Financial Knowledge All Adults Should Know?

[BWV]

stocking up on goods as an inflation hedge is a bad idea

- there is no liquidity- you can't go back. If your A/C goes out, you can't return the pile of toilet paper and soda in your garage for cash to replace the unit

- inflation is an average price increase across what government economists decide is a representative basket of goods for the average consumer. Individual goods do not all inflate at the same rate (and some deflate).

- Interest earned on short term fixed income investments can help offset inflation while,preserving liquidity. 5 year TIPS, for example, currently yield about 0.6% which would remove any inflation risk (at least to the extent that CPI reflects the inflation rate on your individual purchases)

Also picking stocks and timing the market is a zero-sum game, so unless you have some advantage over everyone else playing the game, best stick to low cost index funds

 

[StoneTemplePython]

Right. This is important to understand because he is simultaneously telling you to lose money to inflation with his keep cash on hand idea.

It's here:

It's somewhat counter-intuitive, which has you twisted-around on it: Buying in bulk - even when waiting for sales to do it - *is* buying early because you have to maintain a stock of the thing you are buying (like toothpaste or soup) in order to avoid running out of it while waiting for the next sale.

And the reason it it is "the best guaranteed return on investment" is because it is an inflation hedge, and inflation is basically guaranteed.

Note: buying on sale is a one-time savings/profit whereas buying in bulk is an investment. And while it may seem like saving 50% on the sale is the better part of the deal than saving 2% a year on inflation, it's not. If you spend most of your adult life - say, 40 years - with a closet full of canned soup, you don't just save the 50% by waiting for a sale and buying in bulk, you profit 120% on the investment of storing it.

The first half of this is ok. The second half is non-standard at best. The standard viewpoint is quite simple: consider things in real terms. Hence any 'gains' you make by keeping up with inflation are not gains at all. Cash may depreciate over time in real value -- no arguments there.

But the standard approach is: say you tied up $X for 40 years and earned a real CAGR of $\lt 2\%$ -- that is your buy and hold soup example -- i.e. buy for $0.5 real dollars and get back the value of $1.0 real dollars assuming it increased in price in line with inflation when you eat it 40 years later -- WLOG I'm assuming soup costs a buck now to make this simple. For a comparable risk mixture, over 40 years could you get better real returns? Most people would say yes most of the time. Some mixture of real assets (with a rental yield), stocks and perhaps TIPS are generally viewed as having better expected returns over 40 years. Plus 2 of the 3 are more liquid (maybe pun intended).

The fact that you are buying and storing something to get an inflation hedge, but have no yield in the interim is a red flag of sorts. While this doesn't scale to the individual investor: consider buying timber assets. (There is a very long, rich, history here as a timber hedge, and you get a yield each year when you harvest some small, legal portion of the timber, without depleting the total amount of assets. It's complicated but this is intimately tied in with with savvy investors like Buffett and Swenson like things like timber and pipelines and don't like holding gold, over long time horizons.) The issues with yield are complicated -- most retail investors wildly overpay for it so it's a mixed bag.

There are also some technical issues in that food costs are not that big a part of the market basket of goods, and tend to decrease relative to other items in the baskets over time due to tech gains, which makes them a dirty hedge. (Being able to do something like this with medical costs would be interesting...) But those are small technical issues, not really what I think the main focus should be on here.

And the author does say (as I pointed out before) that most people can only reasonably store one or two thousand dollars worth.

This is an important point, which if I may, suggests that there are storage costs involved in any "storage trade". In real life a lot of things are "chunky" not smooth, so you may have some extra space around the house for a small part of this "strategy" that is "free", but if you actually want to scale this, you need to pay up for storage...

 

[kyphysics]

This irks me so much I have to attack it more:

No worries, so long as you don't personalize it and attack ME!

And now I've watched the video too, and it's even worse. The idea of holding onto cash to wait for an opportunity only works for people who are already rich. And the explanation by the narrator is worse (holding cash and losing 2% is better than investing and losing 10%). Where does that 10% loss come from? It isn't the stock market: the stock market is a highly reliable 8% gainer.

Yeah, I didn't necessarily agree with the narrator and forgot to mention to ignore him, as I was only using that clip, because it was short (~ 4 min.). Here's the full interview with Mark's ideas/words ONLY (it's a little over 20 minutes and the relevant parts, I think are closer to the beginning if my memory is correct):



Mark doesn't say you will lose 10%, although he does say that at any given time the market can be done and, thus, your investments' value can be done too. Maybe that's what the narrator meant, but I don't know. I interpreted him as saying this is a possibility only. On a semi-related note, Mark's Cuban's investing style seems more as short-term trader rather than a long-term value investor. For HIM, maybe having easy access to cash to "jump" on a great opportunity (be it in securities investments or physical goods - from necessities to properties) is crucially important.

See, what makes this advice so bad is that he's advocating taking a loss in order to set up a future opportunity, but he's only telling you how to take the loss! Without knowing what the opportunity for gain is that you are setting up, there is no way to evaluate whether this is a good idea or not, much less execute it!

Again, I'll ignore the narrator's thoughts and just focus on Mark Cuban's words. One of Mark's point with having lots of money in the market is that it's tied down. I don't see anything wrong with that in you're invested in pretty much guaranteed winners like low-cost index funds. But, say you've got selective investments in individual companies. You could conceivably have wild swings. I don't know my parents' full portfolio, but I've heard them discuss over dinner some crazy swings. Their greatest loss was something like $80,000 in a year from some company years ago. Although, they did very well last year with stock in the healthcare industry.

But, anyhow, Mark's saying that you can be sure there will be bubbles bursting every 5-10 years and other bargains popping up all the time that you can take advantage of with direct cash. Whereas, if that money's tied up in investments, you may not have easy access to it during a down year. Would constantly selling your stocks (vs. holding them longer) accrue heavy fees too? I don't know how this part works, as I don't own any securities at the moment. I'm just assuming you've got some fees every time you sell. Feel free to teach/correct me!

You're sort of correct in that you may not know what exact deal you get in the future, but I'm guessing an experienced bargain hunter does come to expect them. Don't recessions have some statistical frequency of hitting like every 5-8 years with major economic bubbles bursting every 10 years or so? I don't have the exact figures, so someone's welcome to fact-check and post. It's during these times that many savvy investors and bargain hunters swoop in and make great value purchases (be it in stocks, struggling businesses, housing properties, etc.).

And even if you are holding an average of $25k and then occasionally taking some of it to make an investment and then replenishing it, I'm not sure you recognize how much you are actually losing by holding the $25k. It's a lot:

-You lose $4,877 over 10 years due to inflation.
-You lose an additional $29,071 by not having the money in the stock market.

So these other investments that you are waiting for, that he won't tell us what they are, better be capable of netting you at least $34,000 over 10 years, with little risk, otherwise they aren't better than storing the money in the stock market.

Yeah, you'd have to have specifics to do a mathematical comparison. Mark Cuban does have a public email and invites people to write to him! People do it all the time and he writes back - one reason why Mavs fans appreciate him so much! You should write him and ask what he's made money on from using this transactional value of cash approach. He does mention in the Forbes quote that you could be buying a dream house for half price during a bursting bubble (I'm guessing the 2008 housing market crash).

I don't think one can write off his strategy without seeing it implemented first. Email him, Russ. Then report back to us.

 

[kyphysics]

This is an interesting idea, but I’m skeptical how much money the inflation hedge will ultimately make you in the real world (unless you’re running a business). For instance, you only make 120% on the can of corn you hold for 40 years. You make 4% on the cans you eat at year 2. And most consumables aren’t particularly value-dense. So you need the capital investment and floor space to hold multiple years worth of toilet paper/canned corn/etc. Factor in breakage (which also compounds with time) and it eats further into gains.

This could probably work for value-dense regular purchases. Wine isn’t the best example—most wines sour after a year or two and the ones that don’t are riskier investments than an inflation hedge should be. Maybe perfume? I’ve got a basement full of consumables that I’ve bought in bulk and I’m trying to think of the most value-dense stuff down there. Razors? But I can’t imagine these supplies will last me more than a few years. I dunno. Maybe I’ll run the numbers when I get some time.

I don't think you need buy years of X or X,Y,Z ... Nor do you have to buy one product only (I'm not saying you meant that, TW, but just being more precise in my wording, since it's gotten me in trouble previously). Rather than buying $3,000 (made up number for convenience here) worth of toilet paper, you can stockpile $3,000 of multiple replenishable goods (maybe a combination of toilet paper/paper towels/napkins, diapers, soap, laundry detergent, bottled water, dental floss, etc.) at a highly discounted rate using multiple "stacking" (a couponing technical term) methods.

I should say that people who aren't great at couponing will have a brief learning curve to climb, as you have to figure out which stores have what policies and where to find different sources of coupons for stacking (e.g., Catalina coupons, Sunday newspaper inserts, store-specific prints, and online and mobile manufacturer coupons). I like this method:

1.) Use a rebate or cash back program (TopCashBack.com is one of the most popular).
2.) Buy discounted retail store gift cards for places like WalMart, Target, etc. from discount gift card sites (where people sell them for money, b/c they got them for gifts and don't want them) THROUGH a rebate/cash back site. That way, you get the discounted gift card AT a discount.
3.) Look for various coupons for items you use regularly and are replenishable. You want multiple coupons from different sources (like mentioned above), so you can "stack" them.
4.) Wait for certain sale days of that store and go in with your discounted discount gift card and buy stuff on sale using multiple coupons (that you stack) to get savings on top of savings on top of savings on top of savings and buy things in bulk...

Some people don't have the patience to wait or don't want to bother with finding coupons (you have to be careful of expiration dates too), so it may not be worthwhile for them.

We coupon in my house and have stockpiles of stuff from water to detergent, all the way to foods.

Some extreme couponers may sell their stockpile items too. I've watched the show Extreme Couponing, where one guy had like a giant stockpile of toiletries he got for a few cents per item and sold them to neighbors or what not. It's become harder to get the giant savings you see on that show after it's airing, because retailers caught on to what people were doing and implemented rules to diminish the returns you can get (I'm sure they didn't want lots of shopper all doing the same thing, b/c before that show only a few people were doing it), but some places (it's store-specific) may still have relaxed rules.

In the hey day of the show, people could get $2,000 worth of groceries and toiletries for like $10.00 or even -$X.XX, where the store pays YOU (due to your coupons saving more than the cost of the items and getting the difference back in cash). Here are some examples of people's stockpiles, btw:



You don't need a warehouse - just an empty room or closet space oftentimes. True, you could make money renting that room out (if your wife/family allows it), but if you've got some spare space in your house, then it's not too bad to fill it with a goods stockpile.

 

[russ_watters]

But, anyhow, Mark's saying that you can be sure there will be bubbles bursting every 5-10 years and other bargains popping up all the time that you can take advantage of with direct cash.

If he's referring to the stock market, that advice is just flat-out wrong, as several people including myself have noted.

Whereas, if that money's tied up in investments, you may not have easy access to it during a down year.

What does "easy access" mean? Can you think of a scenario where not having access to your money that is "tied-up" in stocks for 3 days would actually matter? See, again, he's saying there is a problem without actually specifying a scenario where it's s problem. Reality: this is not a problem.

Would constantly selling your stocks (vs. holding them longer) accrue heavy fees too? I don't know how this part works, as I don't own any securities at the moment. I'm just assuming you've got some fees every time you sell. Feel free to teach/correct me!

You do pay brokerage fees every time you buy or sell.

Don't recessions have some statistical frequency of hitting like every 5-8 years with major economic bubbles bursting every 10 years or so?

Yes.

It's during these times that many savvy investors and bargain hunters swoop in and make great value purchases (be it in stocks, struggling businesses, housing properties, etc.).

True, but that doesn't mean they are sitting on the sidelines for the other 9 years because that would be stupid.

I don't think one can write off his strategy without seeing it implemented first.

That isn't how this works: you can't implement his strategy without seeing what it is.

Email him, Russ. Then report back to us.

Lol, no. If you are intrigued by his idea, you email him and get back to us! You're like the inventor who says "I have an idea but you need to figure out how to make it work for me".

 

[russ_watters]

The first half of this is ok. The second half is non-standard at best. The standard viewpoint is quite simple: consider things in real terms. Hence any 'gains' you make by keeping up with inflation are not gains at all. Cash may depreciate over time in real value -- no arguments there.

I actually agree with you: I was, in that instance, addressing Cuban's claim on its own terms (using his scenario as a baseline even though I agree its a negative). Heck, as I said, my preferred baseline in this scenario is actually the S&P500 since that's what you would have to beat to make the advice worth doing.

 

[russ_watters]

I don't know how this part works, as I don't own any securities at the moment. I'm just assuming you've got some fees every time you sell. Feel free to teach/correct me!

Ok, that's what I thought. A lot of the reason you can't tell what is real and what isn't is because you've never done any real investing, so all of this is hypothetical to you. At this stage of the game, the best advice I can give you since you need way more teaching than I have time to give, is get and read a book who's aim is to teach you the basics, such as the one I linked. Trying to learn from 1-liners from gurus is just leading you to more confusion at best.

I will say this though: in your position, the advice not to have a credit card may not be the bad advice it is for most of the rest of us.

 

[kyphysics]

Lol, no. If you are intrigued by his idea, you email him and get back to us! You're like the inventor who says "I have an idea but you need to figure out how to make it work for me".

Ha! I will!

In the meantime, this is an old post from his Twitter page I came across:

https://twitter.com/mcuban/status/250829027999375360
Been saying this for years.Transactional value of cash needs to be added to the interest you earn. Warren Buffet agrees

article: https://www.theglobeandmail.com/rep...-the-cash-option-is-priceless/article4565468/

For Warren Buffet, the cash option is pricess.

If holding cash in your portfolio for little return is driving you crazy, maybe it's time to look at it the way Warren Buffet does. . .

"Ms. Schroeder argues that to Mr. Buffett, cash is not just an asset class that is returning next to nothing. It is a call option that can be priced. When he thinks that option is cheap, relative to the ability of cash to buy assets, he is willing to put up with super-low interest rates, said Ms. Schroeder, who followed Mr. Buffett for years before she became his biographer.

"He thinks of cash differently than conventional investors," Ms. Schroeder says. "This is one of the most important things I learned from him: the optionality of cash. He thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price."

It is a pretty fundamental insight. Because once an investor looks at cash as an option - in essence, the price of being able to scoop up a bargain when it becomes available - it is less tempting to be bothered by the fact that in the short term, it earns almost nothing.

Suddenly, an investor's asset allocation decisions are not simply between earning nothing in cash and earning something in bonds or stocks. The key question becomes: How much can the cash earn if I have it when I need it to buy other assets that are cheap, versus the upfront cost of holding it?"

continued in article

Business Insider had a discussion of Warren's comments too:
http://www.businessinsider.com/cash-as-a-call-option-2012-9

Granted these guys are professional investors.

 

[kyphysics]

This is another article and video clip of Mark discussing the TVOC:
http://www.businessinsider.com/why-...tage-of-black-friday-and-cyber-monday-2014-11

He says:

If you've got $25,000, $50,000, $100,000, you're better off paying off any debt you have, because that's a guaranteed return. And, you're better off using the transactional value of cash. And what I mean by that, everybody says: "Well, if you just put your money in the bank, you're going to fall behind inflation." I think that's ridiculous, because all you got to do is look at Black Friday. If you saved up cash and don't have to go to your credit card and you walk out Black Friday, you can buy everything at a huge discount. Take that a step further. I've gone to friends who have questioned me on that and I said: "Do this. Go to whatever it is you do - whatever it is you enjoy doing or all those things you have to buy - and go to the market and say you know what will you give me an additional discount if I pay you in cash?" No one's ever said no. You can get a discount for cash and that's the transactional value. Just look at how much retail merchants have to pay for credit cards. If you just pay in cash and ask for that back, so the point being there's a transactional value to cash and I think the whole concept of you fall further and further behind, because of inflation ridiculous - particularly, in a world where you can be an efficient consumer as well. Used to be you were limited to your local retailers or whoever, in order to be able to buy. Now you go online, you can pick the best choice. You can look at alternatives. You can buy in volume. How much toothpaste do you use? Well, I can get a 30% discount if I buy a year's worth of toothpaste. Whatever. I think the transactional value of cash is far more a return than putting your cash in the market.

Now, if you're a bigger investor - you have more than $100,000 - I wouldn't put it in public stocks unless you really feel strong about a company and it pays a dividend. There are so many start-ups now that ...it's become so inexpensive to start a company. If you have a phone, if you have a laptop, and you have broadband and access to cloud services, you can start a company for next to nothing. And there's a lot of platforms like AngelList and others that allow you to go out there and invest in those companies or help other people start up companies. And because it's become so inexpensive, I find myself, anyways, going in that direction a whole lot more than looking for companies that are public to invest in.

I'd probably put my "extra" money into low-cost index funds over the AngelList et. al investing method Mark mentions in the second half, but he does elaborate on TVOC in the first paragraph.

edit:

Also, what do u guys think about asking for a discount when paying in cash that Cuban recommends? Does that work for you? Ever been rejected?

 

[russ_watters]

This is another article and video clip of Mark discussing the TVOC:
http://www.businessinsider.com/why-...tage-of-black-friday-and-cyber-monday-2014-11

He says:

...Now, if you're a bigger investor - you have more than $100,000 - I wouldn't put it in public stocks unless you really feel strong about a company and it pays a dividend...

And there's a lot of platforms like AngelList and others that allow you to go out there and invest in those companies or help other people start up companies. And because it's become so inexpensive, I find myself, anyways, going in that direction a whole lot more than looking for companies that are public to invest in.

Ok, so like I guessed, he is talking about himself and his Shark Tank style investments here. This advice is really only applicable if you have $10 million+ available to invest and even then only works well if you are Mark Cuban. Here are the issues:

1. Money spent on little start-ups is indeed tied-up. Your opportunities to re-sell your stake are very limited.

2. A decent fraction of them fail. Indeed some of the best opportunities come with the highest risk. It is unreasonable to expect someone with a net worth of $500,000 to be willing to risk losing 10% of his net worth on a coin flip a couple of times a year. Mark Cuban is risking less than 0.005% of his net worth on such a bet. And Mark Cuban might mitigate his risk by doing it once a week, but an upper middle class investor won't have the money to do it more than once or twice a year.

3. Mark Cuban has experience evaluating these opportunities and doing well requires this learned skill. Most people can't afford to lose $50,000 on a learning experience. Part of the beauty of the S&P500 index fund is you don't have to know anything to make good returns.

4. Doing this is a lot of work. That's fine for Mark Cuban because he essentially retired and then came back doing this sort of thing for a living. The average investor can't do that: they have a real job. Part of the beauty of an S&P500 index fund is it doesn't require any work.

5. A big part of the reason these investments are lucrative for Mark Cuban is that the companies have Mark Cuban as an investor. He's both a successful business manager and a brand name with value. The average investor is neither of those things.

6. *None* of the investors on Shark Tank got rich this way. All of them got rich from one golden business idea which made them a lot of money and then opened-up the opportunity to start investing this way. That should tell you something about how accessible this idea is to average people.

Regarding his scenarios:
1. It's true that to make the types of investments he does you need to keep cash on hand.
2. It isn't true that to buy toothpaste by the case *you* need to keep cash on hand.

So: *You* don't need to keep cash on hand.

So yes, it is theoretically possible for an upper middle class person with $500,000 in personal savings to do this, but it is a very risky idea and generally not recommended.

 

[StoneTemplePython]

Can I just add that as far as "gurus" go, Cuban is probably the most entertaining? I used to watch Shark Tank mostly to see what he'd say.

A second point: if you look into his history, Cuban's number one talent may be talking other people into overpaying for an investment (i.e. he got Yahoo! to pay an awful lot of money for Broadcast.com, and that is how he got rich. What does Broadcast.com do?)

 

[kyphysics]

By way of example, @kyphisics this is not "advice", necessarily, but here's my entire investment for retirement strategy, in clear, concise, appliable form:

3. After any remaining funds pile-up to about $10,000, depending on my near-term spending plan (if I'm going to buy a car soon or do some home improvement), I buy individual stocks or shares of an S&P500 Index Fund. This money is about half in each.

Spending/lifestyle control is largely a separate issue for me.

So, this is a real, actionable savings plan. It isn't flashy or complex, but it provides a good return and relatively low risk. We can call that "advice" if I say you should do the same thing. But the point is, when you get "advice" from anyone, in order to be worth anything, it needs to be written in a form that is clear enough you can actually act on it, otherwise it has no value.

Conversely, the purpose of things said by a "guru" is to promote the guru. That's why gurus rarely give meaningful/actionable advice. Mark Cuban didn't sit for that interview because he wants to help you save for retirement, he sat for that interview in hopes you might watch Shark Tank or buy Shark Tank products. So there's just no need for his "advice" to be meaningful.

I've been meaning to re: with a longer post and appreciated your thoughts above, but wanted to ask just a quickie for now:

What investment style do you use for buying stocks? Also, what books did you read on investment strategy? These are really questions anyone can answer, btw.

This won't be a concern of mine for years probably, as I need to take care of some things first (what are called "baby steps" by Dave Ramsey):

1.) generate income to pay all my basic needs (I should have $25-30K-ish student loan debt upon graduation FWIW)
2.) create an emergency fund
3.) pay off debt
...THEN invest

I'll post Ramsey's guidelines/roadmap for financial wealth building later when I get the chance and see what people think. You guys can critique it and let me know what you think. I actually feel his views are probably very mainstream and standard in this regard. It's mostly his hyper-focus on getting out of and avoiding debt and prioritizing it over seemingly all else that draws the most criticism.

Where he's somewhat silent is in the area of stock picking. He's got a system he uses for buying mutual funds (and says he's gotten 12% returns over many years), but doesn't say much about other forms of securities.

I've been spending some time reading up on value-investing (Peter Lynch, John Templeton, and Warren Buffet) and thought I'd ask about people's investment styles and strategies. Book/article/video recommendations are welcomed. Heck, even specific stock analysis!

 

[kyphysics]

Can I just add that as far as "gurus" go, Cuban is probably the most entertaining? I used to watch Shark Tank mostly to see what he'd say.

A second point: if you look into his history, Cuban's number one talent may be talking other people into overpaying for an investment (i.e. he got Yahoo! to pay an awful lot of money for Broadcast.com, and that is how he got rich. What does Broadcast.com do?)

I've had a love hate relationship with watching Mark on Shark Tank. He can be arrogant and overbearing at times, but is also often the most enthusiastic, articulate, and insightful shark.

FWIW, I don't see him as a financial "guru" (whatever that means). He happens to be a professional investor and business builder/entrepreneur, but isn't a nuts and bolts personal finance and/or investing expert and answer man (despite the media giving him a lot of attention and a platform to voice his opinions on these matters).

When when it comes to experts like a Suze Orman or Dave Ramsey (I hear the snickers already) in personal finance and Warren Buffet or John C. Bogle in investing, I don't view them in any sort of negative light that seems connoted with people's use of the term "guru" in this thread. I may not agree with everything they have to say, but I respect their craft and expertise in areas where they are correct. And I don't mind them having very strong views.

I guess I think of a guru as being an expert (they way Leonard Susskind is an expert at string theory or Stephen Hawkins in black holes) and not as some kind of pejorative term. If I were to pick a complete financial "guru" charlatan, then it would be Robert Kiyosaki. He's someone who is running a scam (collaborated with Donald Trump in the past too), while pretending to be a "guru."

re: Cuban's path to wealth

He sold MicroSolutions for $6M and retired before coming back into the business world to start Broadcast.com. I've tended to hear that was more Yahoo! who made a very dumb $5.9B offer rather than Mark cajoling them out of that sum that led to his earning his billions. But even a fair market value at the time was estimated in the XXX,000,000 range. He would have been a hundred millionaire at least with the business he created. I probably classify him as first a business builder more than other kind of expert. He's always won big in that role. When he's gotten into other ventures, they've had mixed success.

Yahoo!'s inability to add value to and Broadcast.com isn't something I would blame Cuban for. It was successful before being bought by Yahoo!

I do know this. I wouldn't want to work for Mark on a day-to-day business (at least, not without 51% of my business). He seems too much of a micro-manager, obsessively competitive, and domineering.

 

[Vanadium 50]

I'll post Ramsey's guidelines/roadmap for financial wealth building later when I get the chance and see what people think. You guys can critique it and let me know what you think.

Why do you think we will like it any better than we did 100 messages ago?

You continue to push the idea that the secret is to find the right guru. Everyone else - most of whom are investment-age adults - has spent 100 messages trying to explain why this is a bad idea. What will even more of this accomplish?

 

[russ_watters]

FWIW, I don't see him as a financial "guru" (whatever that means). He happens to be a professional investor and business builder/entrepreneur, but isn't a nuts and bolts personal finance and/or investing expert and answer man (despite the media giving him a lot of attention and a platform to voice his opinions on these matters).

Agreed. And because he isn't programmed to provide useful advice, he doesn't give it -- so he shouldn't be relied on for it.

What investment style do you use for buying stocks?

I've said it many times: I don't recommend buying individual stocks.

Also, what books did you read on investment strategy?

The main one I've used is linked above. Frankly, one of the things that frustrates us about your contributions to the thread is you seem to be repeating yourself without showing that you've read/understood the responses. Please try to correct that.

2.) create an emergency fund
3.) pay off debt
...THEN invest

I disagree with the order and the idea that 2 and 4 are separate things: both credit cards and certain types of investments can serve as "emergency funds".

 

[kyphysics]

Why do you think we will like it any better than we did 100 messages ago?

You continue to push the idea that the secret is to find the right guru. Everyone else - most of whom are investment-age adults - has spent 100 messages trying to explain why this is a bad idea. What will even more of this accomplish?

V50 - Without wanting to get into any kind of unnecessary argument, I think you can all just disregard the "personas" I'm quoting and focus on the substantive ideas (like some have done).

I guess I'm not sure how to engage in a discussion without being accused of being completely intellectually subservient to a "guru." I try to give proper credit to ideas by referencing the person/(s) they are associated with (or, at least, where I've come across them). You can just ignore the person(s) I'm quoting or referencing and just focus on the ideas and discuss/debate those if you like. I honestly and respectfully think you're showing selective or flawed reading of my comments in this thread, because I've said before that I evaluate an idea on its own merits and expect/assume others will too. I might be excited by some idea or just want to "break the ice" to get conversation going by posting things I come across, but that shouldn't be confused with thinking that I fully support everything such and such a person says (I've laid out many things, for example, that I disagree with Dave Ramsey on).

So, long story short, I'm genuinely unsure why you think I'm a "guru-seeker." Let's just focus on ideas going forward! Who cares who said them and if they're famous or not.

 

[kyphysics]

Agreed. And because he isn't programmed to provide useful advice, he doesn't give it -- so he shouldn't be relied on for it.

I judge an idea on its own merits, though.

I've said it many times: I don't recommend buying individual stocks.

I must have missed that then. Sorry!

With Peter Lynch's classics in value investing being the first books I ever read on investing and finding his ideas agreeable, I'm someone who wants to go that route. But, I would want to have other asset classes too.

Frankly, one of the things that frustrates us about your contributions to the thread is you seem to be repeating yourself without showing that you've read/understood the responses. Please try to correct that.

I've read most people's responses (I skip - either temporarily or permanently - responses from people that I deem unnecessarily abrasive) and feel I understand them just fine with all due respect. And I appreciate the time people put into giving analysis of various ideas and arguments. I may not respond to every person, but I do read and appreciate good dialogue from others. What I'd like to see, respectfully, is less commentary on, insinuation of things, reading-into-the mind-of, and criticism on other posters on a personal level and more focus on just discussing ideas. If I were to do what others have done in the thread, I'm afraid I might be arm-chair diagnosing people with all manner of personality flaws and possible personal problems and disorders! But, I haven't and wont!

I disagree with the order and the idea that 2 and 4 are separate things: both credit cards and certain types of investments can serve as "emergency funds".

I think Dave's logic was that having those 3-6 months of living expenses saved up in easily accessible cash savings is much more of a bullet-proof vest, whereas a CC and/or investments may not work in those situations where you're unable to generate income (say, after getting laid off in a recession and unable to find a job for nine months or something).

 

[CWatters]

They say you should never let a tax break determine where you invest, but you should consider making use of any tax breaks that don't dictate where you invest.

For example here in the UK even children can start a Self Invested Pension Pension Plan and get tax back on their contributions. That is they get 20% tax back that they probably never paid in the first place! Obviously children need generous parents or grandparents to make the contributions but that sort of return is hard to achieve any other way. Obviously there are some disadvantages, like not getting access to your money until age 55 but worth considering.

Like Russ I rarely invest directly in stocks, preferring funds or investment trusts. If you don't have a lot to invest the these are a good way to reduce your risk without loosing a lot in dealing charges. Each fund will typically invest in at least 30 stocks and it would be impractical to hold that many yourself if you only have a small amount to invest. Many will also allow you the invest small amounts regularly. If you invest via an online platform you can also switch between different funds at low or even no cost/spread.

 

[russ_watters]

I judge an idea on its own merits, though.

That's not as reasonable an approach as you think: Gold is shiny, but very few shiny objects are gold. You are allowing yourself to be distracted by shiny objects when you should be ignoring them. You're wasting your time and never getting to real learning.

This is why PF forbids discussion of personal theories and perpetual motion. We already know that 99.9999% are garbage so we know it is a huge waste of time and a distraction to evaluate all of them.

I think Dave's logic was that having those 3-6 months of living expenses saved up in easily accessible cash savings is much more of a bullet-proof vest, whereas a CC and/or investments may not work in those situations where you're unable to generate income (say, after getting laid off in a recession and unable to find a job for nine months or something).

Again: if you can't connect the advice to a real life scenario, then the advice must be wrong. Getting laid off for 9 months is not a viable scenario because you can easily access money in the stock market in a week. If you can think of (or your guru provided), a real life scenario where this advice would be good, great, but so far you aren't even doing what you said in the first line: you aren't even really evaluating the advice.

 

[TeethWhitener]

While this doesn't scale to the individual investor: consider buying timber assets.

Timber REITs and ETFs are available (example). I don't know anything about them, though. Is there an advantage to timber as an inflation hedge versus some other (non-gold) commodity?

 

[StoneTemplePython]

Timber REITs and ETFs are available (example). I don't know anything about them, though. Is there an advantage to timber as an inflation hedge versus some other (non-gold) commodity?

Historically, yes. Though Yale's Endowment did so well that a lot of people crowded into timber in the late 90s as I recall. Certain grades of wood also got too coupled with the 2000s real estate bubble. So I am not so sure anymore.

In general holding a commodity has storage costs and no yield -- i.e. you pay to hold onto it, which is not so great. Timber is nice in that the underlying asset base tends to rise with inflation over a long haul, and if you operate it within best practices-- and legal guidelines -- you get a yield (i.e. selling off some wood) but do not deplete the asset base because your harvest rate matches the growth rate so your overall asset base stays about constant.

Saying its superior to other inflation hedges is too much, but it's a nice mix of commodity and hard asset business.

- - - -
edit: there are some technical ways to "synthetically" own a non-perishable commodity -- say oil-- and get a yield at least in certain market conditions-- i.e. if the futures market is backwardated, you over time pocket the 'roll yield', and if the market is in contango, there are contango trades but you have to pay for storage which naturally shoots up in price in steep contango markets. This seems pretty far afield, though. It seemed best to me to focus on commodity holding vs various commodity trading (and storage) strategies.

 

[kyphysics]

That's not as reasonable an approach as you think: Gold is shiny, but very few shiny objects are gold. You are allowing yourself to be distracted by shiny objects when you should be ignoring them. You're wasting your time and never getting to real learning.

So, I agree that not all ideas are worth exploring in depth (mainly due to some ideas' overwhelming absurdity or easy refutation), but that wasn't my point, Russ. I merely meant to say that I evaluate an idea independently from its source and based on reason. There was no mention after that of which ideas I might find worthy of attention.

Again: if you can't connect the advice to a real life scenario, then the advice must be wrong. Getting laid off for 9 months is not a viable scenario because you can easily access money in the stock market in a week. If you can think of (or your guru provided), a real life scenario where this advice would be good, great, but so far you aren't even doing what you said in the first line: you aren't even really evaluating the advice.

So, this was what I meant by selective reading and ascribing certain thoughts of others onto me (that I merely brought up for discussion and evaluation)! I just said a few posts ago that I was hoping to get feedback and open critique of Ramsey's "road map" for financial peace and wealth building. I don't have any definitive views of his guidelines yet!

Having said that, I think I recall him saying something about ideally never touching your investments (until you're old) to allow them to maximize their compounding effect. But, also, having the fund in cash savings helps if there's a market crash too? Just seeing what the advantages are for a stored away cash emergency fund...

 

[russ_watters]

So, I agree that not all ideas are worth exploring in depth (mainly due to some ideas' overwhelming absurdity or easy refutation), but that wasn't my point, Russ. I merely meant to say that I evaluate an idea independently from its source and based on reason. There was no mention after that of which ideas I might find worthy of attention.

By posting ideas in this thread you are declaring them worthy of attention. Your filter is broken...And your analysis... or attention...is faulty...and you arent paying attention to the analysis of others. Frankly it's hard to identify anything you are doing well in this thread.

I don't have any definitive views of his guidelines yet!

You really need to start getting some. You need to start making your posts add more value in this thread.

Having said that, I think I recall him saying something about ideally never touching your investments (until you're old) to allow them to maximize their compounding effect. But, also, having the fund in cash savings helps if there's a market crash too?

Even if I agreed that that rule should be absolute - and I don't - that still doesn't preclude keeping all of the money in the same fund. Having $50000 in a fund that you never touch and $50000 in another fund for emergencies is logically the same as having a $100000 in a fund of which you declare $50000 to be your emergency fund.

Just seeing what the advantages are for a stored away cash emergency fund...

None that I can identify.

 

[jtbell]

But, also, having the fund in cash savings helps if there's a market crash too? Just seeing what the advantages are for a stored away cash emergency fund...

What about an event like 2008-09? Your stock funds lose about 50% of their value, and then you lose your job.

If you're thinking of bond funds or something similar, then OK. It looks like Vanguard Total Bond Market Index dropped by only about 5% in that case, and only briefly (a few months). It recovered completely before the stock market hit bottom.

 

[Vanadium 50]

What about an event like 2008-09? Your stock funds lose about 50% of their value, and then you lose your job.

There have only been two such events ever. (The other was 1929) So the question is how much you want to spend on "insurance" for such a rare event. In my view, a well-balanced portfolio is the best protection against that. If you find you need to sell in a hurry, you can pick the most sensible asset class and avoid locking yourself into a big loss.

 

[jtbell]

In my view, a well-balanced portfolio is the best protection against that.

Sure. However, during the last year especially, I've been seeing a lot of younger investors on another forum asking why they shouldn't be 100% in stocks, they've got the guts to ride out a downturn.

Actually, I think the best case for an "emergency fund", either in cash or a bond fund, is when all of your retirement investments are in tax-deferred accounts like a 401(k) and you can't get at them before age 59.5 without incurring a penalty on top of the taxes. This is more likely when you haven't reached the annual contribution limits for those accounts.

That's why I always kept several months' worth of expenses in my checking account, besides not having to watch out for overdrafts. I didn't call it a formal "emergency fund", just a "cash cushion."

 

[kyphysics]

Sure. However, during the last year especially, I've been seeing a lot of younger investors on another forum asking why they shouldn't be 100% in stocks, they've got the guts to ride out a downturn.

Us millennials are often lucky to just have a full-time, decent-paying job, JT! It's tough out there! I have a good mix of friends who are going into or already have high-paying jobs (for me, if you're above median, then that's "high-paying"), but just as many that can't find one and have to do low-paying part-time work. Some are thinking of going back to school for a change of career, while others are thinking of doing a high demand trade like welding or programming. Lots of us are nowhere near the investing stage yet. My older brother, who is in a joint law and Ph.D program is the one who got me into thinking and planning earlier about this stuff. He mentioned feeling "barely" able to scrape by on $60K a year teaching high school in Los Angeles prior to that. Granted, he admitted he was bad with money too (admitting to not being a devoted saver and spending on eating out and hanging out a lot)!

That's why I always kept several months' worth of expenses in my checking account, besides not having to watch out for overdrafts. I didn't call it a formal "emergency fund", just a "cash cushion."

Why checking instead of savings/money market, JT?

 

[kyphysics]

By posting ideas in this thread you are declaring them worthy of attention. Your filter is broken...And your analysis... or attention...is faulty...and you arent paying attention to the analysis of others. Frankly it's hard to identify anything you are doing well in this thread.

.
Oh please! This is the kind of strange and hyper focus on others' personal character that is completely unhelpful and unhealthy to the thread!

I honestly don't know what you're talking about with saying I haven't paid attention to the analysis of others. I literally just said that I have read most people's posts and understood and appreciated them. I often agree with the analysis/comments. Sometimes I don't. ("Oh, no!" Is that a sin and should you or others berate me or someone else should they happen disagree with you?) In other cases, I'm undecided about some matter. To say that I'm not paying attention, however, is offensive frankly and just plain inaccurate. I'm not sure what you want. Should I quote every person's post I agree with and say: "I agree!" I've done that in the past with someone like NTL, for example, with point-by-point commentary back and forth (affirming areas where I agreed with him and voicing my own line of thought or open questioning of areas where I'm undecided or disagree) only to be "yelled at" at the first instance of maybe disagreeing or providing some critique of a line of thought.

Some of you act like your position is 100% correct when it's not close to being clear that it is, while personalizing things and accusing me of things that are false. You mentioned paying attention. But, I would ask: Have you paid attention to what I've complained about? Can you see why your manner of speaking and "reading into things" can come across as rude, offensive, and also unhelpful to the discussion of ideas? I don't wish to be rude myself, but it's gotten to a point that I think I have to say something about this and have an ultimatum that either people stop personalizing things (it's okay to rationally and politely disagree on ideas) or I shall move on and stop engaging with them.

One final thing: Keep in mind, that I also have things I haven't had time to comment on, because I wanted to look some things up first. I've also mentioned wanting to comment on things earlier, but not having the time (for research) yet to post what I wanted to say. I'm just responding sometimes in bits and pieces, given the time I have on hand.

That's all. I'm going to leave it at that. Either people can take that I'm posting in good faith and also genuinely reading and thinking about others' comments (whether I respond immediately or not and/or agree or not) or think I'm posting badly, in which case it's best to go our separate ways (if the latter).

 

[kyphysics]

So these other investments that you are waiting for, that he won't tell us what they are, better be capable of netting you at least $34,000 over 10 years, with little risk, otherwise they aren't better than storing the money in the stock market.

A summer colleague of mine did FBA sales, but I'm not sure if she was ever as successful as this person purports to be:


This is one example of where having cash on hand may be useful. The former accountant, who quit his job to buy (cheap) things and sell them (at competitive mark up) on Amazon says he's grossed millions doing FBA (fulfilled by Amazon) sales. He goes and buys clearance items at stores (such as WalMart, Target, etc.) in bulk and sells them online cheaper than what the listed price is to draw buyers for a profit.

He says he made $1,000/month in profit working part-time at 10 hours a week at first, before going full-time. As of now, he claims to have made 15% profit on gross sales of $4M and pays himself $60,000 in salary. He's got a staff of 11 people now as well. In a way, this reminds me of the guy on Extreme Couponing, who bought a ton of items in bulk for pennies on the dollar and in addition to using them himself and donating to charity, he also sold them to neighbors and what not. The basic idea is the same. Buy low, sell at a competitive mark-up for profit.

I guess you could say the cash on hand needed for an immediate bulk sale/clearance buy for something like what this guy is doing can be considered a business asset tool and not just some passive cash laying around waiting for a buy every few years. He's constantly buying stuff for his business. But, it's a seeming example of using cash to profit vs. having it stored in securities investments, where it could be tied down or down in the market at any given time.

Another thought that came to me from having watched a lot of Dave Ramsey shows is that of house flipping. FWIW, he warns people against it, despite having made millions himself in his 20's doing it, because it's requires very specialized skills and talent and many people don't have them and think it'll be easy only to lose money. But, basically, anything where there's a very low buy value on something that has a higher or potentially higher sales value (or cash flow generating value) can be something that you would benefit from having immediate cash on hand.

I guess when you say you can't think of anything that you'd buy requiring immediate cash that could net you more than what you'd make with your money in the market, it's perhaps because you're not an all-around business person maybe? I don't see myself in that light either, despite being open to such opportunities. I'm not natural at seeing these types of deals and/or looking for them. Your comments seem to speak more to your own (and mine) limitations of imagination and business expertise versus other people's, who may be in business or just have a knack at these things.

I don't know if having immediate cash tucked away, while using the TVOC and earned interest in savings, is a good idea for me yet. But, I wouldn't rule it out just yet.

 

[kyphysics]

May I ask; are you an investment-age adult? Is this real to you or just hypothetical?

I'm over 21 if that helps, but am not in a financial position to invest yet. I have one year, before graduation and will be taking some "baby steps" (to use a Ramsey-ism) to prepare for when I will be able to invest (or when it would be presumably wiser for me).

But, having said that, many people learn the ropes and/or buy stocks as kids (through their parents' accounts). I just finished watching Lauren Templeton's (the great niece of the famous Sir John Templeton, who has been called the greatest investor of the 20th century) lectures for Google Talks and at the Benjamin Graham School for Value Investing and she mentions having bought her first stock at age 6. And she's been investing ever since!

The big thing with value investing is that you always have to be ready even if you're not making a single trade/buy/sell in several years. Warren Buffet, for example, talks about sometimes not buying a single thing in years and patiently waiting for the right opportunity. Lauren Templeton (who heads Templeton Phillips nowadays) says her great uncle, Sir John Templeton, always kept a wish list of his favorite companies he wanted to own, but for which it wasn't the right time to buy, in his top desk drawer. He would wait patiently for what he called "maximum pessimism" in the markets before buying. Her lectures were great and showed all the historical recessions and crashes of the 20th and 21st centuries and the times Templeton was buying when everyone was selling low. A lot of the "work" to be done for value investors is just "watching" and waiting (and researching).

I'm not actively buying stocks now, but I do have an account with Investopedia and have played their real-time stock market simulator game in the past. I have friends who play too. I got away from it to focus on my academics in the past, but am now going back to learning more about investing. It might take me five years to be in a position to be financially ready to invest and even then, it might take a few more years to find the right stock to value invest in (albeit, I'd want to invest in funds too). The process is "slow." It can take years, so I see this as both a learning time (getting to understand the basics) and also real investing in the sense of laying the ground work of looking into companies I might want to invest in, but for which the timing is not right (i.e., the price is too high for that stock currently).

So, to answer your question more precisely, yes, this is definitely very real for me.

 

[CWatters]

Why checking instead of savings/money market, JT?

I'm not JT but here in the UK the interest rate on some regular current accounts (which i think is the same as a checking account in the USA) is higher than on many savings accounts.

 

[russ_watters]

What about an event like 2008-09? Your stock funds lose about 50% of their value, and then you lose your job.

There have only been two such events ever. (The other was 1929) So the question is how much you want to spend on "insurance" for such a rare event.

It's even worse than that. This "insurance" is only actually insurance in rare cases such as that and only if you stop using it permanently after such a crash. All it takes is to survive one recession and the S&P index fund is the better deal. Or to put it another way, looking forward from today: the savings account is only better if we have a 56% crash every 8 years in the future. In which case none of the conventional investment advice works anymore either.

 

[russ_watters]

Us millennials are often lucky to just have a full-time, decent-paying job, JT! It's tough out there!

It's not as tough as millenials complain it is:

I have a good mix of friends who are going into or already have high-paying jobs (for me, if you're above median, then that's "high-paying"), but just as many that can't find one and have to do low-paying part-time work.

So, right out of college, half of you are already above the median? That means you're 20 years ahead of schedule!

Oh please! This is the kind of strange and hyper focus on others' personal character that is completely unhelpful and unhealthy to the thread!

There is nothing personal in what you quoted. I know nothing about you other than that I now know you are a millenial. My response was entirely in response to your tiresome, repeated, posting of bad advice without analysis or taking-in responses others have given to it.

I honestly don't know what you're talking about with saying I haven't paid attention to the analysis of others. I literally just said that I have read most people's posts and understood and appreciated them.

Repeating the same thing over and over again doesn't show recognition of responses you've already received to it (much less showing you've done any analysis of it).

This is one example of where having cash on hand may be useful.

I'm not even going to respond to that other than to say no...and that you should be able to analyze that scenario by now.

 

[kyphysics]

It's not as tough as millenials complain it is:

Russ - I'm going to put a hold on any further posts in this thread for a while.

I do see that I missed two previous posts you wrote and one that may be relevant to what you're talking about here. I'm not sure why I skipped them. It could have been their proximity to other posters' posts in this thread that I have chosen not to read (in which case my eyes would have quickly glanced over a section of comments while using the scroll feature as well and possibly inadvertently skipping your post) or something you said in one of them that made me discontinue reading it. I'll have to go back and check when I have time.

I'll simply state for the time being (until I have more time to respond in full) - and this is a repeat of what I've said before, but perhaps said slightly differently - I don't read every post in forums, nor respond to them. If a post starts out rude, aggressive, and attacking and/or a particular poster has shown themselves to have that sort of persona and I've warned them before in the past (I usually give fair and polite warnings, but sometimes I don't even do that if I feel I've done it enough already in a thread that that person should have read it too), then I sometimes won't continue reading and/or refuse to respond. Just as I would walk away from a rude, unnecessary conversation on the street with a stranger, I do the same online. I don't feel humans are under any obligation to engage with others who fail to show any signs of personal respect and social/personal consideration in the way they speak to others. In fact, rudeness and things of that nature go beyond just being annoying. They can harm another person's emotional well-being, which in turn affects other aspects of their life (from ability to focus and think properly to even physical health concerns). So, if a post or poster falls into that category, it's not safe to assume I've read them.

Since I'm too busy to reply to this message and some previous ones, at the moment, and I don't want to be accused of ignoring the discussion analysis that's happened thus far, I'll temporarily refrain from posting anything else until I can clear some things up.

I regards to your last sentence of this post, I saw that I hadn't fully read your previous post about using a credit card to float the balance of an immediate high value purchase desire and to use the month to pay it back to cash out some stocks to cover that sum. I did have a question about this I wanted to ask later...no time right now...off the top of my head, it looks okay to do that assuming you have a high credit limit to cover the cost and your securities' values are high enough to cover them at that very moment.

I'll re: this later. Have to run.

 

[Rive]

What financial wisdom, concepts, and knowledge do you feel all adults should know to be literate/functional/successful in society?

Well, the most shocking and useful revelation for me was when I finally understood that most of the so called 'experts' are actually selling the market itself instead of trading in any instruments, stocks, commodities or currencies.