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: , , ,

LIBOR Scandal? Boy, That Sounds Like A Gripping Topic To Read About

July 20, 2012

 

Not again

 

This dwarfs by orders of magnitude any financial scam in the history of markets. 

-Andrew Lo, MIT professor, hedge-fund oracle, and a man who understands that an academic can make the Time 100 list only if he makes outspoken, authoritative pronouncements.

Alright, what the hell is he talking about?

It surfaced about a week ago, a scandal by which we all end up paying a few basis points extra on our mortgages.

LIBOR. The London Interbank Offered Rate, whose acronym incorporates a medial letter and thus avoids being an apt homonym for “liar.” It serves as a starting point for short-term interest rates, and it changes (rarely by more than a basis point) daily.

Every morning at 11:00, the LIBOR is released by the British Bankers’ Association. Which is a consortium – a trade association, if you will – of 199 banks. If your bank is one of the largest in the world, it’s probably on the list. Which is here.

There are actually multiple LIBORs: they’re measured for each of 10 currencies (pound sterling; euro, long may it wave; American, Australian, Canadian and New Zealand dollars; yen, Swiss franc, Danish krone, Swedish krona.)

Each of those is submitted for each of 15 borrowing periods (overnight, 1 week, 2 week, and every number of months from 1 to 12.) That gives us 150 rates, the most widely quoted one being the 3-month rate for the pound sterling.

This morning that rate sat at .79%, the lowest it’s been since last February. They post it on Twitter @BBALIBOR.

How is LIBOR different than the federal funds rate that Ben Bernanke decrees? First, LIBOR is announced daily as opposed to every few weeks. Second, the federal funds rate is more or less mandated artificially. LIBOR is established via the market and then reported, rather than the other (i.e. Soviet) way around.

It’s straightforward, or ought to be. Every morning the BBA (via its vendor, Thomson Reuters) begins with the 199 rates its members charge for overnight loans and lists them in numerical order. It discards the top 50 and the bottom 50, then averages the remaining 99.

With 199 components, how can the LIBOR be subject to skullduggery? One crooked bank, or even 50, can only do so much damage, right?

Here’s the problem. From BBALIBOR.com:

Every contributor bank is asked to base their BBALIBOR submissions on the following question:

“At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?”

So take back what we said earlier. The rates aren’t generated via market transactions. They’re generated via whatever’s going through the head of the bank representative who’s tasked with answering the question.

It gets worse. One paragraph later:

BBALIBOR is not necessarily based on actual transactions

Up until a few years ago, college football named its champion by saying to a bunch of coaches and sportswriters, “Forget about determining a champion on the field. Who do you think the champion should be?” BBA is doing the same thing.

Wait, here’s the funniest excerpt of all:

Each morning between 1100 and 1110 a named individual responsible for cash management at each panel bank formulates their own rates for the day and inputs them into this application, which links directly to a rate setting team at Thomson Reuters.  A bank cannot see other contributor rates during the submission window – this is only possible after final publication of the BBA LIBOR data.

  1. (Boldface ours)
  2. HAHAHAHAHAHAHAHAHAHAHAHAHA

You know how you pay lower interest rates the better your credit is? And how all things being equal, you’d prefer to pay lower rates than higher ones, regardless of the strength of your credit? The same applies to big institutions, too. In 2008 Barclays – the 322-year-old British bank whose group chairman just happens to be the chairman emeritus of BBA – started submitting bogus low numbers for the daily calculation. Those numbers were still often as much as 60 basis points higher than the average from the other submitters. Barclays was admitting to being in bad shape, while being in even worse shape.

Then again, why shouldn’t Barclays have submitted fake numbers? There was no penalty for doing so, at least not in the short term, and at least not a huge one. Barclays benefitted by having people think it was rich and liquid. Lying about its numbers was the institutional equivalent of putting chrome rims on your Cadillac while living in the projects.

The then-chairman of the Federal Reserve Bank of New York knew that Barclays was being disingenuous. His emails with his counterpart at the Bank of England say as much. That regional Fed chairman chose to do nothing. A few months later, he became United States Secretary of the Treasury.

And we thought his predecessor was incompetent and crooked

If you have an adjustable-rate mortgage…first of all, why would you subject yourself to market whims like that? Especially when fixed rates are historically low? Oh, you couldn’t get a fixed-rate mortgage? Then maybe you shouldn’t be buying a house.

Or financing college. Student loans are often tied to LIBOR, too. You pay a going rate, plus whatever today’s LIBOR is. Plus a few basis points artificially tacked on by Barclays and its co-conspirators. Across the globe, that’s tens of billions of dollars extra.

But justice has prevailed. Barclays paid a $450 million fine. Or about 3 days’ worth of its revenue.

As with the provision of health care, the fewer intermediaries there are, the better. Some lenders set rates without respect to LIBOR. Those banks’ managers know enough about their own lending practices – what to charge, who’s going to default, how big their overhead is – to name their own prices without relying on an august body an ocean away. Do business with one of those lenders, and you’re exposing yourself to less risk. And saving money.

 

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

A Message To Graduates Everywhere

June 13, 2012

You don't want to peak early. But you probably will.

 

Congratulations. You coasted through high school – 94% of which requires you to do little more than be present – and now the next chapter of your life begins, to quote a tiresome saying. Or, if you prefer, you can just extend the current chapter and defer adulthood.

If you think a college education is the one good or service in the world that doesn’t stand up to cost-benefit scrutiny, where price means nothing, you’re too dumb to go to college (or for you parents out there, have your progeny go to college) anyway.

How much higher can the universities make you jump? We recently spent a few seconds seeing what a generic accredited 4-year school, Arizona State, charges incoming non-resident freshmen who want to spend 4 years languishing in the liberal arts program. Including on-campus housing, and assuming no fee increases until 2017 (as if), it adds up to $152,588.

What if Arizona State raised that number to $250,000? Or $350,000? Would you shrug your shoulders, say “Hey, it’s an investment in the future/An education is priceless”, perhaps complain to your elected officials about skyrocketing costs and organize a protest?

Or you could take a step back and think, “Maybe the math doesn’t work out on this.”

Universities and the DeBeers Company are the only producers in all of commerce who have adopted the following (wildly successful) sales pitch:

What we’ve got is so important, you have no choice but to buy.

COROLLARY: In fact, you’re lucky we deign to sell to you.

A diamond isn’t forever, and neither are most college educations.

No, really. Unless you didn’t happen to notice that divorcées and underemployed college graduates are two categories of human that not only exist, but flourish. If marriage can be the triumph of hope over experience, so can overeducation. A poorly suited spouse will wreck your life, as will a poorly suited degree.

A B.A. in English literature is – what’s the word? Useless.

How dare you say that. Besides, that’s not true. I can teach.

Are you really going to teach? Furthermore, is that even an ambition, or just a defense against an uncomfortable accusation?

Even if it is your lifelong dream to teach (and the timidity of so modest a dream is a topic for another time), you do understand that you’ll be setting yourself up for a life of miniscule pay and massive debts, right? Or have you not applied the math you learned in the 4th grade, and determined what you’ll be getting into, financially speaking?

Of course you haven’t, because you’re not that bright. Despite what everyone’s been telling you, and despite how going to college somehow serves as reinforcement of your status as a smart person. Look, we’ve seen your emails and comments. Most of you think punctuation is like oregano, to be used only sparingly, not consistently.

Here’s the Control Your Cash College Entrance Questionnaire. It has 78 fewer questions than the SAT, and we can grade it instantly.

 

 

 

1. Do you have an aptitude for math and/or science?

Yes         No

IF YOU ANSWERED YES, PUT YOUR PENCIL DOWN. DO NOT TURN TO THE NEXT PAGE.

2. Okay, how about for craftsmanship? This could be anything that gets your hands dirty and that provides a tangible result – carpentry, working on cars, helping your uncle install ceiling fans, whatever.

Yes         No

IF YOU ANSWERED NO TO BOTH QUESTIONS, YOUR FORMAL EDUCATION IS EFFECTIVELY OVER.

 

 

 

University is not the only option. You don’t need a bachelor’s degree to do plenty of lucrative and/or worthwhile jobs. There are thousands of examples. Here are four:

You can hawk real estate with a high school diploma (and a realtor’s license, which takes a few weeks to earn and does not require a demanding course of study). You can be a roustabout on an oil rig, and you’ll immediately be in the top half of American workers by salary. You can enlist in the Air Force, which will teach you much more marketable skills than college will and will pay you for the privilege. You can get a job selling appliances at Sears, which might sound awful to you, but a) you’re 18 and b) if you go to college to study something that carries no prospect of financial reward, you’re going to be working retail in 4 or 5 years anyway. At least this way, when you’re 22 you’ll have enough experience that you should have moved up by now. You’ll also have zero student debt.

As much as you think tertiary education can improve your life, consumer debt can hamper it. Education broadens your horizons, you’re telling yourself? Great. Debt narrows them at every turn.

“Want to do x (move to Alaska, backpack Asia for 3 months, buy a new and reliable car, put a down payment on this cheap house that I found)?”

“Sorry. I can’t afford it.”

Borrow money to defer life for 4 years, and there’s a lot you won’t be able to afford. Then and later.

None of the above jobs has to be a career, either. The Air Force is the only one that comes with an obligation, and even that lasts only 3 years.

Stop believing the hype. People hear the phrase “college isn’t for everyone” and they think it means “college is for everyone but the dumb.” When we say someone “isn’t college material”, it’s usually intended as an insult. It shouldn’t be. Some of the stupidest people on the planet parade through the halls of academia. Many of them never leave. Your average long-haul driver at the roadside diner will give you more stimulating conversation than your average adjunct professor of sociology. Also, the former is far more likely to offer to pick up the tab.

Can you find something satisfying and rewarding to do for a living? Will you be able to do it without dreading certain bills that’ll come at the end of the month (unless you planned to not incur those bills in the first place)? Can you do it while building wealth, and thus options, for you and your loved ones? If you can do all three, that’s true intelligence.

Filed Under: Bad Examples, Education, Making Smart Choices Tagged With: , , , , ,
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