to find a definitive source for this quote, but the classic line is “Credit is most available to the people who need it least.”

National credit ratings are on a different, more coarsely calibrated, non-numerical scale. The same principle is supposed to apply: the better the rating, the lower the interest rates the country can borrow at; and indirectly, the more likely it is that businesses will invest in said country. Standard & Poor’s, the biggest credit rating agency, uses the following rating scheme: AAA/AA/A/BBB/BB/B/CC. Below AAA, each rating also includes either a plus sign, or a minus sign, or nothing. Beyond that, each rating includes a terse descriptor: “positive”, “stable”, the ominous-sounding “watch negative” or “negative”. Confusing things even more, the “positive” and “negative” descriptors have nothing to do with the + or – signs found in some ratings. S&P (the same people behind the S&P 500 stock index) doesn’t rate every country in the world, because places like Tuvalu and the Vatican City don’t attract enough foreign investment to warrant anyone crunching the numbers (nor do those countries even have their own currencies.)

Standard & Poor’s does rate 128 countries, including pseudo-countries such as Abu Dhabi and Hong Kong. There are no AAA positive countries by definition, as they have nowhere to go but down. Here’s the complete list of AAA stable countries:

Australia
Austria
Canada
Denmark
Finland
France
Germany
Hong Kong (but not China, which is AA- stable)
Liechtenstein
Luxembourg
Netherlands
Norway
Singapore
Sweden
Switzerland
UK/Isle of Man/Guernsey

Notice anything missing? Here’s the complete list of AAA negative countries:

United States

Which for us is historically low. Fall to the next level, AA+ stable, and we’d be sharing creditworthiness with New Zealand and closing in on Belgium.

If you’re interested, the only CC country in the world is Greece.

Therefore, it would seem, the United States’ transition from the world’s most dynamic economy to a backwater incapable of paying its bills and digging ever further into debt is a foregone conclusion at this point. But it isn’t, and this is why:

Volume.

Let’s say you make $40,000 a year and indeed use credit as wisely and sparingly as possible. And say you somehow crack the Fair, Isaac & Co. secret formula to the point where your credit score sits at a perfect 850. You apply to your bank for a loan, primarily just to see if you can do it but also because you want to see how low an interest rate you can qualify for.

The moment after you walk in, Sergey Brin and his 849 credit score apply for a loan.

Who do you think’s going to get a loan with more favorable terms? Mr. Brin might not be quite as on top of his obligations as you are, but he’s not far behind. And he’s got far more money than you do, and far more potential for making yet more. Don’t take it personally.

On Monday the House of Representatives voted to raise the debt ceiling, leaving the Senate to rubber-stamp a similar bill Tuesday and drawing more attention to a particular vote than anything since the nationalization of health care. The nation will reach its credit limit in a few months, Congress will request another increase, and so on indefinitely. Why? Because they can. The Greeks didn’t have this luxury of preeminence, at least not in the last 25 centuries or so.

For the last few weeks we’ve been subjected to a panicked call from journalists who don’t know any better and politicians who never let a good crisis go to waste, trying to make you believe that the world economy is on a precipice. It isn’t. Economies don’t collapse overnight, and if they did it wouldn’t be because of legislative stalemate. If Standard & Poor’s and its fellow agencies Moody’s and Fitch downgrade America’s rating, it’s still going to be relatively strong. Far stronger than China’s, for instance. And we’ll still attract investment from abroad, simply from sheer size. No other country can boast 300 million first-world consumers with a relentless penchant for buying things. That’s a greater determinant of economic robustness than anything else.

That’s not to say that our economy isn’t in the toilet. Nor that our elected representatives don’t need to exercise some serious restraint. Raising the debt ceiling (to more than twice what it was during George W. Bush’s first term) only invites more opportunity to finance an already unsustainable level of government spending. But let’s call Monday’s vote to raise the debt ceiling what it was: it wasn’t a last-second attempt to right the American economy before it collapsed. It was an indirect means of letting our nation’s record debt break even more records. Greater interest payments and an economy built more on borrowing than on wealth creation? Yes, but that’s your grandkids’ problem.

**This article is featured in the Carnival of Personal Finance #322: Diminished Expectations Edition**

Filed Under: Bad Examples, Consumer Debt, Economy Tagged With: AAA, agency, debt ceiling, debt rating, moody's, standard and poor's

GUEST POST: Don’t Reach For The Middle

August 1, 2011

We found someone who wasn’t intimidated by our guest post guidelines. Nelson Smith, who blogs over at Financial Uproar. He’s one of the very few personal finance bloggers who can actually write. And he’s hilarious. And we agree with almost all of what he has to say. If you like this post, then he’d love for you to come check out his blog.

Few people notice how roomy it is on the right side of the curve.

I’m friends with a married couple, even though I’m single. Yeah, it’s a little weird.

This married couple is just like so many others. They’re both gainfully employed, combined they probably make close to $90k per year. They have reasonable housing costs and reasonable vehicle costs too, since they’re both smart enough to drive fully-paid-for used cars. They don’t spend excessive money on wants. They probably go out a little more than they should, but that’s fairly common for young people. Hell, I go out more often than I should, and I’m probably the third cheapest bastard on the whole internet.

On the surface, they don’t seem to be in bad financial shape. There’s no obvious place where they overspend. Yet, like so many others, they struggle to make ends meet every month. Are they morons? Well… yes. But they’ve got numbers on their side.

If this couple complains to me about their finances one more time, I’ll strangle their puppy. They easily make enough to pay for bills and to save for a rainy day. This shouldn’t be that hard. Why are they struggling so much? Here’s a snapshot of some of the excess in their lives:

– an alarm system ($40 per month)
– unlimited long distance ($20 per month)
– movie rental subscriptions ($25 per month)
– overdraft charges ($40 per month)
– new shoes from some website ($40 per month)
– a dog (>$50 per month)

Chances are, you’re practically blinded with outrage right now. What morons! Who gets a perpetual liability (that’s the dog) when they can barely afford to make ends meet? Who needs new shoes every month? They literally go to work and leave the house unlocked, yet pay for an alarm system. There’s hundreds of dollars more that they could cut from their budget tomorrow if they were serious about cutting. It doesn’t take a financial genius to figure out they’re wasting money. Why don’t they just do it?

Because they don’t care.

Most people sit in kind of a financial purgatory. They don’t get themselves in too much trouble, yet they never bother to get ahead. Every month they essentially break even. Because they have no financial sense, they pat themselves on the back for not getting any further in the hole. They slowly make progress on their student loans or credit cards, even eventually paying them off. Once they do, they decide they can now afford another payment, so they buy a new car. They rinse and repeat until sweet, sweet death saves them from their never-ending avalanche of payments.

Okay, not really. But they don’t get wealthy, that’s for sure.

As the writers here at Control Your Cash advocate tirelessly, the key to wealth is quite simple. Buy assets. Sell liabilities. Keep doing these things until you become wealthy. I guarantee if my friends read that golden rule, they’d understand it. Yet they have just about zero hope of ever implementing it. They’re just not PFers.

For those of you unfamiliar with the term, a PFer is a personal finance geek. PFers check their bank balances more than once a week. PFers constantly look for ways to trim the excess from their budgets. PFers spend more time on their budgets than their sex lives. PFers… well, you get the idea.

Most of the people who’ll ever regularly read this blog are PFers. Some just stumbled here looking for really snarky posts on the lottery or something. Most of us are people trying to move in one direction- toward wealth. And since we hang around each other so much, we often forget just how different we are than most other people.

What I’m going to propose just might shock and appall you, but that’s kind of what I do. After all, my blog is called Financial Uproar. It isn’t called Sunshine Flowers Puppy Personal Finance Hug Hour. I try to tell it like it is, just like the fine folks here at Control Your Cash. And that’s why we’ll be friends forever. Well, that and our friendship bracelets. You did get my friendship bracelet, right Greg? (Ed. note: No.)

What was I talking about again? Right. Here’s what you should do about your friends’ bad financial habits – absolutely nothing. You should give no advice. You should avoid bringing up money topics. They’ll complain about how their financial life sucks, but you should offer no advice past the most simple of concepts. Do not get involved in their finances one bit. And for the love of God, never lend them a dime.

No matter what the accomplishment, the impetus for change has to come from within. If your friends are going to improve their finances, they have to do it. No amount of prodding or helping on your part will get them to change. They have to get to whatever their breaking point is. Your help won’t do squat, as much as you think it might.

Most people will never reach that point. They’ll have a mortgage payment for most of their adult lives. They’ll cash out equity from their house to take vacations and buy cars and pay for their kids’ weddings, because they’re morons. They’ll think they’re doing well because they’ll compare themselves to the masses instead of comparing themselves to the wealthy.

Chances are that if they’re not already on the path of wealth, they’ll never become any higher than middle-class. No matter how much you want to help, it’ll ultimately fall on deaf ears. You can’t help somebody who doesn’t want to help themselves. Or, more accurately, you can’t help someone who doesn’t think they have a problem.

**This article is featured in the Yakezie Carnival -Newbie Edition**

**This article is featured in the Totally Money Carnival #32-A Flood of Great Articles**