Here is a nice tidbit for you. According to research from the University of California, rich people are more impolite than poor people. Regardless of whether or not you agree with their conclusions, its certainly a bit of interesting and novel research.
From livescience.com:
A flashy handbag or Armani suit can signal a person’s wealth, but so can their body language, according to a new study. People of higher socioeconomic status are more rude when conversing with others.
Psychologists Michael Kraus and Dacher Keltner of the University of California, Berkeley, videotaped pairs of undergraduate students who were strangers to one another, during one-on-one interviews. In total, 100 undergraduate students participated.
The researchers then looked for certain gestures that indicate level of interest in the other person during one-minute slices of each conversation.
They found that students whose parents were from higher socioeconomic status (SES) backgrounds engaged in more of what he called “impolite” behaviors, such as grooming, doodling and fidgeting. Lower SES students showed more “I’m interested” gestures, including laughter and raising of the eyebrows.
A little while back I traveled to Michigan to visit a friend of mine who’s at the University of Michigan getting his PhD. Since we’re both hockey fans, we planned the trip for the weekend that the Washington Capitals were going to be in Detroit playing the Red Wings. We’ve all heard about the struggles that Detroit has been facing recently, and with the decline of the American automotive industry we’re basically seeing what happened to Flint, Michigan in 1980s all over again, just on a larger scale. Just look at some of the problems facing the city:
* The unemployment rate recently hit a record 28.9%. It’s unbelievable to think that a major American city has nearly 1/3 of its population unemployed.
* It’s estimated that nearly 1,000 people are leaving per month, reducing population levels to between 750,000 and 1 million residents. Detroit used to be the U.S.’s fourth largest city.
* A murder rate that was at 14% last year and was lauded as a good thing, prompting mayoral candidate Stanley Christmas to say: “I don’t mean to be sarcastic, but there just isn’t anyone left to kill.” There are more people murdered in Detroit than in New York City, despite the fact that New York City has nearly 10 times the population.
* A public education system so broken that it has been put in a state of emergency and has been taken over the state government. A study conducted in 2008 by researchers from Michigan State found Detroit’s public High School graduation rate to be just under 32%.
* The median home price in Detroit in July was around $7,000. That’s about 4 months worth of rent at what I’m currently paying. I was so blown away by this I spent 15 minutes on Google, verifying and re-verifying that this was true.
I could go on, but you get the idea. Detroit has some serious systemic problems, and despite encouraging words from state and local politicians (what else are they going to say?) there doesn’t appear to be a way back. Like so much of Michigan, Detroit was built by the automotive industry, and its rise and falls has directly correlated with the rise and fall of the auto industry.
The thing that struck me the most about Detroit when I was there, traveling downtown to go to the rink, were the abandoned buildings. Abandoned industrial complexes aren’t something completely new to me; the south side of Indianapolis has its share of warehouses and manufacturing plants that were forced to close and exist without a tenant, and same can be said for other major U.S. cities. The Federal Hill neighborhood in Baltimore (and Baltimore in general I suppose) had many of the same problems until the last 10 years, when gentrification revitalized the neighborhood and surrounding areas. But the number of buildings in Detroit and their current state of disrepair right in the heart of the city was overwhelming. The buildings in Detroit had everything from broken windows and cracked facades grass and other plants overtaking their grounds. Whole buildings were burnt out, or even partially demolished.
Detroit is a sad case study in poor city management. Their entire economy relied on the automotive industry, and the general consensus was that it would never go away. When it did, Detroit had nothing – analogous to investing all of your money in one security. One political party more or less dominated local politics for 30 years, a stretch of time marked by ineffectiveness, wasteful spending and corruption – former mayor Kwame Kilpatrick was recently released from prison after serving a four-month term after being convicted of obstruction of justice stemming from an extra-marital affair.
The road back to financial viability will be difficult for Detroit, especially considering the current state of the economy across the U.S. The weather in Michigan is brutal – discouraging many young people from moving there – and there hasn’t exactly been a massive influx of new businesses to Detroit. But its new mayor, Dave Bing, is an intelligent and hard working man. With time, they may have a chance, but it seems like it will be a tough road back. Which is very sad for what used to be one of America’s premier cities.
According to research by Moshe Levy published in 2002 in the Journal of Economic Theory:
We formulate a general stochastic process of wealth accumulation by capital investment and analyze the conditions required to ensure convergence to the empirically observed Pareto wealth distribution. While homogeneous investment talent leads to the Pareto distribution under very general conditions, even a mild degree of differential investment talent results in a non-Pareto wealth distribution. This finding suggests that chance, rather than differential investment talent, is the dominant factor in the process of wealth accumulation by financial investment. Our findings conform with market efficiency and may have implications regarding the origins, the economic significance, and the social desirability of wealth inequality at the high-wealth range.
In plain English, rich people are rich because of dumb luck, not because of investing smarts – at least as it pertains to stocks.
Purchasing a share of stock doesn’t have to be a simple transaction. Investors are often presented with a variety of different mechanisms by which they can execute a trade. Scottrade, for example, offers me five: Market, Limit, Stop, Stop Limit and Trailing Stop.
* Market: Market Orders are the most simple, most straightforward means of purchasing a security. Executing a market order just means purchasing shares of a stock at whatever rate the stock is currently trading at. Since market orders are executed at the best available price at the time of execution, inherent market volatility will likely mean you will pay a price that is close to, but not exactly the same as, the price you saw when you initiated the purchase.
* Limit: Limit Orders give the investor a little bit more control over the price that they pay for their shares. With a limit, you specify the highest price that you are willing to pay per share. Obviously, there is risk that the order never gets filled, if the share price does not breach the specified limit.
* Stop: A Stop Order (also known as a Stop Loss Order) is similar to a limit order. A stop order tells your broker to execute a buy market order whenever a stock’s price rises above a certain threshold.
* Stop Limit: A Stop Limit is basically a combination of a stop order and a limit order. When the stop price is reached, a limit order is then executed, meaning once the stop price is triggered, shares are purchased at a rate no more than another specified limit price.
* Trailing Stop: A Trailing Stop does exactly what the name implies. This is most easily illustrated through use of a sell example, as opposed to a buy, which is how we’ve viewed the previous examples. When initializing a trailing stop order on a sell, you specify either percentage drop or a hard drop amount that will be your stopping price. For example, that value can be something like a decline in share price of 10%, or a $2 drop in share price. So if you buy a share at $20 and set a trailing stop of 10%, your broker will enter a market order to sell if the stock price decreases to $18. However, if the stock goes up, the stop price moves with it. For example, if the stock then shoots up to $30 a share, the stop price now become 10% * 30 = $27. In this instance, losses are managed when the share price falls and maximized when the share price increases.
These categories also apply to selling stocks. There exists many more combinations and exotic rules than the five I’ve described above. Learning the different mechanisms by which someone can execute trades can save you some money and make your investing process more efficient – especially if you are moving larger blocks of shares.
Also its nice to be a bit of technical geek when you are talking with other stock traders. People who are really into stocks sometimes have a specialized vocabulary, so its good to be able to speak the lingo.
Budgeting can be a fine art. If you’re like 99% of the rest of the human race, you may be experiencing occasional issues sticking to a budget. If so, here are some tips you might consider for staying on track.
1) Write it down. When you write something down, it tends to make it more concrete in your mind. Writing it down is about clearing your head, identifying what you want, and setting your intent. There isn’t any right way to do this, just do it.
2) Try the envelope system. Its a little old fashioned, but here is how it works. Take some envelopes, write the budget categories on the envelopes, then put the amount of cash you’ve got budgeted for each category in the envelope. Then once the money in the envelope is gone, don’t buy anything else in that budget category. Its that easy.
3) Decompose the problem. One way that people can sabotage themselves is by focusing on the negative. So, one way to stay motivated is to break your budget down into smaller problems. Say, for example if you are constantly over running your entertainment and your clothes budget, you might consider setting a goal to meet your targets for your entertainment budget only. Sometimes dividing a problem up is easier than addressing it all at once.
4) Stay away from situations that tempt you to spend. Some people’s daily routines brings them into situations or into contact with persons that temp them to spend. For example if you enjoy picking up a cup of coffee on the way home from work, consider taking a different route home to avoid the temptation. Also, if you have friends who are big spenders, it might make sense to plan activities that are low cost, such as going for a walk or seeing a movie, rather than a pricier event like a sit down restaurant dinner.
Hopefully some of this helps. If you have other ideas for sticking to a budget, feel free to let us know!
For those of us who are prudent, its enough to see solid, modest returns on our investments. We spend a great deal of time playing with stocks screeners and researching investing techniques advocated by sensible gurus like Peter Lynch. However, instead of putting in the homework to come up with a profitable investing strategy, some people don’t want to exert the effort. They want the fast easy money right away.
Therein lies the appeal of penny stocks. For those who are unfamiliar, a penny stock is a security with a price per share of less than $5 that is not traded on one of the major stock exchanges. Penny stocks are appealing due to their extremely low price (allowing an investor to scoop up a large number of shares) and a perceived high growth potential. Often, penny stock traders aren’t investing for the long term, instead, they will buy a large number of shares in a security, wait for some upward movement, and then sell. A movement of a few cents can yield a tidy profit if you own enough shares.
Although that may appear appealing, there are two problems associated with trading penny stocks: susceptibility to fraud/scams and unavailability of good financial information.
First, penny stocks scams are common in equity markets. We’re all aware of various stock frauds, and it seems like every couple of months we hear about more corporate fraud cases. They’re common enough with regular stocks, but even more prevalent in the penny stock system.
A good book on this subject is Jordan Belfort’s The Wolf of Wall Street, detailing his rise and fall as a stock manipulator. If you read his book – or have seen the movie Boiler Room, they deal with the same issue – then you’re probably familiar with the popular “pump and dump” scheme, where a stock manipulator will buy a large number of shares in a company, then through a variety of means such as cold calls to potential investors, paying off supposedly independent stock evaluators in the media, etc… will “pump” up the value of the stock. Shortly thereafter, the manipulator will sell of their shares in the security, and with the sudden lack of momentum the stock value will fall and all the new investors will lose their money.
Penny stocks are an ideal mechanism for performing this type of manipulation due to their inherent volatility, lack of media attention and their inherent attractiveness to unwitting investors looking to make a lot of money quickly. By the way, that is just one example of potential fraud when dealing with penny stocks!
Second, in addition to their susceptibility to manipulation, penny stocks are difficult to invest in because there isn’t a lot of information about them. On the other hand with a larger company like Google or McDonald’s there is a lot of financial data for you to analyze. Since penny stocks aren’t listed on a major stock exchange they aren’t subject to the same financial disclosure obligations other securities are.
Personally, I’ve had a variety of people try to talk me into dabbling in penny stocks, but you’ll never convince me. If I’m going to gamble then I’ll find a sportsbook or a poker game. There’s no way to effectively evaluate a penny stock, and there’s so much fraud and manipulation out there you can’t ever be 100% sure that what you’re participating in is legit.
Readers, any of you have experience with penny stocks?
A couple of years ago I found myself at Safeway late in the evening picking up a snack. Unfortunately, it was semi-busy and they only had one cashier working. While we waited, the gentleman in front of me struck up a conversation, eventually asking what I did for the living. I told him that I was a software engineer and he seemed genuinely interested. He mentioned that he worked in “e-commerce” and could use someone with my skills. I’ve been approached before to work on websites and such, so this wasn’t that strange.
We exchanged contact information and later that week he called him and said that he had a meeting at a local hotel with some of his fellow “small business owners” that he thought I should attend. That was an immediate red flag, but instinct didn’t kick in and so yours truly showed up anyway. When I got there, he explained in vague terms the arraignment and immediately that sinking feeling set it. This got worse as we were shuffled into a conference room, and once a the speaker began his pitch, I knew it was time to get out of there.
Here’s how the set up would have worked. We would buy in (literally; there were a ton of materials that had to be purchased, including “small business registration” fees) and would receive a catalog of common household goods – generic versions of the name brands. We would then sell those items – or buy them ourselves – and recruit other people to work under us doing the same thing. We would receive points for each revenue level we’d reach, based on our own sales and the sales of those working beneath us. Those points determined how much money we were paid from the parent company.
I felt terrible for being so stupid to fall for something like this. However, I may have been the only one in the room who felt that way. The speaker was great at getting everyone riled up. He talked about buying a dream car, or maybe, a dream car for every day of the week! (seriously) It was pathetic, but people were eating it up; this guy was certainly good at what he did. He paraded up the stage a bunch of people who talked about what a positive experience it was for them and how rich they were now. Not wanting to be rude I didn’t immediately walk out, but took the first opportunity to bolt out of there.
It wasn’t a complete loss though, and outside of wasting an evening, no money was lost. There were some interesting observations to be taken away.
* Freedom is the MLM buzzword of choice. A lot of people hate the grind of their daily jobs. The speaker harped on this “business model” giving you freedom, an idea that I think would be very attractive. The speaker obviously realized this and played on it heavily.
* Details are the enemy of MLM. I asked the guy who brought me at least three times what the initial costs were and he wouldn’t tell me. By this point, it was pretty clear what the deal was but I wanted to see how much information it was possible to extract from these guys. Answer: not much. The main speaker talked for at least an hour and he never gave any program details. I didn’t even know the name of the parent company.
* Cognitive Dissonance. The guy that brought me knew what was going on, that was pretty obvious, but he tried really hard to convince both himself and I that this was more legitimate than it was. Here was a textbook example of cognitive dissonance. Everyone knows that MLM benefits only those at the top, and yet people still sign up, banking on that glimmer of hope that somehow they’ll be able to make some money. It just doesn’t work that way.
For my part, I’m just glad I got out before I actually got involved financially.
Readers, do you have any experience with Multi-Level Marketing?
As a bit of a departure from our usual fare of nuts and bolts personal finance topics. For this posting we’re taking about the importance of the US dollar as it relates to other currencies.
Financial Samurai is a very good personal finance blog associated with this website. They recently posted an article on why a weak US dollar does not matter. We respectfully disagree and wanted to tell our readers why.
First, we’ll go over the reasons Financial Samurai gave for desirability of a weak dollar. These include:
1) Inflation fears are overblown 2) A weak dollar is good for exports 3) Weak dollars help to fund debt 4) Costs of weak dollars are felt only by travelers
We address each of these arguments in turn:
1) Inflation fears are overblown. Financial Samurai is basically saying that concerns about inflation are overblown. We think that FS’s conclusion is too optimistic. Why? Milton Friedman classically argued that inflation is always and everywhere a monetary phenomenon. This means that inflation is caused at least in part by a large supply of money and not enough economic activity to raise demand. Given the titanic amount of stimulus the Federal reserve has pumped into the economy, we feel there is a fair chance the US will experience some inflation once interest rates increase. There are simply too many dollars in circulation for this not to happen.
2) A weak dollar is good for exports.FS is right. However this is increasingly unimportant. Without a doubt, a weak dollar is good for exports. However, exports have been declining over the past 15 years. For example, since 1991 the US balance of payments – an indicator of payments for goods exported – has been negative and getting worse. So any benefits that come from a weaker dollar are mitigated by the fact that we aren’t selling as much as we used to. Don’t believe me, check out some data from the US census below:
3) The weak dollar helps to fund our debt. This is the worst part of the argument for a weak dollar. Instead of advocating for a policy which allows us to carry large of amounts of debt policymakers should consider ways to reduce expenditures and prevent further debt growth. Larger amounts of debt at the federal and state level puts pressure on government budgets. This can cause higher taxes. Thus, with all things being equal, more debt means Joe and Jane average have to pay more in taxes.
In addition, more debt can impact Americas global position. A major creditor to the US is China. With mounting federal debt levels, ask yourself what is likely: will China continue throwing money down a drain (i.e. buy our worthless debt) or will they adjust and start depending on their own consumers? We think their choice is obvious. Inflating our dollar to pay debt off cheaper ultimately will destroy our ability to sell debt to nations like China, and provides a motivation for government to increase taxation on average Americans.
4) Direct costs of weakened dollars are only felt by travelers. FS maintains that if you don’t have assets outside of the US dollar, weak greenbacks aren’t that big of a problem. However, Americans purchase a great deal of goods and services from places like China, Europe, and Japan. This is particularly important in the case of energy. Oil is primarily imported and when our dollars buy less oil, you get stuck with the bill at the pump. So, to say that US dollar is really only felt by travelers seems to come from the antiquated idea that the world is not a globalized place.
FS says…
“If you are an American who makes a US$ denominated salary, buys US$ denominated assets like property, consumes Levi’s jeans, and never plans to leave the country, what are you freaking out about? The US Dollar can depreciate by 90% against the Euro, and it still wouldn’t really matter“.
The problem is, the world is a globalized place. Gas comes from the middle east, cheap consumer stuff comes from China, electronics come from Japan and cars from Europe. Everyone gets stung by weak dollars, either directly or indirectly.
In short, the Financial Samurai team maintains a very good blog, but is unfortunately wrong about the dollar.
Okay, just saw this one the web. If you are buyer of silver coins or a numismatics collector, you’ll be interested to know there is a rumor flying around about fake coins being made in China and sold on ebay.
Since we love a nice juicy rumor, go ahead and click here for the story, otherwise check out the picture below. Its one of the machines used to produce the fake silver.
By far, the most expensive and significant purchase I’ve ever made was the engagement ring that I bought for my wife. I had known for a while that I wanted to marry my wife Stacy, but I wanted to wait until the timing was right. That time came in the fall of 2007, when, after stashing away money bit by bit for a while, I decided to visit a couple jewelry stores and buy that ring. I already had the situation planned out; I was going to surprise her with a trip to New York City to see The Lion King on Broadway (something she had said she always wanted to see) and afterwards I was going to propose. That was the easy part. Buying the ring, however, was a much more complicated and nerve-wracking process.
I was willing to bend a few of my own personal finance rules in order to make this happen. Most responsible people will tell you to pay cash for the ring, but I knew what I wanted to get her and subsequently, knew that it was more than I had saved up. But I was hoping to pay for as much as I could in cash up front, and then finance the rest at a 0% interest rate. As I write this, I can feel the cringes from you readers. But stay with me. From shopping around and examining rings, I got an idea of the price ranges I could expect.
First, I spoke with a company that I previous had a credit card with about a 0% interest for 12 months promotion they were currently having. So I visited a couple of places “just looking”, until I found a couple places that had what I was looking for. I ended up with two places in mind, and after work one day (after making a lame excuse to my soon-to-be fiancée about having to head up to school for a meeting with my professor) I went to the first place to sit down with a “consultant” to set about picking a ring.
The consultant was nice, even if she was pushing me to rings that were way out of my price range. She wasn’t the first salesperson I had come across so I just kind of smiled and went back to the rings that I wanted. We started talking about financing and she mentioned an interest free plan, so I had her run my credit to see if I qualified. Unfortunately, I did not (barely a year’s worth of credit history played a role in that). The saleslady said that wasn’t a problem (for her at least) and she offered one of the worst pieces of financial advise I’ve ever heard. She asked if I paid my credit card off every month, and when I indicated that I did, she said that was my problem. She suggested I carry a balance from month to month to entice creditors to extend me credit. I told her that I’d keep that in mind, but no, I wouldn’t be buying that ring.
The second place I visited was a smaller place but I liked their merchandise so I talked to the sales staff there. Right away I was told that they didn’t get paid on commission and the gentleman spent a decent amount of time with me picking out the ring. It was a better quality ring that I had seen at the first place, and the price was so much better. It was low enough that I could pay for most of it with cash, and I signed up for the offer with the credit card company for 0% interest for 12 months (the one I mentioned above) to take care of the rest. Four months later the ring was paid off, without me having to pay any interest and I was all set to propose. Buying from this company turned out to be a great decision, as we’ve had to go to them for service a couple of times (resizing of both the wedding band and the engagement rings, as well getting a tiny diamond that fell off the band fixed, all free of charge) and they’ve been great. I couldn’t be happier with how it all turned out.
Buying the engagement ring taught me some great lessons that have stuck with me:
* Planning is key. I knew I wanted to propose long before I did, but taking my time in doing so helped in a number of areas. In particular it afforded me time to save my money, and although I wasn’t able to pay for the whole thing in cash, I was able to pay for a significant portion of it.
* Know how to differentiate between good and bad advice. Not paying off my credit card in full every month was not going to be a good way to “entice” creditors to set my interest rate at 0%. I still can’t believe she suggested that to me.
* Not all risks pay off. Relying on an interest free credit card to hold the balance until I could pay it off was quite a risk. It worked out in this instance, but it was never guaranteed. If it hadn’t worked out I would have been hurting trying to pay off that debt. Although I know people who play the interest-free credit card game, it’s a risky one if it doesn’t work out.
* Shopping around always helps. The more places I looked, the better idea I had about what price ranges to expect. That certainly helped me make an informed decision.
* Buying a big ticket item isn’t always just about the item itself. By getting her ring at the second place, I not only got a great ring, but a relationship with the jewelers that has been great, and has come in handy when we needed them.
* Controlling emotions is important. It’s hard to not get wrapped up in the process when buying an engagement ring. But I didn’t want us to start out lives together in debt (a theme that would pop up again when we were planning our wedding). Controlling my emotions allowed helped me make a smart choice.
Overall it was a potentially stressful experience that turned into a real positive. I’ve tried to take what I learned during that experience and apply it to other situations. I certainly learned a lot!
