Easy money is harder than it looks

April 18, 2011

Every deputy assistant vice president has a tell

 

If you’re bad at something, better to find out early than late. Especially if not doing so comes with a price.

At Control Your Cash, it’s not exactly news that we think gambling is for idiots. Technically, we’d argue that poker isn’t gambling in the sense that keno and roulette are. Skill obviously factors into poker, at some level.

Therefore it stands to reason that the most successful poker players are the ones who learned it from an early age and applied themselves to their craft, right? Just like athletes?

Well, there’s one big difference. Serena Williams spent her childhood banging a ball against a wall (or sparring with the ready-made opponent one bed over), but she only paid for her lessons in sweat and bruises. It didn’t cost her anything out of pocket.

Improving at poker, on the other hand, costs money.

Yours truly moved to Las Vegas as an indestructible 20-something, armed with a mathematics degree from a fairly demanding college and convinced that he was going to hit every poker room on the Strip and use his logical mind to leave a gaggle of impoverished opponents in his wake. Sophisticated me would start off methodically, conquer the visitors and send them packing, move up to the locals, vanquish them, build my confidence and my winnings, then eventually go pro and make millions just for playing a game.

(NOTE: This is not a bad beat story we’re making you sit through, we swear. Nor will we tell you about the fish that got away, nor how our fantasy football team got screwed.)

On slow weekday afternoons, the casinos offer “free” lessons. The instruction is free, the stakes are real. I sat down at a learning table that held a dozen rube tourists who didn’t know a railbird from a kitty. The puzzlement in their eyes was all the incentive I needed. When one of them asked the dealer whether a full house beats a straight, I started salivating. That I knew barely knew the rules myself and didn’t know strategy at all was a non-issue.

I bought in for $20 and drew two low, unsuited cards. The flop* came up and I wagered $5, even though I knew I had close to the weakest hand at the table. There’s no point in sitting in a gambling hall and not gambling – I could have done that at home – so I gambled.

The dealer dealt the fourth community card. The card didn’t help my chances, but I placed a relatively gargantuan $10 bet. I went all-in with my remaining money on the fifth and final community card.

I held a pair of sevens. The best possible hand anyone could have held was a flush, and if anyone did, he wasn’t betting heavily enough for someone who had only a small chance of losing.

No one folded, including the two players who held worse hands than me. Our winner held a pair of pocket 10s. Most of the money she won in that pot was originally mine. She looked confused as the dealer pushed the chips toward her. “Really? I can take these? And exchange them for cash if I want? Or walk out of the casino with them and security won’t chase me? You sure?”

I wanted to stand up and scream at my fellow players. “Do any of you understand the concept of folding? Here’s how it works: you look at your cards and know you’re not going to win the hand, so you cut your losses before being obligated to wager more. Oh, and there’s something called ‘bluffing’, too. That’s when someone with a poor hand – me – bets so much that you assume he must have a great hand. Which I was doing. And none of you bought my bluff! Why the hell not? You people can’t possibly be so smart as to know that I was bluffing, given that you were all too dumb to fold. God, you’re exasperating!”

The dealer reminded me that if I wanted to be in on this next hand, I needed to cough up some more. Which would have been impossible. I walked out of the poker room dazed, trying to recalculate my steps. Could I have won that hand? No, because my idiot opponents wouldn’t have folded. Is every hand going to be like this? I always have to hold the best cards to win? Well, I’m not going to hold the best cards more often than anyone else will, so to win I’ll have to rely on my opponents’ psyches. But they don’t have psyches, they’re robots. And they weren’t even programmed to make intelligent decisions, just to bet and bet until the game ends. This is retarded.

I was right about that. It was.

Most players play to the death. Not out of bravado, but because they don’t know any better. Or they assume everyone else will, which means they have no choice but to mimic the crowd if they ever want to win a pot. To get past players like that and advance to the level where people bring math skills and psychoanalysis to the table, you have to be lucky enough to win more than chance would dictate. And that’s a price of entry that most of us shouldn’t be willing to pay.

Leave professional poker to the guys you see on ESPN2 late at night – the ones with the funny nicknames, horrible wardrobes, disjointed personalities and grotesque physiques. If you want camaraderie coupled with a chance to win money, invite your friends over and keep it amateur. In the long run, you’ll neither profit nor lose. And you won’t have to pay a cut to the house.

*Leaving much out, this refers to the first three of five cards the dealer deals face up in the middle of the table. Each player also receives two cards of his own, and creates the best possible five-card hand out of the communal five cards plus his own personal two cards.

**This article is featured is the Totally Money Blog Carnival #16-Easter Edition**

Filed Under: Bad Examples, Capitalism, Healthy Living, Making Smart Choices Tagged With: , , , ,

1 tip for finding undervalued stocks

April 8, 2011

Recycle Friday! Featuring something we already wrote for someone else’s blog, but liked enough to eventually want back. Last spring this ran on Free From Broke. Today, we’ve updated it for a more mature audience.

1 Tip for finding undervalued stocks

Nah. Shop at the place next door, with the higher prices.

Why do people get excited when their favorite retailer holds a sale, but not when Wall Street does?

Let’s start with the obligatory disclaimer – this is not an encouragement nor a discouragement to buy or sell particular securities, stocks carry risk, consult a financial advisor but you don’t have to, etc.  That was for that infinitesimally small segment of the population that is a) literate enough to read this post, yet b) dumb enough to do whatever a disembodied online voice suggests.  There, now you can read the post absolved of any obligation to think.

Most investors know, in theory, that it’s foolish to buy at the top of the market and sell at the bottom. (Of course, human nature means that the opposite is true in practice – otherwise the top and bottom wouldn’t be where they are.)  But it’s equally foolish to assume that the market will carry you along indefinitely if you just buy a flat representation of it and don’t research at all.  We have 12+ years of real-world evidence of that.  Factoring in inflation, the Dow has risen by an average of .4% annually since February of 1997.  Your index fund would have been better off if it had collected tin cans since the Packers last won a Super Bowl.

There is such a thing as overdiversification. You might find stability in a comprehensive index fund, but it’s impossible to find any significant value.  Buying a basket of Dow stocks, or something similar like a Wilshire 5000 index fund, will likely give fantastic returns over an 80-year period.  If you plan on not waiting until you’re 115 years old to enjoy your money, there are more targeted ways to go about attempting to build wealth in the stock market.

Instead, look at companies that are temporarily wounded, i.e. whose stock sells at a discount. Earlier this year, when the global CEO of Toyota (NYSE: TM) was being grilled on Capitol Hill for selling cars to people who confused the brake with the accelerator, the company’s stock sank.  But some fleeting bad PR can’t negate a decades-long reputation for value and quality.  A few weeks after our demonstrative congressmen and senators finally pulled the curtain on their combination political theater/witch trial, Toyota stock had quietly gained 15%.

Around the time Toyota emerged from a bruising at the unfair hands of public opinion, British Petroleum (NYSE: BP) made Toyota’s problems look trivial.  BP traded at $60.48 the day the Deepwater Horizon spill began.  Today it’s at $36.52, a 60% drop.  The rig’s manufacturer, Transocean (NYSE: RIG), has fallen from $92.03 to $50.04 over the same period, a 46% decline.  Fortunately for Transocean, it’s in an industry with few players.  Also, most people had barely heard of it since it doesn’t sell directly to the public.  (When was the last time you bought an oil rig?)  This distinguishes Transocean from BP, which plasters its logo everywhere and goes out of its way to embed itself in the public consciousness.  Thanks to that insistence, almost everyone identifies the Gulf of Mexico spill with BP more than they do Transocean.

Both BP and Transocean have otherwise healthy financials that can normally withstand a one-time event. Then again, Deepwater Horizon is some event.  But a wounded company isn’t a doomed company: despite the Exxon Valdez disaster, ExxonMobil went from pariah to the world’s most profitable company in just a few years.  Johnson & Johnson rebounded after the Tylenol scare of 1982 and came back stronger than ever.  There are several ways to murder a company along with its stock: obsolescence (Atari), poor economics (General Motors) and rampant crime (Enron) are three of the most efficient.  But for a temporarily disabled company with a history of success and goodwill (in the general sense, not the accounting sense)?  A resurgence is more likely than you think.  Don’t confuse a broken bone with a bullet wound through the cranium.

One more time: there’s always value somewhere in the stock market, but very rarely can you make money simply by buying into the market as a whole.  In fact, the times when the market (as a whole) rises fastest are when the gains are most dubious and tentative – case in point, the dot-com bubble and ensuing crash.  More accurately, there’s always value in the stock market among particular entrants.  Finding the ones whose stock prices have suffered for no better reason than that of public perception is as wise a place as any to start.

Filed Under: Capitalism, Investments, Making Smart Choices, Math, Net Worth

Buying a vacation home on a teacher’s salary

April 6, 2011
Investing, Create wealth, control your cash, retirement planning

It’s at your vacation home, you whining harpy. (By the way, this picture was taken in Florida. Miami, to be precise. On February 11. A school day.

As philistines and libertarians, we make it a point never to listen to NPR nor watch PBS (why would we, they don’t broadcast football.) Unless, of course, NPR runs a story on a college classmate of ours. Especially with such an auspicious introductory line:

There are wealthy Canadians buying multimillion-dollar beachfront homes. And there are people like “Kirk”, who recently bought a 2-bedroom condo in Fort Myers, Fla., sight unseen.

Kirk is the high school teacher in question, and it’s not as if he retired from a lucrative career in personal finance before switching careers. He paid $56,000 for the condo, which sounds like a price out of the 1970s.

The NPR interviewer didn’t ask him how he afforded a vacation home on a teacher’s salary, especially with a couple of kids to feed. Nor did NPR ask him how he ever managed to date Khyrstine Thibeault, the hottest girl on campus, despite being neither a jock nor a rich kid nor remarkably good-looking. That’s where Control Your Cash came in. Kirk elaborates:

We went on vacation to Fort Myers Beach about 3 years ago, but I knew the price was cheaper inland than it was near the Gulf. We actually didn’t stay near this particular unit at all.

We bought the unit in early May and then we saw it in late August. We bought through Florida Home Finders of Canada in Brampton, Ontario. I saw pictures of the unit, went online to see what the area was like, what units were going for, etc. We didn’t use, or need, an appraiser or home inspector because FHFC had done all the legwork.

I borrowed C$50,000. I had $10,000 from a condo sale that went sour in Whitby, Ontario. With the Canadian dollar at U.S. 96¢ the Fort Myers condo was a shade under C$60,000.

 

By go sour, he means that the condo company went out of business and he got his down payment back.

I paid for it with a home equity loan over 25 years. I think it was 3½% or 4%. I wanted to keep it separate from the mortgage on my primary residence in Canada, just in case we do a home renovation. (If we do,) then I will extend my mortgage.

 

If you’re thinking about a big purchase like this, especially if it involves big financing like this, understand that a 3½% mortgage and a 4% mortgage aren’t interchangeable. You don’t just round the number to the nearest integer and hope for the best. If the interest rate on this home equity loan is 4%, Kirk would be paying $263.92 monthly. Which is $79,175.53 over the course of the loan. If it’s 3½%, he’d be paying $250.31 monthly, or $75,093.54. Or $4.081.99 less over the course of the loan.

I have an off-site property management company that guarantees me a renter and takes 8%. Every month they rent it out for $792, and deposit my share of that in my bank account. The homeowners association takes their $273 (Editor’s note: holy crap) and then I’m left with about 470ish a month. ($455.64, by our calculations.) I pay $122 on my loan every 2 months, (sic, he means weeks) so I guess I’m ahead about $200 every 2 months (not sure what he means here, but we think it’s “every month”. See below). My tax bill was just under $1000 at the end of the year. Tax time is coming up, I’m not sure what to expect there.

Our take? This condo was a sufficiently smoking deal that Kirk will still profit from despite making a couple of mistakes.

Here are a few tips if you fancy yourself a low-level land baron:

1. Know your numbers. Nothing’s more important than this.

Kirk had only a hazy idea of his interest rate. A 50-basis point difference is huge. His low estimate is 1/8 less than his high estimate.
Assuming the higher estimate, he nets a pre-tax $205.33 monthly. Hopefully a) it’s a fixed-rate mortgage and b) Kirk knows that it is.

2. This doesn’t necessarily apply to Kirk, but know your terms, too. If you don’t, ask someone. Keep asking people until the answer is no longer ambiguous. We know of one 40-something apartment dweller who was ready to “send some guys over” to deal physically with her old landlord. Why? Because she had been on a lease option, which works like a regular rental arrangement for a fixed term. At the end of the term the renter has the option to buy the place.

She had never heard the term before, and assumed that it meant her monthly payments were going toward eventual ownership of the condo, like an ordinary mortgage. No, those monthly payments were going to pay her landlord’s mortgage. Her lease expired and she had neither the tens of thousands of dollars on hand, nor financing in lieu, to buy the place. She had been nothing more than a renter, and didn’t even realize it.

(Editor’s Note: Therefore, a lease option is a wonderful thing to be on the other side of. Worst-case scenario, you sell your property for a price you already agreed to, all the while having had your mortgage payments taken care of by the renter. Better-case scenario, the lease term expires, the renter can’t afford to exercise the option and you get to keep owning the place. There’s an excellent chance of that happening. There’s a reason why most renters are renting, and that reason is fiscal indiscipline.)

Assuming Kirk’s numbers are consistent, more than 40% of his net condo revenue goes to taxes. Still, if he’s “getting paid” $1400 a year to own a modest vacation home, there are worse places for him to have put that home equity loan.

**This article is featured in the Yakezie Carnival: The Chuck Norris Edition**

**This popular article is also featured at the Baby Boomers Blog Carnival Eighty-Eighth Edition**

Filed Under: Bad Examples, Estate Planning, Investments, Making Smart Choices, Real Estate, Rental Property, Role Model Tagged With: , , , , , ,
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