The 22nd Through 24th Ways Rich People Think Differently

September 19, 2012

One downside to being rich is that you don’t get to decorate your cubicle in fun and exciting ways that highlight your personality.

 

Saw this on Yahoo! Finance. It’s a 21-point summary of a book titled How Rich People Think. The consensus seems to be that the book is mediocre, but the summary was solid. Points included stuff like

Average people live beyond their means. Rich people live below theirs.

Average people believe the markets are driven by logic and strategy. Rich people know they’re driven by emotion and greed.

Average people teach their children how to survive. Rich people teach their kids to get rich.

All of which are indubitable, and which inspired us to add to the list.

 

Rich people quantify, average people aren’t “all about numbers”.

You want to take the one most beneficial step towards improving your financial situation, regardless of how good or bad a place you’re in right now?

Figure out your net worth. Add up everything you own, even including your house if it makes you feel better. Don’t use the sale price, use the current value. Go to Zillow if you don’t know where to start. Don’t forget to subtract your mortgage balance. Oh, that makes it negative? Sorry about that.

Add your 401(k) or IRA balance. It’ll take you 10 minutes to figure this out. You should have an account number and a login somewhere. We’d tell you to subtract your credit card balances, but we’re assuming you’re not so dumb that you’re carrying any.

That’s your net worth. A rich person knows his or hers within a few percentage points, instead of dreading the bills that are going to come in tomorrow’s mail. Here’s one of the stupidest lines we’ve ever featured in our weekly Carnival of Wealth, which itself is often a paean to stupidity. This is verbatim from a submitter, plus the ((sic)):

The Debt

Erika Amex: $285.67
Citi Card: $2,128.41
Student Loan #1: $9,101.51
Student Loan #2: $11,432.70
Student Loan #3: $2,050.00

So apparently there is a third student loan (0% interest) that I completely forgot about it (sic) until I was sent a bill in the mail. Great.

Average people get willfully blindsided like this all the time. Rich people don’t “forgot about” $2,050 debts. They know what they owe, and when they’re supposed to pay it by.

Yeah, whatever. Rich people don’t have debts.

Which brings us to another point:

 

Rich people leverage, average people make do with what they’ve got.

Rich people have plenty of debts. To some extent the richer you are, the more you’ll borrow. If this sounds counterintuitive, you might be average.

Rich people borrow money, at known and stated interest rates, with the intention of earning returns that outpace what they’re borrowing said money at. The prospective dry cleaner who borrows $500,000 at 6% is now on the hook for $30,000 a year. But now he can buy machines and a storefront. He can sell his wares – or in this case, his services. He can take money from customers, who will pay that $30,000-a-year loan for him and do it gladly if he returns their clothes sufficiently gleaming. Maybe he’ll even be able to pay the loan back early, allowing himself to borrow even more, at lower rates, which he can then use to finance bigger operations with.

Or he could get a job working for someone else, and save as much of his pitiful salary as possible.

It’s like people who pride themselves on paying cash for a house, but don’t tell you how long it took them or where they were living in the meantime. If you have to save for 30 years to buy a house, 30 years during which you paid rent to some other homeowner, that’s hardly anything to be proud of.

Most rich people are not born that way. Really, they aren’t, despite what the more reactionary folks on the left side of the political spectrum believe. The Cox family heiresses are outnumbered by the successful entrepreneurs who understood this fundamental principle of leverage. Ultimately, that’s far more important than an inheritance.

 

Rich people learn from mistakes, average people dwell on them.  

Everybody fails. You’re probably somewhat familiar with the following story, but it illustrates the point:

Apple. The largest corporation in the world and one of its most respected. 5 short years after it went public, the board of directors tossed out the company’s primary founder and visionary. The board sided with the CEO whom Steve Jobs had hired, over Jobs.

12 years and 3 CEOs later, Jobs came back, and every home run since has been well-documented. Here’s what a rich person would have learned in that interim:

  • I can still create imaginative products, but I need to spend more judiciously.
  • Instead of suing my biggest competitor (Microsoft), maybe we can cooperate and both get even richer. Heck, I’d even be willing to sell them a non-voting chunk of the company.
  • Our designs are a little different than most. Let’s make them vastly different, and brand ourselves in a way that Dell or Hewlett-Packard can’t imagine.
  • We’ve got to stop cannibalizing our own products. In fact, what if we were to make minor changes to them on a regular basis, and sell them to the same people again and again?
  • Being a computer manufacturer is swell, if limiting. Why can’t we be a retail outlet? A phone company? A music store?

Here’s what an average person would have learned in the interim, if you’ll suspend disbelief for a second and assume that an average person could have built Apple in the first place:

  • This sucks. Ungrateful bastards.
  • Who are they to treat me like this?
  • Damn, I never should have created the Lisa. Damn. Damn. Damn.
  • I wonder if Microsoft would hire me. Maybe I could be a department head there. Gates will rub his hands with glee, but I really need a job.

Ways 25 through 27 on Friday.

Filed Under: Capitalism, Education, Entrepreneurship, Finance Tagged With: , , ,

Your Fund Isn’t Killing You, But It Isn’t Helping Either

September 12, 2012

A parade of fund managers, showing both their eclectic viewpoints and love of the United States and its capitalist system

Last month we claimed that the same stocks are often held by the same funds. But we didn’t back it up with any data.

Lipper is the go-to company for fund research. This is their list of the largest mutual funds by net assets. Let’s walk through the relevant abbreviations and codes.

The 3rd column lists the funds’ objectives.

IID is intermediate investment-grade debt. “Intermediate” refers to the length of the debt, 5 to 10 years.

SPSP means the fund is supposed to replicate what the S&P 500 does.

MLCE is multi-cap core funds. “Multi-cap” means the fund invests in a range of market capitalization sizes; everything from giant companies to small ones, with no more than ¾ of its value in any one size. If you want that size quantified, well, you’re asking too many questions. (That’s not a copout. We seriously couldn’t find a formal definition.)

CMP is commodities precious metals, which means not just physical gold and silver, etc., but their corresponding derivatives.

MLGE is multi-cap growth funds. Same as MLCE, except MLGE funds invest in stocks with above-average price-to-earnings ratios, price-to-book ratios and 3-year sales-per-share growth value.

We’ll spare you the rest of them – if you want the details, they’re here – but now we’ve got 3 categories (SPSP, MLCE and MLGE) that specialize in equities, as opposed to debt or commodities.

Here are the biggest holdings of the SPDR S&P 500, the largest S&P 500 replicator:

Apple 4.66
Exxon Mobil 3.26
Microsoft 1.81
IBM 1.76
General Electric 1.72
AT&T 1.71
Chevron 1.71
Johnson & Johnson 1.54
Wells Fargo 1.46
Coca-Cola 1.44

Here are the largest of the Vanguard Total Stock Market Index Fund, the largest multi-cap core fund and one whose very summary says it’s “designed to provide investors with exposure to the entire U.S. equity market, including small-, mid-, and large-cap growth and value stocks.”

1

Apple

2

Exxon Mobil

3

Microsoft

4

IBM

5

AT&T

6

General Electric

7

Chevron

8

Procter & Gamble

9

Johnson & Johnson

10

Pfizer

Wow, what tremendous diversity. Did you notice how although the two funds’ 1st– through 4th– and 7th-largest components are the same companies in the same order, the one fund’s 5th-biggest component is AT&T and 6th-biggest is GE, while the other’s 6th-biggest is AT&T and 5th-biggest is GE? It’s like they’re from different galaxies!

Finally the Fidelity Contrafund, the biggest multi-cap growth fund. It holds the stocks of, according to Fidelity, “companies whose value (we believe) is not fully recognized by the public.

APPLE
GOOGLE
BERKSHIRE HATHAWAY
MCDONALDS
COCA-COLA
WELLS FARGO
NOBLE ENERGY
TJX COMPANIES
WALT DISNEY
NIKE

 

Apple’s value could not be more recognized by the public if the company tattooed its logo on every citizen’s forehead. Same with Google. The only Contrafund major component that you might not have heard of is Noble Energy, a $7 billion oil and gas driller based out of Houston.

Funds make their full holding data difficult to access. Contrafund has 413 components (which is nothing compared to the Vanguard fund, which has 3220 components.) The Fidelity fund’s components are listed here. We can’t put an image in the site, it’d run for way too many columns, but here’s a summary:

Microsoft is 50th on the list. The Contrafund’s 2nd-biggest component, Google, is 13th on the Vanguard Total Stock Market Index Fund list while Berkshire Hathaway is 36th, McDonald’s is 25th, Coca-Cola is 15th, Wells Fargo is 11th and Disney is 33rd.

It doesn’t matter whether you do business with Fidelity, with Vanguard, with American Funds or with PIMCO. Buy a mutual fund, at least one that deals in equities, and you’re paying a fund manager to say “Hmm…this Apple looks like a good buy. I think I’ll pick some up.”

Look, this isn’t necessarily an argument for you to stop whatever your occupation is and devote the requisite hours to becoming an amateur fund manager. Whatever motivates you. Rather, we’re asking you to acknowledge that “picking” hundreds of stocks en masse barely counts as picking. Choosing the stocks of the largest, most profitable, most widely held companies doesn’t take any special aptitude or knowledge. It’s a defensive measure, done purely out of the fund manager’s self-interest. He’s thinking:

I’m 20-something. I’m making ridiculous money, way out of proportion to the value I’m creating. Women are enamored of me, or at least of what I can buy. Should I actually do some research, look for nothing but undervalued stocks (which there won’t be 413 of, at least not simultaneously), sell all of my fund’s current components and buy those instead?

Of course not. The higher-ups wouldn’t have it. They’d have me, roasting on a spit. My job isn’t to provide the highest possible returns. It’s to avoid mistakes.

Understand that there is no room for outliers nor independent thinkers among the ranks of the major fund managers. The managers’ job is to be as conservative as possible. Which means your money is going to be treated conservatively, which means little chance for legitimately large appreciation. When a fund hits big returns, it’s an accident. Yes, there’s a top-performing fund, and a top 10 list. Every year and every quarter. There has to be. Someone’s got to be at the top. Whether the SPDR S&P 500 outperforms the Vanguard Total Stock Market Index Fund thus reduces to little more than the question of whether AT&T will outperform GE.

You can do better than this. You can also do worse, but we’re talking to the ambitious among you.

Synthesizing the classical proverb with Mark Twain’s updating of it, “Put your eggs in a few baskets. And watch those baskets.” You need to buy individual stocks. You can start by reading here.

Filed Under: Bad Examples, Capitalism, Economics, Economy, Finance Tagged With: , , , ,

One More Time: Temporary Setback = Opportunity.

August 8, 2012

It’s a knight! In shining armor! Get it? Do we have to explain everything to you?

Last week we wrote about the meteor that landed on Knight Capital. If you can’t be bothered to read that post, the New York Stock Exchange’s biggest market maker endured a computer glitch that resulted in the company losing $440 million. Knight fell victim to a singular event (at least one wag actually used the term “black swan”), shrank to a third of its size overnight, and looked like it might not survive the week.

Here we have a company that

  • Provides a valuable service.
  • Is the market leader, more or less.
  • Has a solid reputation.
  • Suffered a temporary, non-lethal, inadvertent misfortune, as opposed to doing something villainous.

Knight’s stock (KCG) opened trading at $10.33 last Wednesday. The software flaw showed up immediately and was contained within 45 minutes. KCG closed the day at $6.93, opened the next morning at $3.48, reached a nadir of $2.43 late in the afternoon, and closed at $2.59.

This is what’s called a buying opportunity. KCG opened the following Friday at $3.11, closed at $4.05, and on Sunday received the $400 million cash infusion it needed to stay alive.

Who loaned them the money?

  • TD Ameritrade, one of Knight’s biggest clients.
  • Stifel Nicolas, a brokerage that sounds faintly Swiss but is actually based out of St. Louis.
  • Blackstone Group, a private equity firm.
  • General Atlantic, another private equity firm and owner of Getco (Global Electronic Trading Company), another market maker, one of 6 firms designated as such by the NYSE.
  • 2 unnamed investors, probably selfish capitalists like that job-killing tax cheat Mitt Romney.

The money comes with strings attached, of course. The lenders received something called “convertible securities”, which are bonds that will turn into stock at a certain undisclosed price. The 4 disclosed lifeguards and Mystery Firms E and F don’t make it a habit of lending money without it offering the likelihood of decent return, especially when forced to make a decision with only 2 days’ notice.

While we don’t know many more details of the deal, including the strike price of those convertible securities, the consensus belief is that it’s less than the $4.05 Knight stock ended the week at.

Here’s the type of reasoned response that makes the consistently under-water easy to distinguish from the enterprising few. From the LA Times story on Knight:

Not that internet comments are ever going to be a source of any usable knowledge, but it’s probably fair to say that COOLTUB and Highpressure’s opinions are not out of the mainstream.

The easy, effortless, simplistic, reactionary and false way to look at the Knight capital infusion is as fat cats covering for each other. The first commenter seems to think either that federal taxpayers are cutting a check to Knight, or that there isn’t a difference between that and private capital.

We don’t want to assume anything, but we’re guessing that when Magic Johnson and a handful of rich white financiers recently did the exact same thing for the Los Angeles Dodgers, COOLTUB and Highpressure were ecstatic about it.

Don’t be an idiot. How can you compare the two? The Dodgers as a team are a community icon, not just a bunch of rich guys shuffling paper.

No, they’re a bunch of rich guys swinging bats and fielding balls. The Dodgers pay an average of $3,171,452 to their top 25 employees. We don’t have a similar figure for Knight, but it’s almost certainly less.

We’re getting off track here, and we swear we didn’t start this post intending for it to turn into a sports analogy. But it’s important to remember that when a legitimate business that provides a benefit to society (in the form of liquidity) gets smacked in the mouth, it’s a chance for a sharp investor to make some money. If Knight had been charged with fraud, that’d be something vastly different, and inapplicable here.

Maybe you’re tentative, and still don’t think KCG is a good buy. Or you’re not familiar enough with the company’s stock in trade to take a position. Fine. Look around you and you’ll see opportunities daily. Seriously, daily. The local business that needs cash to expand and is looking for a silent partner. The overextended homeowner, or car owner, desperate to sell. The stock of the company that recently underwent an even less traumatic event than Knight did. (Read WSJ.com and Yahoo! Finance, just for a few minutes a day at the start. Think of it as unmarked course work for your future career in self-determination.)

You can get past the initial reluctance, the thought of “The markets? Not for me. Nothing more demanding than a conservative mutual fund in my company-directed 401(k), thanks very much.” Really, you can.

Or you can just assume that your job and its annual cost-of-living raises will help you build wealth as convincingly as seizing opportunities will. Whatever.

Filed Under: Capitalism, Estate Planning, Finance, Investments Tagged With: ,
« Previous Page
Next Page »