Rules of the game

I recently spoke with a brilliant young man with a somewhat lucrative job; he only had to work for three months out of the year and spent the rest of the time traveling to Europe and telling friends and college students how great his job was. Just a couple of years out of college and had little savings and no credit card. I talked with him a little bit about the rules of the game that big institutions, like banks and the IRS, set up for peons like us to follow. He asked me if there were some book he could read so he could know what the rules were.

Well, there are some books out there, usually published by modern-day get-rich televangelists, and these investevangelists have the same purpose as ordinary televangelists, that is, to seperate fools from their money. At best they want you to buy their book, at worst there are 200$ board games and 1500$ seminars to attend. I’ve always felt these talks were helpful but I never want to pay a dime for them. Similarly, I felt I learned a lot about big business when I attended an Amway meeting, at the ripe age of 17. However, I didn’t want to invest the time or money (I didn’t have any!) trying to persuade others to invest their time and money etc. etc.

A good barometer for the legitimacy of the investevangelist is their promixity to Amway and other pyramid schemes. Suze Orman, for example, has an audience participation part of her programs. Often these audience members stand up and talk about how they ruined their credit buying tons of stuff in an attempt to get rich off of some pyramid scheme, and she has often set these people straight. On the other hand, Robert Kiyosaki does not distance himself from the pyramid schemes as he wants their business.

Probably the most reasonable of the investevangelists is David Bach, who writes and talks about the “latte factor”.

If anyone wants to learn about the mindset and techniques of getting rich, you can easily get a copy of their work at the local library. Usually it is in CD, Video, or book format. At it’s worst this kind of stuff is still more educational, and has fewer plot twists, than an episode of 24 or Lost. But, most likely, if you find someone successful in business, you can find out pretty much everything you need to know from them that are covered in these infotainment shows. Although I am not rich or wealthy, not even a success story yet really, I’ve made some mistakes and learned from them and have a plan that doesn’t deviate from these guys too much. And as a one time offer I will void the logipundit gold member subscription fee (50$/month) required for this special money making content guaranteed to double or triple your income within the next ten years. You’ve heard of Donald Trump and Warren Buffett right? Don’t you want to learn their secrets? Well just keep reading silly, and you’ll find out the true secret to ultimate riches.

Rule #1.
(Are you ready)

(Drum roll)

GET A JOB
What did you expect? People will just give you money for nothing? Think everyone can just flip houses for a living with a zero $ down payment? What planet are you on? Sure, this can work, if you make a full time job out of doing your homework of knowing the neighborhood you are buying in, knowing what is a good house, catching any problems, and knowing the demographics of customers, this might work. Flipping houses also might work in a big city like NYC or DC, but less likely in the “Columbus metropolitan area”, and for most of the heartland. By the way, anyone interested in a 1200 square foot 2 bedroom home for $300,000 here in Columbus? It’s only about 30 years old.Yeah, I didn’t think so.

Ok ready for Rule #2

THIS IS A BIG ONE…READY?

GET AND/OR PAY OFF YOUR CREDIT CARD

In today’s society, there are simply too many benefits to carrying a credit card. Having a line of credit is something banks look for when you buy a car or home. Old school of thought was that you buy everything with cash on the barrelhead, but it is unheard of to cash out a house these days. Having a line of credit for a long time tells banks that you are playing the game and not sitting on the sidelines. Also, good luck getting a plane ticket, renting a car, and getting a hotel room with your debit card.

Another old school way of thinking, which is really admirable, honestly, is to just keep the credit card for emergencies. Unfortunately, it kind of works out that you should spend a good bit on your credit card and pay it off at the end of the month. The trick is not to put more on your credit card than you can afford to pay off at once. Pay off your credit card at the end of every month all the way down to zero. Pretty soon you can get dividends and frequent flyer miles, we got a $300 of dividend from our credit card, which was basically 1% to 5% of our purchases sent back to us, spending money on stuff we were going to buy anyway.

Also, using the credit card in this way helps you itemize your purchases, which can help you come tax time.

Ok now time for the big one:

Rule #3: Don’t eat out if you can cook it yourself.
Ok, this one’s real metaphorical. But seriously, when YJ and I take an opportunity to eat out, we aren’t going to eat omelettes, spaghetti, or anything with chicken. These are staples of our diet. I am the omelette master, and I’ve calculated the price per omelette of my one-of-a kind masterpieces. For a kickass omelette it costs ~$1.50. Why would I pay $7.50 for something I can do better myself? I know many eligible bachelors are saying, “Ha, I can’t cook anything”. Well, I hope you enjoy microwave pizza. Get some Ragu and learn to boil noodles, or else pay 6+$ per meal to someone else. Or, ask your Mom how to cook something.

But the cook it yourself principle applies to many aspects of life, specifically investments. I used to invest in Edward Jones, and was pretty passive about the process. Well, after getting my savings thoroughly trashed at the hands of a trusted investment specialist, I took charge of my own money and did substantially better at a no frills investment house than going with $50 per transaction investment gatekeepers. I estimate I gained about 10% in a bull market, and I’m skeptical, really, about how I can do in a Bear market. But probably betting on big blue chips with fat dividends is a good start. Anyway, as our fellow contributor Reagan Gahagan attests, Citibank and others are getting aggressive about offering 5% savings accounts, which is better than nothing and is FDIC.

We plan on taking the same approach to buying a house when the time comes (i.e. when we leave Columbus). Hopefully soon it will be just as easy to buy a house as a stock.

Update ( I got a little tired at the end there. Of course buying a house will never be as easy as buying a stock. I am trying to allude to the shift from using the services of a gatekeeper (realtors and real estate agents) to using online resources, which should drive down the hassle and cost of buying a home some.

Posted at 10:46 pm by Johnny B

Posted by BP @ 08/07/2006 09:25 AM PDT
You mentioned “investevangelists”…that’s a great word and I don’t think I’ve heard it. The worst example is Suze Orman…who gave up her licenses a few years back so she couldn’t be sued for giving bad financial advise.

So how do I join your system? Can I get started without any money?

Risk vs. caution

A former undergraduate student who worked with in my lab in the past drops by from time to time with his progress. He is a remarkable student who had to overcome a lot of obstacles. He went to college late (he is now 32) and has a 4.0 in psychology (Aside: Psychology classes yield the lowest average GPA of all the Arts & Sciences majors, because it is the most challenging A&S major here at OSU). Anyway he’s applying to clinical psych programs and asking my advice re:GRE, Letters, etc. He dropped in on my lunch break and I was checking the price of Google stock to see if it is going up. I told him it was about to go over $400 a share and it will go even higher.

“Can you really make money off of that? I mean did you see any benefits?”

Now, I won’t tell you all what I told him because y’all don’t need to know how much money I’ve lost or gained recently, but let’s pretend I told him about Google instead.

Me: “Yeah, I bought 10 shares of Google at $300 a share back in July. I could sell it now and make $1000 in six months.”

Him: “You mean you actually could get the money?”

Me: “Yeah, all I have to do is pay 7$ to sell the stock. I could take my sweetie out to eat and give her a nice birthday gift. I mean, NICE. You know?”

Him: I never got into that stuff. You could lose money.

And he’s right, and I have. It was a “learning experience”. I’ve learned to minimize the risk by doing a little economic homework before I invest. Funny thing is, this is a smart guy who was a salesman before going to college. But he is just a risk averse guy, whereas I like to occasionally swing for the fences. Now I think that’s the big factor that differentiates nanny-state liberals and economic libertarians like myself. Unfortunately, the academic environment fosters the kind of cautious voter that ensures that risk takers pay for the school lunches and pensions of everyone else after their “windfall” profits. Of course this guy is a big time liberal despite being all the wrong demographics (i.e. blue collar white male), and I think risk-aversion is the big reason for it.

Now, all the caveats apply. Certainly one can be small-government fiscal conservative and be against the war etc. Certainly big hot-shot lawyers take a lot of risks, but they aren’t the rank and file democrat voters, either (but rather pretend to be their shepherds). One always succeeds when trying to break out of his comfort zone, even if he fails at first … when I lost money in stocks @ 23 I learned to avoid the same mistakes when I’m 32.

Posted at 10:10 pm by Johnny B

Posted by Jordan @ 11/22/2005 01:44 PM PST
Interesting, how no one responded to your post yet. I say that because it reminds of my first post, the one that brought down a firestorm upon my head. I guess one of the main differences though is you had the good sense or caution to title yours “Risk v. Caution”, whereas my post was titled more along the lines of “Men vs. Pussies.”

Posted by JohnnyB @ 11/22/2005 06:00 PM PST
I learned from you Jordan. My big departure from your earlier post is that both he and I are intellectual, I’m just willing to take the risk. My problem with your earlier post was that I (kind of) consider myself an intellectual and still a man, and felt I had to defend myself.