Looks like round three of government intervention in the housing market is about to kick off. Apparently, the powers that be believe getting struggling home owners who can’t pay their mortgage out of their homes (simultaneously saving their credit report) and selling those properties to well qualified buyers, via the short sale process, will prop up home prices.

Of course, the big picture behind this type of move is pretty simple:

1. Prevent further deflation in the real estate market.
2. Prevent further writing down of bank owned assets.
3. The banks get paying customers living in those homes.
4. Banks get a little something for the effort to push paper a little faster.
5. Homeowners who pay their mortgages also pay their taxes (e.g. tax revenues go up).

So the take home message (my completely non-professional opinion only) is:

1. Don’t expect mortgage rates to jump above 6% anytime soon. The government simply can’t take the hit.
2. An expedited and incentive based program will speed up the short sale process, but I wouldn’t expect home sales to jump substantially.
3. Getting approved as the buyer of a short sale will be just as difficult as it is now because the same gate keepers are still in charge. Meaning, the banks must still approve the write down of the original mortgage, and approve the buyer for the mortgage.
4. If you’re a real estate investor, there will likely be plenty of time to sort through the plethora of bargains still on the market. You may not have the pick of the litter, but there is still a lot of inventory to choose from.

When you consider just how high the spike in the real estate bubble really was, I’m not sure anything can prop up the housing market… except lower prices.

Thoughts?

This was an original post from Steadfast Finances. For more, follow me on Twitter.

The Short Sale Process Could be Getting Much Faster

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This is a devil’s advocate, humor based post. I do not recommend you skip work for any event. However, I will admit to using and/or knowing colleagues that successfully used these excuses, but do not hold me responsible if you were terminated because you can’t properly execute a little white lie.

March Madness might be the most productivity sapping sports event in the U.S. In my circle of friends and family, it’s probably the most important of all considering that I live in the geographic confines of the ACC — think Duke, North Carolina, Virginia Tech, Clemson — so it’s almost obligatory that I get caught up in the emotional contagion.

So imagine my surprise when I saw that some men are actually signing up for the most taboo of all male elective surgeries — a vasectomy — to have a justifiable excuse for skipping work and watching the entire March Madness basketball tournament from the comfortability of their couch.

Doctors at 21st Century Urology in Orland Park have launched a marketing campaign encouraging men to schedule the procedure during the three days before this year’s March tournament. They’re even offering patients a free pizza to snack on while recovering and a bag of frozen peas to help with swelling.

“I’m booked up,” says Dr. J. Stephen Jones, chairman of regional urology at the Cleveland Clinic’s Glickman Urological & Kidney Institute. “My schedule on that part of the month filled up very quickly. It filled up ahead of time.”

Yikes! I’m a basketball fan, but not nearly enough to get “snipped” and sit on a bag of a frozen peas for a week.

Less Invasive Excuses to Skip Work

If you’re looking for a few clever, although not entirely foolproof, excuses to ditch work and watch the tournament at the sports bar with your crew, these might be of interest to you.

1. Sick, dying, dead relative. If it worked for Ferris Bueller getting his girlfriend out of school, it could work for you. Only problem is, you have to make the dead relative or sick kid excuse believable, so if you’re going to use it, be prepared to have your bluff called. I’m embarrassed to say this, but I have a close family member with MS and I’ve used her as an excuse to get a four day weekend to watch March Madness with a group of devoted UNC fans. I know, I’m going to Hell for doing this, but a former boss of mine was notorious for pulling a Lumbergh (making me work weekends) so I felt a little justified. Please note this is a last minute excuse, so if you’re a bad liar or you’re boss doesn’t trust you, then it’s not an excuse I’d recommend using since the timing will make you appear highly suspect.
2. I’m a [insert school mascot] alum! Several years ago, my boss actually took a half day to watch the game at the local sports bar (and made me cover for him) just because his alma mater advanced to the second round of the bracket. If your school gets into the big dance, don’t be afraid to tell your boss you’re a huge fan and you wouldn’t mind taking a half day or a few days off to watch the games. If he/she is cool and you have the sick/personal days available, maybe they’ll look the other way. They’ll probably know you’re checking the scores every two minutes on the web or watching a streaming video feed at work anyway.
3. Last minute illness. Of all the excuses to give, this is probably the most abused and least believable. So if you’re going to use it, make it believable. Several years ago, a colleague who was a fanatical University of Maryland fan, purposely licked a piece of raw chicken the night before the tournament began. So when he showed up to work on Day #1 of the tournament, he looked like death itself, but he also had a great excuse to watch the games from the comfort of his couch. I consider this completely irresponsible and stupid, but hey, if you’re a fanatic, there isn’t much you won’t do.
4. Emergency repair needed. This excuse is about as questionable as a sudden cold or sore throat, so the standard “my car won’t start” or “baseball through my window” excuse probably won’t cut it. So the more outlandish the excuse, the better. Perhaps something like “my dishwasher sprung a leak” or “my water heater flooded the basement” excuse, which requires your immediate attention, but also requires at least one day of additional repairs. I wouldn’t try this excuse if you have a nosey boss that might ask for photos or other proof that this actually happened.
5. Schedule a health related issue. Taking the “Vas Madness” example and running with it, why not do something similar? If you have a medical, dental, or optometry issue that you need resolved and you’ve been planning for it ahead of time, why not tap your health savings account and schedule the procedure to occur the day before the March Madness tournament begins? Something like wisdom tooth removal, plastic surgery, lasik/lasek surgery, etc? Not to mention, this excuse doesn’t have to involve you directly. You can say the procedure is for your wife or child, and you have to stay at home to take care of them during their convalescent period. Sneaky and devilish I know, but hey, it’s effective and scheduled months in advance.

Got any other solid excuses that you’ve used to get out of work for less than ethical reasons?

Photo by Cayusa

This was an original post from Steadfast Finances. For more, follow me on Twitter.

Best Excuses to Skip Work and Watch March Madness Basketball

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I ran across this clever, or ghastly if you work in the banking industry, idea from Thomas Power from Ecademy.com.

What if Facebook became a bank?

If you’re a banker, I’d bet the Bank of Walmart idea is looking pretty good about now since the Internet is steadily putting the middlemen out of business.

But think about this for a second…

If Facebook could persuade just 1 in 10 of it’s 400 million users (as of 03/15/2010) to deposit just $1000 in the Bank of Facebook, you’re talking a cool 40 Billion dollars.

Not exactly chump change.

But 40 Billion isn’t anywhere near enough to hurt the banking industry. Not by a long shot. It might get some media attention since they’ll lose the spread between checking/saving rates and mortgage rates, but it would take a capital loss much larger than 40 Billion to do any serious damage.

However, since the number of Facebook users is growing by 100%+ annually, Facebook users are more web savvy and comfortable with Internet banking, and Facebook can probably get a much better conversion rate than 10% of its users to switch to the Bank of Facebook, you’re talking about a substantial change to the status quo of the global banking system as it continues to grow and mature.

Perhaps even more progressive (or scary from your point of view), is what if some of this money was devoted to social lending (similar to Lending Club and Prosper). The need for an “old school” credit card issued by a Too Big To Fail bank is considered obsolete because you would rather share the wealth with your Facebook brethren than a group of fat cat bankers.

All you would need (in theory) is a pre-approved Facebook line of credit, with a fixed interest rate, and a group of friends (or investors) who wanted to indulge your consumerism. All they ask in return is a 10% return on their investment after paying for your stuff.

Of course, I might be in entrepreneurial dreamland expanding on Mr. Power’s idea that may or may not become a realization.

Then again, when you have an “army” of 400 Million followers/users, you can probably use, or leverage, them to do just about anything you want…

Like kill off an entire industry.

Not to be facetious, but it would be ironic if Facebook did actually move forward with this business plan considering that the 2000 to 2009 decade was the rise of Too Big To Fail, but the 2010 to 2019 decade could be known for the  Too Big To Stop social media behemoths.

This was an original post from Steadfast Finances. For more, follow me on Twitter.

What Industry Could You Bankrupt if You had 400 Million Users?

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One of the reasons why I loved the recession is the creativity of small business owners to get customers coming through the door and filling the empty seats.

This clever idea, from a sports bar owner in Boston, is actually selling season tickets to watch the Red Sox… on television in his bar ?

For a $500 up front purchase price, your sports bar season ticket gets you a guaranteed table and a $25 bar credit each time you show up to watch the game. While not exactly all that enticing of deals when you look at it individually, it becomes a fairly good bargain if you’re a socialite and/or a serious baseball fan since you make your money back after showing up 20 times.

Since there are 162 games in the season, you have the potential to turn a profit on your investment (in terms of beer, hot wings and jalapeno poppers consumed) after 21 games. Looking at it from a purely financial vantage point, I have the potential to double my money after showing up to the bar for 40 games. (Assuming you don’t go over the $25 credit, which will probably occur more times than staying under the $25 credit.)

Of course, there are a few negatives to this kind of deal: many regular season baseball games are played during 9 to 5 workday hours, your wife/girlfriend would probably skewer you for hanging at the bar more than twice a week, etc.

But if you’ve got a group of friends that likes to hangout at the sports bar after work, or maybe you’re in a company with lax rules about how you can spend your departmental “team building” money this year, it might be worth running this idea past your boss or forwarding it to your Human Resources manager.

So what do you think? Clever idea built solely for cheapo companies who don’t want to spring for real season tickets, or a new microtrend that can go mainstream?

Best reads that caught my eye

NPR Planet Money – We Bought A Toxic Asset; You Can Watch It Die

NY Times – Changing Channels, From Cable to the Web

Wall Street Journal – A Star Trader Who Rarely Ever Traded

The Big Picture blog – Vanguard’s Broken Discipline: The Buy & Hold Model [Just for kicks, set your start date in 2000, end in 2009, sell when losses equal 10%, then repurchase after a 10% gain. You'll beat the S&P.]

Frugal Dad – Dividend Investing Supplements Passive Income

Carnivals

Carnivals I participated in over the last two weeks.

Festival of Frugality at Fire Finance

Money Hackers Carnival at Might Bargain Hunter

Twenty Something Finances at LifeTuner

This was an original post from Steadfast Finances. For more, follow me on Twitter.

Best Reads of the Week: Season Tickets to a Sports Bar Edition

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Who uses Groupons?

Rich people. That’s who!

Okay, maybe not just rich people, but you may be surprised to learn that people who make major bank ($100k+ annual salary) are the heaviest users of daily groupon email alerts.

Then again, it should be no surprise at all that young people who make a lot of money want to keep as much of it as they can. So when they see a good bargain, either from a coupon/groupon or they’ve developed a preference for secondhand merchandise, they the pounce on it to avoid paying retail prices.

After all, folks like these didn’t pull all nighters in college to get a killer GPA or work 60+ hours a week at their small business to just give away their disposable income. These days, they want the most bang for the buck as possible.

What is surprising, at least to me, is that nearly half (48%) of all Groupons are being used by more affluent consumers ($70,000+). That’s several percentage points higher than traditional coupon super users, where 39% of affluent consumers ($70,000+) cut coupons the old fashioned way.

I guess frugality really is the “new black”.

This was an original post from Steadfast Finances. For more, follow me on Twitter.

High Income Consumers Love those Groupons

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I consider myself fairly immune to the persuasioneering techniques of modern day advertising.

The buy me, but wait there’s more, buy one get the second at half price hard sale SOPs are outdated and they work about as well (at least on me) as penicillin works as well on a superbug like MRSA.

I’ve adapted, I’m immune, and by in large, 9 out of every 10 ads I see blend into the background.

However, there are those certain ads that strike a nerve so ingeniously that they’re unforgettable. I may not rush out and buy their product after seeing it — that rarely, if ever, happens — but I enjoyed the creativity of the advertisement so much that it stuck in my brain for years. Moreover, I want to see it so badly that I actively go searching for it on video sites like YouTube.

This should come as no shocker if you’re a serious loyalist to brands like Apple Computer, Coke, or Nike.

So for all you advertising and marketing gurus out there, take a lesson from Nike and learn how to capture Gen X and Gen Y’s attention.

Nike: Take It To the Next Level

First person shooter game enthusiasts should love this one.

My German friends always say that American advertisements aren’t anywhere near as cool as European ads. I might have to agree after seeing this one.

Nike: The Human Chain

How quick are you gonna get up?

Sounds cheesy, but so true in all aspects of life.

Nike: Bleed as One

Destroy egos. Starting with yours.

I admit, I’m a total quotes junkie, but many of these reminds me of the types of motivational quotes I used to hang in my football locker back in the day.

Nike: For Warriors

Perhaps its the unique nature of the commercial, or that someone finally capitalized on the visualization techniques athletes use where they take on a second identity when they enter the field of play.

Consumer psychologists say the best advertisements stimulate an emotional response, so if you feel the need to hit the gym or go jogging, don’t feel too badly.

This was an original post from Steadfast Finances. For more, follow me on Twitter.

What Makes an Advertisement Unforgettable?

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On March 9, 2009, the stock market closed at it’s lowest level in over a decade. The doom and gloom news factories were pumping out negativity as loudly as it could because that was what “people wanted to hear.”

You couldn’t pick up a newspaper, click to highly trafficked website, or flip on the 6 o’clock news without hearing how terrible the U.S. economy was. Business pundits and money managers were saying the U.S. Dollar wasn’t going to worth the paper it was printed on and was about to collapse. Even a few outlandish perma-bears were spewing nonsense about a stock market going to zero.

And look where we are today…

From the close one year ago today, the S&P 500 is up around 68%.

I say this not to rub their face in the dirt, but to illustrate that to be a successful investor, you much think counterintuitively. Meaning, that if you’re a long term investor and you want to generate above average returns in the stock market, you can’t follow the herd and sell when the news is at it’s worst, only to buy back your shares when the financial news turns decidedly positive and says we’re back to happy days again.

Instead, you should consider adopting a counterintuitive approach (e.g. be greedy when others are fearful and fearful when others are greedy) by dollar cost averaging into a Plain Jane index fund or your favorite individual stocks when the news cycle is at its worst. Guys like Warren Buffett and Wilber Ross didn’t become household names because they bought Cisco at the height of the tech bubble. They bought large stakes in troubled companies during times of fairly high despair at substantial bargains (a buy on the dips methodology).

Be Greedy When Others are Fearful

Hindsight is always 20-20, and picking the exact market bottom, while possible, is much like picking the winner number at the roulette table. However, for the sake of lessons learned, let’s take a hypothetical look back at how our portfolio would look had we bought, or perhaps dollar cost averaged into, some widely held buy and hold forever stocks at or around March 2009 when the news was at its most dire.

Apple

Apple is one of the most well known and widely held tech stocks in the world. Having hit a new all time high just days ago, Apple’s ROI would be ~150% having bought at or around the time of the stock market crash of 2009.

Bank of America

The rumors around BofA’s demise due to threat of nationalization was one of the most sensationalized stories of the 2009 stock market crash. Not surprisingly, these negative rumors pumped by mainstream media erased 25 years of stock appreciation and pushed BofA’s stock into low single digits.

However, the buy signal was sounded when Ken Lewis (Bank of America’s CEO at that time) bought several million dollars worth of BofA stock in a fantastic example of buy on the dips investing. Insiders know their company’s future better than anyone, so perhaps, it’s an indicator worth monitoring from time to time.

Goldman Sachs

Love them or hate them, Goldman Sachs is widely regarded as the best investment bank on Wall Street. Some even consider owning GS stock the equivalent of a free actively managed mutual fund.

Google

If you travel in an investing savvy circle, you would be hard pressed not to find someone who doesn’t own the GOOG as a long term, buy and hold forever investment. Had you decided to add to your position at or around the March 2009 lows, your investment has nearly doubled in just a year’s time.

Proctor & Gamble

Good ol’ P&G certainly isn’t the most sexy of companies (considering they make toilet paper and laundry detergent), but it’s also one of the most widely held defensive stocks on the NYSE.

Interestingly, had you bought P&G at our around the March 2009 lows, you would have underperformed the S&P 500 index by around 25% (excluding dividend payouts). Which just goes to prove that even though you may fancy yourself an expert stock picker and a whiz at fundamental research, there is still a good chance that you will not outperform the S&P 500 index.

~ ~ ~

Disclosure: At the time of publishing, I do not hold any of the individual stocks mentioned in this post, but I do hold S&P index funds in my retirement account.

This was an original post from Steadfast Finances. For more, follow me on Twitter.

Why it’s Important to Buy during the Doom & Gloom News

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As a self confessed quotes junkie, few things in life can change my thought process or motivate me to change my opinion more than a hard to forget quote.

Not only are they fairly easy to remember and somewhat sexy to interject into everyday conversation, but in a small number of incidents, they can act as kindling to light a fire under someone as motivation to make a change in their life.

Granted, you have to be something of a philosophizer and have an open mind, but it is the mark of an educated mind to be able to entertain a thought without accepting it.

Douglas R. Andrew from Missed Fortune

There are three kinds of people in the world: those who pay interest, those who earn interest, and those who pay interest in order to earn greater interest.

Which one of the three might you you be? Perhaps a better question to ask is: which one would you rather be?

Scott Langmack at PeerLendingWealth.com

Friends don’t let friends leave their money in the banks with 2% CD.

Said in reference to the disintermediation business model that Peer to Peer Lending/Investing is having on traditional bank financing. No longer do everyday citizens have to earn 1% to 3% on bank owned CDs and savings accounts while banks lend out out money earning 5% on mortgages and up to 30% on credit card interest payments.

Henry David Thoreau

The price of anything is the amount of life you exchange for it.

As you can see with this very simple graphic, the stuff you own really does own you!

Zeng Han Jun

He who feels pain when paying off debts is not fit to leverage on debts as an investment strategy.

If you can’t stand the heat, stay out of the kitchen.

Yiddish Proverb

Interest on debts grow without rain.

If you’re interested in learning by example, why not learn a few money management tips from the United States’ wealthiest religion.

Anonymous Banker

Interest is the phenomenon that allows me to create money out of thin air, or foreclose on your assets.

I do not recall the names of the bankers who mentioned this quote on financial television, but if you hold a 30 year mortgage and pay the minimum payment each month, you have more than doubled the bankers investment over the lifetime of the loan (the amortization equation is the lender’s friend, not yours). Otherwise, if you can’t pay your mortgage, he/she acquires your real estate investment via the foreclosure process.

Christian Bible, Proverbs 22:7

The rich rule over the poor, and the borrower is servant to the lender.

Sage words that apply to everyone. If you disagree, I suggest you call your lender and ask what happens if you stop payment.

G. D. Prentice

Some people use one half their ingenuity to get into debt, and the other half to avoid paying it.

If only some people could use all of their ingenuity to not get into debt in the first place, we’d never have a problem. But that’s far too optimistic considering the lure of consumerism and saturation of advertising in western culture.

Earl Wilson

Today, there are three kinds of people:  the have’s, the have-not’s, and the have-not-paid-for-what-they-have’s.

As with the first quote, you have an option of which one you choose to be.

Jon Stewart from The Daily Show

The bank changes your bill due date [on a credit card] without warning you, which they can do so you’ll incur late fees and a penalty rate hike up to 30% interest, or maybe, they just give you a rate hike up to 30% for no reason at all. Why? F**k you! That’s why!

As always, the debtor is subject to the terms of their master lender.

Got a favorite debt, credit, or interest payment related quote? Please add it to the list in the comments section.

This was an original post from Steadfast Finances. For more, follow me on Twitter.

Thought Provoking Quotes about Debt and Paying Interest

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As if you needed more ammo in the “education matters” debate, take a look at your chances of becoming a disposable worker (a less than flattering way of saying unemployed) if you only have a high school diploma or you’re a high school dropout.

Graphic via Chart of the Day.

Granted, a 5% unemployment rate for college graduates isn’t ideal (especially when you have tens of thousands in student loan debt), but I’ll take those odds any day when compared to a 10% unemployment rate for those only holding a high school degree.

I don’t have any data to support my theory, but I’m thinking the unemployment rate for graduate degree (MS, MBA, PhD) and professional degree (MD, DO, DDS, JD) as a whole is lower than 5%. Although, MBAs and JDs might be lagging professions in this theory because I knew several MBAs (finance guys) who are out of work, and one JD that’s having difficulty landing a job in her last year of law school.

This was an original post from Steadfast Finances. For more, follow me on Twitter.

Education versus Unemployment Rate

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For some time now, I’ve been considering becoming a real estate investor (>1 property) once again. Even though real estate prices haven’t found their absolute bottom yet (my non-professional opinion only), I’m thinking that 2010 might be a decent time to test the waters, do some bottom fishing, and see what sort of deals are out there by digging a little deeper than surfing Realtor.com can provide.

For the most part, I’ve been focusing on geographic areas that were overbuilt with “cookie cutter” homes that flooded the local market with new construction, pushing the demand for housing so low that prices won’t appreciate anytime in the near future. Therefore, I’m not concerned with my investment(s) significantly appreciating in value, but I’m entirely focused on cash flow generating potential. If I can return an annual cash flow profit of 10% or more after operating expenses, I’ll consider it a success.

However, as I was screening what seemed like hundreds of beachfront condos today, I found myself shying away from condos that weren’t turnkey ready. Meaning, that if I had to put in more than a weekend’s worth of manual labor, I wasn’t interested.

Is it Worth Paying Extra for a Turnkey Investment?

When I noticed that I wasn’t acting like the normal bargain hunter, DIY, save yourself a few bucks cheapskate that I am, I got a little curious as to why I might be thinking this way.

Pros of a Turnkey Investment

1. I get to be lazy. Hey, I’m a mid 30s guy and even though I can still benchpress my weight plus 20% on a good day, it doesn’t mean I want to be busting my hump for two weeks with my limited Home Depot weekend warrior skills. Watching the guy from Holmes on Homes while chilling on my Lazy Boy is a lot easier than actually doing the work.
2. The higher costs are rolled into the mortgage. Even if I pay extra for a turnkey project, the extra five to ten thousand dollars will, by in large, be included into the mortgage. Since the tenants are going to pay the mortgage for me, perhaps it’s in my best interests to pay just pay extra up front, and not go through the frustration of breaking out my tool belt.
3. It can be rented immediately after closing. If I invest in something that’s been remodeled or well maintained, then I get put a tenant into the unit right away.
4. Peace of mind. This hurts a little to admit, but I’m not the world’s best handyman. So if I can find something that’s been lightly used or maybe looks brand new, then maybe that’s worth the extra money versus turning me loose with a wet saw and a few hundred bucks worth of tile.

Cons of a Turnkey Investment

1. Not getting the best bang for the buck. Obviously, I like to get the best price possible, so if I overpay by 5% to 10% on a turnkey condo versus a fixer upper, my buyer’s remorse will likely bug me for years.
2. Bigger mortgage equals more interest paid. I know all too well how the amortization equation works, so not getting the lowest price possible will result in more of my money going to mortgage lender profits. That might not bother most people, but to a numbers and spreadsheet savvy guy, the idea of paying more interest than I absolutely have to is vaguely similar Edgar Allen Poe’s Tell-Tale Heart, where my guilt might cause me to hear imaginary cries of pain from my checkbook.
3. I’m stuck with the design/decor. I’m not a fan of cookie cutter homes, so if I buy a fixer upper, I get an opportunity to make the condo’s interior stand out from my competition. If I do an above average job and use some modern appliances, I’ll have the ability to attract higher paying renters.

So what do you think? Is paying extra worth the time and sweat equity saved?

I honestly don’t have the answer, so I wanted to open up the discussion to the group.

Photo by rioncm

This was an original post from Steadfast Finances. For more, follow me on Twitter.

Pay Extra for Turnkey Real Estate or Save with Fixer Upper?

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I ran across an interesting bit of research today suggesting that one of the leading ways investors get suckered into investment bubbles, and subsequently decimate our annual performance, is that we are far too concerned with being left out of the money making process, rather than losing our original investment.

As one trading coach summed it up:

The prospect of regret [from not making money] is actually shown to be more motivating than the prospect of making money. So how that plays itself out is: well, my neighbor is in Google. I’m not making the money. I got to jump into Google now!

That’s the fear you’ve got to be on the biggest lookout for because that’s the one that will get you into bubbles at the worst possible moment.

- Denise Shull, CEO, The Rethink Group & Trader Psyches

[Fast forward to 2:20 minute mark]

This adds more fuel to the belief that there is still a largely unrecognized Behavior Gap among many investors in what we believe in our self deluded, confirmation bias clouded minds versus the actual rate of return we see on our quarterly balance sheets.

But what I find so intriguing is that this also lends more proof to the theory that our brains are programmed to follow the herd, and the real money makers are the iconoclastic personalities that can ignore the peer pressure, and/or make the investments that no one wants to make (e.g. take the path less traveled).

The Regret & Fear of Being Left Out

As Shull points out, it’s the regret of not making money that influences many of our poor investment decisions. But it’s also extremely difficult to ignore the desire to compete, or to make investing into some sort of competition — whether real in the case of professional money managers or a childish competition between neighbors — that may push you into bad investments that you might otherwise avoid.

For example, if the belief that your neighbor who already owns Google, might socially embarrass you by stating that he made a killing in Google while you’re the investing equivalent of Driving Miss Daisy, is so powerful that it would override your common sense not to buy, then you’re caving to the regret or fear of missing out.

In essence, the shortsighted belief that you may not be able to participate in the fun or celebration (e.g. making money) outweighs the fact that you may get punished later (e.g. losing money).

Sounds rather like high school… doesn’t it?

Like the time you knew it was a bad idea to ditch school, like all of your other friends, but you did it anyway because of peer pressure? Worse yet, to get the attention of a certain someone? Sounded good at the time, right? But man, did you regret it later.

That’s precisely what I find so astounding about the herding mentality and the efficacy of social leverage! You already know the herd is behaving irrationally. Yet, you’re willing to succumb to peer pressure, follow along with the herd to relieve that peer pressure, and accept that if you get hurt, at least everyone else will suffer the same fate as you.

Conquering the Fear of Missing Out

Maybe I’ve just seen too many investment bubbles in my 15 years of investing, or maybe I’m too antisocial to care about being part of the cool crowd, but nothing turns me off more about an investment (or anything else for that matter) is to find out that everyone else wants it or already owns it.

So from my point of view, the best ways to shield yourself from this “fear of being left out” phenomenon are:

1. Stick to index funds. Many investment advisers, psychiatrists, and even a few neuroeconomists, will only invest in broadly diversified index funds because they don’t trust higher priced money managers to ignore their emotions and irrational feelings in order to outperform their benchmark index on a multi-year time line. In other words, they would rather pay low management fees to equal the market’s performance, rather than pay 5x to 10x to a professional money manager who may, but probably won’t, outperform the S&P 500.
2. Ignore the noise. If you’re easily influenced by others, shut out as much of the white noise as possible. For example, don’t discuss your investments with others or avoid watching the daily business news. In no way am I suggesting you pull an ostrich and ignore the world around you, but if you’re susceptible to social leverage or peer pressure, learn how to tune it out when making financial decisions.
3. Investing isn’t gambling. If the number one screening metric for your stock research requires looking for stock charts that go from the bottom left to the upper right, you’re basically gambling with a 50/50 chance of making money or losing money. True, you’re buying into a popular stock that everyone likes, but you’re also entering a crowded trade with lots of sharks who will sell at the drop of a hat to protect their profits. That means, you better be quicker on the sell trigger than they are!
4. Pull the long term price chart. If XYZ investment has a stable rate of appreciation for many years, and suddenly triples in value in less than one year, chances are good you’re entering bubble territory. If you own already own XYZ asset, then look to cash in on your good fortune by capitalizing on this rare opportunity. Conversely, if you’re just catching wind of this investment idea after everyone and their brother has taken advantage of it before you, then it’s probably better to exercise patience, and remain on the sidelines. Knowing when not to buy is just as important as knowing when to buy in a bubble driven economy.
5. Wait for the noise to die down. If “buy low and sell high” is an investment meme you follow, then why would you buy high and pray you can sell higher, rather than wait for XYZ to return to levels you feel more comfortable with. So perhaps, one of the best ways to avoid the “buy high and sell lower” phenomenon is to exercise some patience, pick your spots and use trending information, like Google’s Insights for Search, to make value driven investments when the buzz is low and only a small number of investors are buying.

In the end, I don’t think it’s feasible to suggest that one person, unless you’re some kind emotionless robot, can ignore their emotions every hour of every day. Perhaps the best thing to do is to realize that you’re human, acknowledge that you’re going to make the occasional mistake, but simultaneously do all that you can to minimize outside influences when it comes to your money management decisions.

This was an original post from Steadfast Finances. For more, follow me on Twitter.

Investor Psychology: Missing Out on Profits is More Frightening than Losing Money

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Being a student of social anthropology, I always find generational studies particularly interesting because they ask wide array of behavioral, economic, and big picture questions that have a fairly good chance of impacting the future path of a country.

This demographic profile, from the Pew Center on the American Millennial generation (aka Gen Y), is one of the most eye opening that I’ve seen in a while.

[RSS and email readers may need to click to site for video]

Highlights:

• Millennials are the most diverse demographic in U.S. history.
• More than 4 out of 5 sleep with their mobile phone nearby.
• Gen Y is the most liberal generation in U.S. history.
• Believes “big government” is a positive thing.
• On track to be the most educated generation in U.S. history

Of course, if you’re a Gen Y member or you interact with them on a regular basis, none of this is really news to you. But from a business or political standpoint, much of this data will be highly influential in the way marketers attempt to sell you their products/services or the way political candidates try to persuade you for your vote come election day.

To dig a little deeper, I would have been curious to know what percentage of Millennials earn their income from a single source, or had multiple income streams. From the interactions that I’ve had with my < 30 aged friends, it seems that a minimum of 1 in 4 has a blog, has a second job, or doing something outside of their normal 9 to 5 job as a side income hustle.

If anything pops out about the study that you find interesting, be sure to leave a comment below.

Best Reads of the Week

Articles from the last week that stimulated more than two neurons…

Fiscal Fizzle - There’s No Such Thing as Passive Income.

Interesting article that generated lots of discussion, but I’m not so sure that I agree with the conclusions. I’m of the philosophy that no income source is 100% passive, but just because a business idea or investment isn’t a “fire and forget” missile, doesn’t mean you should ignore the income generating potential.

Minneapolis Star Tribune - Real frugality means carefully using your limited resources.

Excellent example of the “new frugality”…

Being frugal doesn’t mean being stingy, miserly or downright cheap. The true spirit of frugality is to be mindful of how you use your limited resources. To be prudent with your money. To buy the best of what you need but no more. To avoid waste.

Slate - A parable about how one nation came to financial ruin.

If you’re a Berkshire Hathaway shareholder, and you aren’t familiar with the name Charles Munger yet, you might want to give this a read and gain a few insights into how your Executive VP’s mind works when it comes to investing. Basically, he’s just like Buffett with a more outspoken tone and without the witty sound bites.

Marketplace Public Radio – Banks: Like fragile little girls.

Leave it to Bill Maher to come up with the most humorous way to say what we’re all angry about.

LifeHacker – The Best Times to Buy Anything, All Year Round

If you’re a bargain hunter, you’ll love this detailed chart of the best time to buy those higher end items you’re always trying to say money on.

Carnivals

I participated in a few carnivals over the last two weeks:

Money Hackers Carnival at Live Real Now.

Carnival of Personal Finance at Budgets Are Sexy.

Carnival of Debt Reduction at Ask Mr. Credit Card.

This was an original post from Steadfast Finances. For more, follow me on Twitter.

Best Reads of the Week: The Demographic Profile of Millennials Edition

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Around this time every year, I’m usually suffering from sporting event purgatory. Meaning, I’ve got a nasty case of football withdrawal and with March Madness still several weeks away, I’m looking for something to fill the hours.

So now that my normal repertoire of buffalo wings and homemade chicken fingers isn’t needed until summertime, I decided to revert back to a few my personal favorites that are a bit more upscale. Meaning, these dishes can be a bit pricey at a restaurant, but also because they’re a bit more complicated and time consuming to make.

But don’t names like Eggs Benedict, the amount of time they take to make, or even the half page of ingredients they call for, intimidate you. Most of these really aren’t that complicated, and since you’ve got them on video, you can rewind them as many times as you need.

So if you’re the family type, make this a weekend thing where everyone pitches in and gets their hands dirty. If you’re single, and you want to do something more intimate than the standard dinner and a movie, ask your date to show up at your place at 6pm sharp, pour him/her a glass of vino and let them watch as you show off your (wannabe) chef skills.

It may sound old fashioned, but cooking for your date earns major brownie points. Although, I would recommend that you practice whatever dish on yourself and another friend at least once before making it for your special someone. Don’t want to build up the anticipation of a home cooked meal… only to call for takeout at 9pm!

Easy Eggs Benedict

Eggs Benedict is one of my all time favorite brunch dishes. However, I can probably count the number of times I’ve made it for myself on both hands because it’s tedious to make and very unhealthy by my standards. Then again, everyone deserves to spoil themselves with two sticks of butter, half a dozen egg yolks, and a few slices of pork a few times a year!

Around half of the Eggs Benedict recipes I’ve eaten have included ham, and since I’m in the southern U.S. that usually means a salt cured ham. So even if you can’t get peameal or Canadian bacon, it’s still a worthwhile dish to spoil yourself with some extra fatty decadence.

Cedar Plank Grilled Salmon

In my opinion, there isn’t a better way to eat salmon than on a cedar plank and thrown on the grill. It’s super simple, but for some reason, I don’t make it nearly enough considering it’s so rich in Omega-3 fatty acids.

Around two years ago, I purchased some cedar planks from a higher end grocery store and they’re still going strong. If you feel they’re losing their taste, I suppose you could rough them up with a piece of sandpaper, but I haven’t had to do this yet.

My only tweak on this recipe would be to place the salmon fillets/steaks on top of cedar planks overnight so that “cedar taste” is a bit stronger.

Duck Confit

Duck is one of those special dishes that I reserve for special occasions because it’s rather fatty, which doesn’t make a heck of a lot sense considering my favorite way to eat it is with skin on (the only way in my opinion) and letting it marinate in it’s own rendered fat.

Restaurant quality duck confit takes hours, around 18 to 24 hours according to this recipe, so be prepared to do some low and slow cooking, followed up by some additional work prior to dinner time.

Certainly not a difficult dish to make, but one that takes above average patience and planning if you’re not accustomed to working in the kitchen.

Hat tip to Chef John at the Foodwishes.com blog.

Jamaican Jerk Chicken

If you haven’t tried Jamaican Jerk Chicken, you’re doing yourself a monumental disservice. While it might not meet your classic idea of an upscale dinner, it’s definitely one of eclectic dishes you should know how to make for yourself unless you live down the street from a restaurant that knows how to get it right.

Like any cultural dish, you’re going to have variations on the types and quantities of spices used, but I think this video recipe does a fairly good job at getting the flavor profile correct.

However, I will admit, I skipped the ketchup (few things are “authentic” if they call for ketchup) and substituted it with a dark Puerto Rican rum when the blender needed some assistance chopping up all the onions.

You also get an excellent tutorial on how to butcher a whole chicken, which I always prefer to buy over chicken breasts, because a 5lb whole chicken might cost me $4.00 where a 6 pack of chicken breasts might cost twice that. Just make sure to rub the jerk marinade under the skin, and I let mine marinate for at least 18 hours prior to cooking.

Gourmet Hamburger?

You’re probably thinking… where is the upscale in a bleepin’ burger?

Trust me, these aren’t you’re standard 3am, just coming down off a beer buzz, smothered in ketchup and mayo type of burgers.

In fact, this video is an excellent tutorial of how you can slice and dice your own hamburger meat out of an inexpensive piece of fatty beef without using a grinder, as well as learning how to add lots of unusual flavors like blue cheese stuffing, grilled pineapple, or caramelized onions.

By the way, I would highly suggest you try Gorgonzola stuffed burgers with a healthy dose of cayenne pepper and cumin. Definitely one of my new favorite flavor combos!

This was an original post from Steadfast Finances. For more, follow me on Twitter.

Upscale Dishes You Can Make at Home for Half Price

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If you’re a believer in The Stuff You Own Ends Up Owning You philosophy, it’s only natural that you should spend a few minutes of every month actually calculating how much, if any, that you’re leveraged and how much of income goes solely to repay your debts.

Yes, I know that for many, topics like these can be depressing, but even if you find that you’re leveraged to the hilt and in debt up to your eyeballs, it doesn’t mean your leverage ratio and debt to income ratio aren’t worthwhile personal finance metrics to track.

So aside from being excellent anti-stuff metrics to track, they’re also fairly good predictors of your financial stability, your creditworthiness when applying for additional credit/loans, and if you’re something of a take-charge personality, they might serve as a source of motivation to put yourself on track for a debt free lifestyle.

The Leverage Ratio

The leverage ratio is quaint mathematical way of quantifying how much you owe versus your annual income.

Where…

Total Debts and Liabilities = mortgage payment, student loan debt, automobile debt, credit card debt, personal loan debt, child support, litigation related debt, etc.

Total Income = Primary job income, second job income, passive income, stock/bond dividends, child support, etc.

Obviously, the lower your leverage ratio, the more solid your finances will be.

Using the Leverage Ratio

If you’re a relatively young person (< 40 years of age) and you have a mortgage, a car, a family, or basically anything that resembles a contemporary lifestyle, the sum of your debts and liabilities likely be larger than your annual income. So don’t be shocked if your leverage ratio is somewhere in the 2.0 to 3.0 range.

For example, let’s say you’re a young professional making an annual salary of $65,000. However, you also have $180,000 left on your mortgage, $10,000 remaining in student loan debt, and you’ve got got $20,000 in auto loan debt.

Your Leverage Ratio would be:

Leverage Ratio = ($180,000 + $10,000 + $20,000) / $65,000

Leverage Ratio = 3.23 or 323%

Thus, even though you’re making an above average salary, you’re still fairly highly leveraged considering your debts total 3.2 times your annual salary.

However, just because you’re highly leveraged, doesn’t mean you’re making a mistake. In fact, the leverage ratio can be somewhat deceiving because as long as you can make your minimum monthly debt repayments, you’re building equity in an asset that you may own free and clear someday (house, car, etc.) or have received/are receiving a valuable service/skill (college education vs. student loan debt) that will continue to pay dividends well into the future.

The problem lies when you have acquired a substantial portion of so called “bad debt” (although one can argue there is no “good debt”) acquired by poor financial judgment, negative social behaviors, or acquiring more consumer related debt than your income allows that doesn’t positively affect your future earnings power or net worth.

The Debt to Income Ratio

Essentially, the DTI ratio calculates how much of your monthly paycheck doesn’t belong to you, but belongs to your creditors until your debts until your debts are fully repaid plus amortized interest (bank profits).

So if you’ve ever applied for a mortgage, or any other type of loan for that matter, you’ve probably your debt to income ratio calculated right and didn’t even know it.

Where…

Total Debts and Liabilities = mortgage payment, student loan payment, car payment, credit card minimum payments, child support, etc.

Total Income = Primary job paycheck, second job paycheck, passive income paycheck, stock/bond income, child support, etc.

Obviously, the lower the ratio the better.

Using the Debt to Income Ratio

Just like the leverage ratio, the debt to income ratio is very simple to calculate. All you need to know is the sum of your monthly debts divided by your gross (pre-tax) monthly income.

Using the example above of the young professional making $65,000 per year (or $5416.66 per month), let’s assume his monthly debts are:

DTI Ratio = (Mortgage Payment + Student Loan Payment + Car Payment) / Gross Monthly Income

DTI Ratio = ($1250.00 + $100.00 + $450.00) / $5416.66

DTI Ratio = 0.33 or 33%

While 33% is an excellent number considering this example has the mortgage already factored in, it is somewhat deceiving in that this liberal version of the DTI doesn’t include many real world expenses, such as: purposely excluding the full costs of home ownership (utilities, HOA fees, etc.), using pre-tax income instead of post-tax income because borrowers can qualify for a larger home.

So why use this liberal method of calculating DTI? Because that’s what a mortgage lender would do if you were applying for a home loan (the so called 28/36 rule).

Therefore, the resulting DTI ratio isn’t nearly as conservative as it probably should be considering that you don’t have the luxury of liberal accounting when you’re paying your bills every month.

If you want to make this ratio more conservative using more realistic numbers, you should consider using real world expenses just as you would when calculating you monthly cash flow. I say this because  where you are using the sum of all real world expenses, your total bring home income (after taxes, 401k contributions, etc), and other debatable monthly “debts” like your car insurance and home owner association fees, the real debt to income ratio will be much higher.

This was an original post from Steadfast Finances. For more, follow me on Twitter.

Personal Finance Equations You Should Know: the Leverage Ratios

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If you’re curious why I take most investment advice and the majority of news/analysis from mainstream financial media with a grain of salt, this chart might answer your doubts.

(Note: Y axis is percent increase or decrease.)

At their peak, the mania driven belief in the bubble that these investments were ironclad, bulletproof, and would never depreciate in value was so ingrained into our brains that to say anything contradictory to those beliefs would have gotten you blacklisted from most major financial circles or never invited on financial TV to speak again. In essence, you would have been labeled as a naysayer, an idiot, or a bozo who just can’t accept the new paradigm of investing in the 21st century.

Of course, after these investment bubbles popped, and you were one of few outspoken individuals brave enough to criticize them, avoid them altogether, or be so bold as to short them, mainstream media quickly flipped their position and labeled you a genius and shower you with praise (e.g. Peter Schiff on The Daily Show).

Funny, how fickle the mob really is. (Yes, I swiped this line from Gladiator!)

Unfortunately, for the retail investors like you and I, many of us aren’t sharp enough to spot the warning signs of a bubble, and fail to realize the very simple fact that when XYZ investment appreciates several fold in just 1 or 2 years, that what they’re buying isn’t an investment… it’s a trade!

As I always say, sometimes the smartest move is to make no move at all, conserve your resources, and watch how the game plays out. Then, if the opportunity presents itself, the smartest and the most savvy of investors swoop in and buy all they want when no one else wants it or they’re getting it at a discounted price once the herd has moved on to the next big thing.

This was an original post from Steadfast Finances. For more, follow me on Twitter.

Knowing When ‘Not to Buy’ is Just as Imporant as Knowing When to Buy

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