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: , , , ,

In Case You Missed It

September 5, 2012

 

We couldn’t decide between 2 captions this week:
a) She never took a toothbrush on tour, and things worked out just fine.
b) Who says British women are unattractive?

 

An unscheduled feature in which we fill you in on what’s happening with other personal finance blogs. Because after all, Control Your Cash doesn’t have a monopoly on good advice:

Bible Money Matters

The author is going to a blog conference this week. Because he writes his blog for other bloggers, rather than a general audience, it’s filled with minutiae of interest only to that tiny little subgroup. Imagine how much more popular Bill Simmons would be if he wrote about paragraph spacing and interview techniques in every column. Guess we’ll never find out.

That’s actually not fair. And we strive to be fair. Bible Money Matters has handy tips for anyone traveling to any kind of conference. Or traveling, period. Or leaving the house:

Photo ID: Planning on getting drinks at the conference after party, or flying? You’ll need a photo ID of some sort.

Bet you thought tooth decay was an inevitable part of traveling, didn’t you? Well, it turns out that it isn’t:

Assorted toiletries: Don’t forget all your assorted toiletries from deodorant and shampoo, to a toothbrush and toothpaste.

When other bloggers are reminding you to remember your toothpaste and toothbrush, there’s not much we can add. “Wipe”, e.g.

The author also suggests that you take your phone, just in case you were dead set on leaving it at home. Like most people do when they travel.

 

The Simple Dollar

Well, here’s the opening sentence, formulated for the Alpha Centaurians whom the site’s author usually writes for. It’s a good refresher for any extraterrestrials, really, who aren’t familiar with human living customs:

In most American family homes, you’ll find one or two adults, sometimes paired with some number of children.

Some of these homes also feature pets, such as a dog or cat, or multiple dogs or cats, or a single dog and multiple cats, or a single cat and multiple dogs, but now we’re getting into advanced-level course work.

This post features the most toothless word in English, “consider”. As in, “consider quitting smoking to reduce your risk of lung cancer.” No, just freaking do it. Or don’t do it, whatever. But to tell people to “consider” doing something is the equivalent of telling them nothing at all.

To summarize, the Hamm-fisted (hey-oh!) author suggests that you “consider an alternative living situation” to save money on housing expenses. Whereas a normal person would say “find a roommate”, “consider an alternative living situation” adds that spunk of impenetrability.

But wait, he’s not done. The concluding tip in this post?

construct a second home on your land. 

Yes! A months-long full-time project that will require you to hire a contractor and laborers! Why doesn’t every person who’s short on funds try this? Heck, we should all be rich.

The point is that none of this garbage – pack a toothbrush, build a house on the house-sized lot that you already own but never thought about improving – is actionable, worthwhile, or anything other than a waste of both the author’s and the readers’ time.

Here’s some advice:

  • If you live in Washington, Idaho, Nevada, California, or Oregon, buy your groceries at WinCo. Good God. Their prices make Walmart look like Whole Foods.
  • You have an emergency fund? What the hell for? Take that money and put it in a 401(k). Buy gold with it. Buy BHP Billiton stock with it (3½% dividend yield, trading at near a 52-week low, ridiculously profitable.) That emergency will never come. Then again, there’s every possibility that it’s happening right now and you’re too blindly optimistic to even notice.
  • Change your freaking oil. Buy a permanent air filter, too. You can install it in 30 seconds, without tools. A $7 AutoZone battery tester will help out too, unless you want to run the risk of your battery dying in traffic and you have your heart set on paying a premium to get it fixed then and there.
  • Buy a house. The big quinella of low interest rates and low home prices won’t last forever. It’s lasted for years, but we’ve reached the nadir. The housing market is having a sale. Everything must go. Make someone an offer. Unless you have a compelling professional reason for renting, stop giving 100% of your dwelling expenses to a big fat rich landlord. (Note: The CYC principals are neither big nor fat.)
  • Which brings up another point. The proverbial ounce of prevention is physical activity. You know how some old people can fill out a pair of shorts without completely nauseating everyone around them, while others have those thick purple ankles and feet that terminate in toenails you could use to harvest crops with? What do you think those folks were doing 40 years ago? The former were taking the stairs and lifting weights. The latter were watching All My Children with one hand in a bowl of dry Froot Loops. (Note: Example cited may or may not be drawn from author’s real family life.)
  • Spend an hour or two running the numbers before spending 4 years in college. Chances are, your university education will not pay off. For it to be a worthwhile investment, you need to major in something not meaningless. If the very idea of running said numbers intimidates you to the point where you don’t want to do it, that’s a pretty good indication that anything you’d feel comfortable majoring in is not going to be worth studying.

Personal finance is as simple or as complex as you want it to be. As a general rule, the more complex it is (and the more you rationalize), the worse off you’ll be.

Filed Under: Bad Examples, Finance, Investments Tagged With: , , , , ,
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