April 24, 2008
The Best of Intentions Aren't Always Enough
Are you more likely to keep an item you really
dislike because it was expensive? Do you buy an extra pair of socks just
because they’re on sale – even though you don’t need them? Do you clip coupons
to buy groceries each week but go out to eat most nights anyway? MIT behavioral
economist Dan Ariely has found that our choices aren't rational, but they are
predictable. He’s written a new book titled Predictably
Irrational: The Hidden Forces That Shape Our Decisions.
Mr. Ariely was hospitalized for a number of years while recovering
from severe burns. The worst part of each day during those years was when the
nurses would give him an iodine bath. They would soak him in the solution and then try to
take off the bandages. Every time they did this, he wondered whether the
bandages would hurt less if they were removed slowly or more quickly. Because he had burns over more than 70% of
his body, this became the most important question he could think about. Each
day he would have a debate with the nurses about the correct way to do it. The
nurses believed that he would experience the least pain if they ripped the
bandages off as quickly as possible, starting from his leg and ending at his
head. The whole process would last about
an hour. This was terribly painful, and he would routinely ask the nurses to go
more slowly and space it out longer. The nurses reassured him, though, that
their way would cause him less pain.
Since the question was never fully resolved for him, he
decided to settle the question for good. As an experimental psychologist, he got a carpenter’s vice and used it
to crunch subjects’ fingers a little bit. He would try this with longer
durations, shorter durations, higher intensity and lower intensity. When he got some
more funding, he moved to electrical shocks and heat.
At the end of the trials, he concluded that the nurses were
wrong. Despite their good intentions and their years of experience, he would
have had less pain if they would have pulled the bandages off more slowly,
taking several breaks in the process.
So how could it be that people with good intentions and
valuable experience get something like this so wrong? Ariely wondered whether
there are more examples in life where intentions and experience are not enough to guide us in making good choices.
Ariely says that primitive humans would have wanted a
warning system that immediately prompted them whenever a tiger was spotted in
the middle of the jungle. We obviously could not have survived by sitting there
and thinking about the costs and benefits; if there’s a tiger near, you’d
better run! Ariely says that our emotions exist to ignite a message in the
brain that forces us to make quick decisions.
The problem is that these days, we don’t have tigers to deal
with. Instead, it’s the stock market, or a fight with a spouse. Or maybe
someone cuts us off in traffic. These emotions are not as functional as they
used to be. That doesn’t mean that they are useless, but in some instances they
can compromise our better judgment.
Take money, for example. When it comes to money, Ariely
believes that we are not designed to deal with it at all. He cites back-dated
stock options as an example. He became interested in the subject after the Enron
scandal. At first glance, Enron’s executives didn’t look like awful
people—certainly not people who were going to take $20 to $30 billion out of
the economy for personal gain. Though
they were not angels, they did all kinds of philanthropic things within their
communities.
Ariely wondered if there was something within the Enron
culture that made the executives behave that way, and if the average person was
in their shoes, would they behave similarly? In other words are we as capable as the nurses were of convincing ourselves that what we're doing is correct despite the fact that it isn't?
So Ariely decided to study cheating. He created a simple set
of math problems, with the ability to cheat in some cases. He paid his subjects
based on the number of answers they got correct. What he found was that instead of
there being a few people who cheated a lot, there were a lot of people who
cheated a little bit.
So then he set out to discover what the mechanism is that
gets people to cheat just a little bit. Economic theory says there are two
factors: 1) How much you stand to gain by cheating; and 2) what the probability
is of being caught. It turned out that it didn’t matter how much people stood to
gain by cheating, because people would still cheat regardless of the dollar
amount. People would cheat just a little bit. Also, when he changed the
probability of being caught, the results stayed the same.
What this told Ariely is that people are not as sensitive to
the economic variables as we think they are. He says it goes back to the joke
about a little boy who comes home from school with a note from his teacher. The
note says the boy stole another kid’s pencil. His father, terribly embarrassed
by his son’s behavior, says, “Just ask, and next time I can bring you a dozen
pencils from work!”
It seems that it’s really about having a fudge factor rather than
some external reward. We all want to think of ourselves as honest people, but
we all gain from being less than honest sometimes. Ariely says that most of us cheat up to the
level that we don’t have to revise our opinion about ourselves.
Later, Ariely wanted to see if he could make people more
aware of honesty and thus cut down on the cheating. So he asked people to recall the Ten
Commandments before the experiment began as a pre-exercise. No one could recall
them all, and many made some up! He had another group sign a (nonexistent) MIT
honor code. He found that these exercises were significant enough to make
people shrink that fudge factor. It was just the fact of contemplating morality
that was enough to make them cheat less.
For Ariely, the most worrisome part of his experiments was that when he had people cheat for tokens instead of cash, they cheated far more. He says this is a real problem because we are moving to a society that uses more tokens. He gives the example of someone who back dates stock options but would never dream of taking $100 from a petty cash box. It’s the fact that when something is so far removed from cash, the temptation to cheat becomes far greater. It seems that the only solution to losing touch with the real value of token items like credit cards and stock options is to visualize what they really represent before we make any decisions about using them.
-Alison Abney
Sources:
Ariely, Dan. Predictably
Irrational: The Hidden Forces That Shape Our Decisions.
New York: Harper Collins, 2008.
Boyd, Chris. Interview with Dan Ariely. Rec. 16 March 2008.
Podcast. The Hidden Forces That Shape Our Decisions. KERA 90.1, Think!
April 10, 2008
Time to Fix a Big Mess...Again
This year for my 36th birthday, my dad gave me a
subscription to The Economist
magazine. Apparently he remembered that once on our way to
The last two Economist
issues have naturally focused on fixing the financial crises of late. The April 5th edition arrived on my doorstep just in time to fuel a healthy
debate with my super Libertarian best friend who believes that most government
regulation is a complete waste of time. My initial reaction to the mortgage
mess and now Bear Stearns is the opposite -- doesn’t someone need to monitor
these people?
If you’ve listened to the news at all lately, then you’ve
probably heard that Treasury Secretary Henry Paulson is proposing just that -- more
monitoring. In fact he’s in favor of a sweeping overhaul of regulations for the
financial industry involving more government regulation. Great! There’s
just one problem -- it's totally impractical not only from a financial standpoint but also a logistical one. There simply isn’t enough manpower to
reach inside the doors of every hedge fund, financial firm or mortgage lender
in the country.
From the article:
“It is natural and right that that regulators seek to learn lessons. […] But before governments set about reforming financial regulation, they need to be clear about the causes of the crisis and to understand just how little regulators can achieve.”
Looking back, it’s pretty clear that the history of financial
markets is a rocky one. Just about every decade or so there is some kind of
implosion, the result of the pendulum swinging too far in either direction. The article points out that in recent years, we’ve experienced relatively mild business
cycles that have lulled us into a false sense of security. In other words, we
didn’t really see this one coming. So it would seem natural that intervention by regulators would
make sense, but here are two reasons the article gives to hesitate:
“First, finance was not solely to blame for the crisis. Lax monetary policy also played a starring role. Low interest rates boosted the prices of assets, especially housing, which in turn fed into complex debt securities. This created a spiral of debt that is only now being unwound. Central banks in economies with deep mortgage markets should in the future lean against the wind when housing prices are rising fast. The second reason to hesitate is that bold re-regulation could damage the economies it’s designed to protect. […] The fact is that a sophisticated financial system is susceptible to destructive booms; but a simple, tightly regulated one will condemn an economy to grow slowly.”
The article goes on to point out what may be the biggest
problem with an army of regulators sent to clean things up and put the ship
back on course:
“[…] The system is stacked against them. They are paid less than those they oversee. They know less, they may be less able, they think like the financial herd, and they are shackled by politics. In an open economy, business can escape a regulatory squeeze in one country by skipping offshore. Once a bubble is inflating, many factors conspire to discourage a regulator from pricking it.”
Much as we wish it weren’t the case, bubbles form and this one popped. Here’s to hoping for a lasting solution rather than just another band-aid.
-Alison Abney
Source: Economist.com. April 10, 2008. http://www.economist.com/printedition/
Kim Snider, Kim Snider Financial Communications and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
March 25, 2008
Karate for Investors
I read a lot so I appreciate a book that gets straight to the point like The Wall Street Self- Defense Manual by Henry Blodget. Mr. Blodget writes with that jaded, slightly smart-aleck tone that only comes from having been to the other side and lived to tell about it. I hadn’t heard of him, but Henry Blodget has quite a story to tell. While working for Oppenheimer & Co. in 1996 in Internet research, he famously predicted that Amazon stock would trade for $400 back when it was then trading at $240 a share. A few weeks later, Amazon did indeed temporarily trade above the $400 mark, turning Mr. Blodget into an instant financial celebrity. Later, he moved to Merrill Lynch (yes, of Evil Empire fame) and became the top-ranked analyst in the industry. Of course, if you’ve lived and invested long enough, you probably guessed that the story doesn’t end there:
For a frantic two years, I was all over the globe and thanks to the brief and unfortunate popularity of do-it-yourself stock picking—all over newspapers, radio, and TV. […] Unfortunately, despite believing that the Internet boom was probably a bubble and often saying so, I waited too long to pull the plug. For much of that year I was disastrously wrong.
He goes on to say that if missing the top had been his only mistake, he might have been OK—because everyone else failed to call it as well. Instead, Mr. Blodget found himself in the cross-hairs of former Wall Street crusader and New York Attorney General Eliot Spitzer. Mr. Blodget was found to have written self-incriminating emails in which he privately trashed stocks while simultaneously recommending them. In the end, he was punished with a huge fine and was barred from the industry--deeply humiliating for someone who’d once been so publicly on top of the investment world.
You may wonder why I would recommend you read a book by someone like this. I really believe you can learn a great deal from someone who’s hit rock bottom, picked himself up and lived to tell about it. As Mr. Blodget explains it:
One benefit of getting tossed out of your industry is that you get to look at it from the outside […]. This perspective helped me see that there is a vast gulf between how most outsiders think the business works and how it really works. The secret to intelligent investing is not news. It won’t fill you with excitement or make you feel like a market wizard. It won’t make you rich quick or solve your money problems. It won’t relieve you of the need to do what most Americans hate to do (save). It won’t impress your friends or make you the toast of cocktail parties. It will, however, make you a lot of money. Here it is: Diversify your assets, reduce your costs, and get out of the way (we like to say it with a little more zest--go to Bora Bora!). He goes on to explain that if you can do that, market odds are in your favor.
Last week, we discussed how most people who call themselves financial advisors are in truth just salespeople. He says the same thing, but I got a chuckle out of his list of reasons you might still hire one :
• You want someone to talk to
• You want to get schmoozed
• You are so rich you don’t care about costs
• You want someone to blame.
My favorite chapter, “Serenity Prayer for the Intelligent Investor,” includes this: “Accept what you can’t know or control. Know and control what you can and get wise enough to tell the difference. If you don’t, your investing life will be an endless series of dreamy infatuations, dashed hopes and lingering resentments.”
He says that the most serious obstacle to successful investing is simple. People hold out hope against hope that they can somehow know these things:
• What the market will do
• What a stock, bond, or company will do
• What interest rates will do
• What inflation will do
• What the dollar will do
• What the economy will do
• What the Fed will do
• What everyone else will do
He suggests you forget it. These are the only things you can do anything about:
• Transaction costs
• Management and advisory fees
• Taxes
• Accounting for Inflation
Although many readers of the blog will by now be aware of these seemingly obvious investing pitfalls, Mr. Blodget doesn’t believe the word is out:
“Judging from the way most investors spend their time and energy, you would think it was the theory of relativity. Here’s the only honest answer to the questions the world struggles with daily about what stocks, bonds, mutual funds, interest rates, inflation, the dollar, the economy, the government and other investors are going to do: No one knows. The persistent myth among Wall Street outsiders is that somewhere there’s a Wall Street insider who knows.”
He goes on to say that even if there is an insider with that kind of information, it is illegal to trade on anyway. Therefore, the wisest attitude investors can have when it comes to these things is this one: “I don’t know and I don’t care.”
-Alison Abney
Source:
Blodget, Henry. A Wall Street Self- Defense Manual: A Consumer's Guide to Intelligent Investing. New York: Atlas Books, 2007.
Kim Snider, Kim Snider Financial Communications and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
March 13, 2008
Two Types of Investors
Recently I was listening to a conversation among a group of average, every day Americans discussing their views on the topic of personal finance. I found their responses surprising and a little disheartening. I learned that many people really believe that the financial services industry is full of experts and that these experts make it their life’s mission to serve their customers’ interests before their own.
Anyone who knows Kim Snider or uses the Snider Investment Method™ is well aware that we heartily disagree. Okay, to be fair, there are some good financial advisors out there. In fact, I recall once that we had a pair of gentlemen in the workshop that seemed like two good buddies and it turned out that one was the financial advisor and the other his client. But, let’s face it, that’s a rare occurrence. Most of the time, the “expert” is some salesperson who needs to sell you a product in order to make a living. That’s fine if you’re being sold a commodity, but inherently problematic when that product can vastly alter your future standard of living.
Most of the time, we teach people who’ve been burned a time or two and have long since given up the idea that someone else cares more about their money than they do. Not so with the aforementioned group. These folks felt intimidated and woefully ill-prepared to handle their own investment decisions. Even more surprising, they see the level of expertise in the financial services industry as on par with that of a physician, lawyer or architect. This may be the case with an estate planner or a lawyer who specializes in complex trusts or wills, but not when it comes to investing for retirement. There are just too many resources out there describing in quite simple terms how to manage your own investments.
What distinguishes these two groups? I think it comes down to a touch of laziness. Given a choice, certain types of people would rather have someone else do their due diligence for them. But why in the world would anyone allow someone else to do their homework on such an important topic? If you’re buying a car and you want the best deal possible, you do your homework, right? You don’t just say, “Oh, this is too hard to figure out,” and throw up your hands accepting the first deal you’re offered. If you’re buying a home, you do the same thing. Is it a chore and does it take more time than you’d like? Of course it does. But why do you do all that work? Because you have a fiduciary responsibility to yourself and your family to make the resources you have work with the greatest efficiency possible. It is no different when you’re looking at investment choices.
I think another problem is that people get dazzled by important sounding companies and the prestige of Wall Street mythology. They’ve been sold the notion that there’s a way to consistently beat the market if you’ve acquired the skills and possess the necessary years of experience.
If you still believe this is true, allow me to provide you with this quick and entertaining read: Where are the Customers’ Yachts? Or A Good Hard Look at Wall Street by Fred Schwed, Jr. The author was a professional trader who quit after losing a small fortune in the 1929 stock market crash. The book is a tongue-in-cheek look at the hypocrisy, conflict of interest and inherent absurdities at the heart of Wall Street culture. Most remarkable is that the book was written almost 70 years ago and precious little has changed. This story from the book’s introduction explains the underlying message:
Once in the dear dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor. He said, “Look, those are the bankers’ and brokers’ yachts.” “Where are the customers’ yachts?” asked the naïve visitor.
Unfortunately, it isn’t any more apparent today either. Check out this recent SEC Order against Fidelity:
In a settled Order against Fidelity, the SEC charged that the firm failed to seek “best execution” – the most favorable terms reasonably available – for its clients’ mutual funds securities transactions. The Order found that Fidelity allowed the selection of brokers to execute those transactions to be influenced by lavish gifts as well as family and romantic relationships with brokers. "The broker selection process on Fidelity’s equity trading desk was compromised when gifts and lavish entertainment swayed the flow of brokerage business,” said Walter Ricciardi, Deputy Director of the SEC’s Division of Enforcement. “This misconduct created a serious risk of investor harm and violated Fidelity’s duty of allegiance and loyalty to investors.”
Okay, so maybe we do know where those yachts are after all. If this isn’t a compelling reason to educate yourself about your own investments, I don’t know what is.
Sources: Schwed, Fred Jr. Where Are the Customers' Yachts? Or a Good Hard Look at Wall Street. New York: Wiley and Sons, 1940.
U.S. Securities and Exchange Commission Website: www.sec.gov
Kim Snider, Kim Snider Financial Communications and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
February 28, 2008
Reframing Retirement
Every morning on my way to work, I listen to the Marketplace Morning Report. Very often the subject is the current state of the economy, but once in a while there’s also a good story about funding retirement.
Last Friday morning the reporter interviewed financial planner Peter Toll on how he uses psychology to help people reframe their attitude about saving for retirement. People are often extremely overwhelmed with the amount they’ll need to save. That anxiety creates worry and a sense of helplessness that often stops people from moving forward. Toll says that if he can show clients that saving the proper amount is not as far-fetched as they’ve come to believe, then people can often get back on track rather quickly.
Mr. Toll suggests that planners reframe the process with less emphasis on numbers:
It's a backwards process. Instead of saying, "OK, if you can have $50,000 a year or $100,000 a year to live on, what would you like to do with it?" The backwards process is "Let's figure out what you want to do and then figure out if you can afford it." That way, people start saving for a specific thing -- a new life -- which makes it more doable and less overwhelming.
Financial planners find that clients often can't see beyond today's bills enough to start saving. They may understand that they need to cut costs, but they can't see the forest for the trees. Another financial planner, Bedda D'Angelo, says that often she can re-orient her clients toward retirement using a mental trick like taking the focus completely off that goal to start.
If I feel there's a need for rigorous cost cutting, I find a short-term goal that I know they can achieve. It's really just getting people refocused on a positive short-term goal. Once a few bills get paid, a retirement fund can start. Then D'Angelo holds clients' attention with monthly statements showing their assets growing. And most people are very goal-oriented. Once they see that, the way you play this game is to have more, they get focused on it. Focused to the point where clients often start upping retirement contributions on their own.
The basic idea, it seems, is to almost trick the client into saving more. It occurred to me that that the idea of getting clients to reframe their thinking is really just another way of asking people to live below their means--and let's face it, that's not something we Americans are all that good at doing.
Financial planner Matthew Schott says that getting clients to think about today's purchases differently -- especially big ones -- is the key. Schott uses the example of a new car where you can finance the luxury model for $600 a month or get a more basic model:
What if instead of having a car payment of $600 a month, I instead get the basic edition at $400 a month and I then pre-purchase a half a year of retirement with that other $200 a month? This approach has two benefits. It can kick-start saving and establish the mental budgeting that keeps spending down, leaving even more to save. That's because every needless expenditure gets reframed as a sort of theft from your future self. Schott says it makes you think twice about the true cost of living large.
Schott says there are three ways to reframe your thinking right now:
First, think of today's spending curbs not as a sacrifice, but as a down payment on your own future freedom. Second, pay off bills in small steps if you must -- whatever it takes to start the saving cycle. And finally, put big, scary future retirement numbers out of your mind. You don't need half a million or a million dollars today. Focus only on what you need to save now. All three ways of reframing retirement thinking have this advantage: They'll launch you on a path where the rest, over time, often takes care of itself.
Here's a link to one of those scary retirement calculators, however, I think this one is better than most.
-Alison Abney
Source: The Marketplace Morning Report, Money: http://marketplace.publicradio.org
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
February 13, 2008
The Wrong Kind of Financial Education
Have you ever noticed that many people have no idea what to do with their money once they’ve managed to hang on to some of it? Perhaps you've been in the same predicament. I’m pretty sure that’s because many of us suffer from analysis paralysis—a fun new term I learned from one of our advisors. Analysis paralysis is the result of overanalyzing and over-thinking something to such a degree that the problem you’re trying to solve never actually gets solved. It’s somewhat like chasing your tail—only more technical.
I believe that in the case of our finances, this paralysis is often a byproduct of my other favorite new term—financial pornography. I learned this one while reading Daniel Solin’s The Smartest Investment Book You’ll Ever Read. Financial pornography refers to the endless predictions made in the financial media that are bandied about with alarming frequency. The term is generally credited to writer Jane Bryant Quinn. In a 1998 interview with ABC news, she explained what she meant by the term:
"I was getting at the newspapers and magazines that make investing sound easy. 'Three ways to double your money.' 'Ten hot stocks.' The articles that make it sound like the journalist knows the right stocks or mutual funds to buy. And the fact is, we don’t know. Journalists don't have any business pretending they're investment analysts. We can talk about stocks, investment ideas and what people are saying. But journalists shouldn't say that certain stocks will increase in value."
As Mr. Solin illustrates, the problem isn’t that predictions are being made, although these predictions have been shown time and again to be nonsense. It’s that they’re used to sell TV programs, magazines, news stories and the like. Most problematic is that they breed a particularly unsuccessful type of investor—the hyperactive type. Hyperactive investors are those who think that they only have to keep reading, study more, search harder and listen to more pundits in order to discover the magic bullet.
I am not referring to those people who take the time and effort to educate themselves about topics such as investment choices, taxes, estate planning or ways to be a better saver—things that actually make you a better steward of your money. Hyperactive investors are people who treat investing like an evening at the blackjack tables. As Noble Laureate in Economics Paul Samuelson once commented, “It’s not easy to get rich in Las Vegas, at Churchill downs or at the local Merrill Lynch office.” It's also pretty hard to get rich if you're following the advice of the financial media.
The problem is that financial pornography attempts to convince investors that they can beat the markets if they buy the right books, magazines, newspapers and watch the right shows. As an example, Solin cites the story of a former Fortune magazine journalist who wrote an article called Confessions of a Former Mutual Funds Reporter. In his article he admits that “we were preaching buy-and-hold marriage while implicitly endorsing hot-fund promiscuity.”
In another case, Solin writes about a 1993 Forbes feature story in which Barton Biggs, the chief global strategist for Morgan Stanley, wore a bear suit to highlight his advice that investors needed to sell U.S. stocks and buy the stocks of emerging country growth markets. Solin writes that following his advice would have been a disastrous move since emerging-market stocks plunged for the next three years solid.
Another example comes from Fortune magazine’s “top picks” from its panel of “top” stock analysts. From November 2000 to November 2003, the S&P lost 22%, the NASDAQ lost 41% and Fortune’s picks lost 80%.
Solin goes on to cite several more examples that are no more glowing than these. He admits, “Sometimes they are right. Sometimes they are wrong. When they are right, it is luck and not skill. Smart investors pay no attention to the predictions made by the financial media and never use them as a basis for their investment decisions.”
Read the financial press for entertainment but keep in mind that it’s nothing more than noise generated to sell a product with a track record that is dubious at best.
Related to this post is Kim's reprint of Nick Murray's scathing essay about a financial journalist's misuse of the term recession. Enjoy.
-Alison Abney
Source:
Solin, Daniel. The Smartest Investment Book You'll Ever Read: The Simple Stress-Free Way to Reach Your Investment Goals. New York: Penguin, 2006.
Kim Snider, Kim Snider Financial Communications and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
January 31, 2008
Gotcha!
This week’s book isn’t directly related to investing for retirement, but it may help you hang on to more of your hard-earned dollars. I’ve mentioned this before, but I think it’s worth mentioning again. Sometimes it isn’t just about how much you’re putting into your 401(k), IRA or savings account every year; it’s what you’re not spending on the little things. The things that eat up your extra cash.
David Bach may have brought as much attention to this idea as anyone. In his book, The Automatic Millionaire, he somewhat famously coined the phrase, “What’s your latte factor?” In other words, what items do you buy day in and day out that you might be able cut back on so that you can save more? Admittedly, I balked at that one since I don’t like giving up anything I really love. Coffee is something I really love. But I took the idea to heart and now there are things I do less of -- like eating out and dry-cleaning every garment I own.
But now I’ve found an idea that I may like even more: not getting ripped off. In his new book, Gotcha Capitalism: How Hidden Fees Rip You Off Every Day and What You can Do About It, Bob Sullivan explains in sometimes hilarious (if it weren’t so annoying) detail about the nasty little ways people pay an average of $1,000.00 a year extra for absolutely nothing.
Here are just a few that Mr. Sullivan discusses: (Warning: You may want to take your blood pressure pills before reading further).
We’ll begin with everyone’s favorite, the ever-cryptic and totally nonsensical cell phone bill: Cell phone companies not only have charges but they have charges for charges. For example, they not only charge you a federal tax but for the cost of collecting that tax as well. Sullivan says to imagine if you went to the deli and they charged you for your sandwich, charged you tax on that sandwich and then charged you for collecting the tax. Cell phone companies also charge a Federal Universal Service Charge. That’s the charge that’s supposedly going to the schools and universities of America so that Internet use is universal. This is a controversial federal program because most schools and libraries already have computers and Internet access. Sullivan discovered that some of that money actually helps resort communities get fiber-optic access in Hawaii rather than the type of thing you might think it goes to, like little kids getting Internet access at school.
He says that cell phone contracts are also terrible because they prevent you from acting like a true consumer in any normal free-market system. Most contracts are now two years long. Inevitably, six or seven months into the contract you find out you’ve been transferred to another city, or let’s say there’s construction near your office and the phone no longer works. Or perhaps you lose the phone. Or there’s a brand new phone that comes out, and you want that new phone. In any of these situations you are going to have a very tough time getting what you want—a new phone. He says that really the only way you can avoid this is by getting a pre-paid phone. Or you can pay for the phone up-front, which for most people is a not the ideal choice. Sullivan recommends that you always get the shortest contract term you can.
The larger problem with these contracts is that when companies have millions of people as guaranteed consumers, they have no incentive to improve their service. He recommends getting the shortest contract possible not only for cell phones, but DSL service and cable TV. His basic rule of thumb is that you take the shortest contract possible for anything where you have no choice but to sign a contract.
Cable and Satellite TV: A lot of these companies have teaser rates. Cable TV rates are particularly egregious. For example, you will see an ad for service that costs $29.99 a month. There’s often an asterisk, but almost never does it say what the price is going to be when that teaser price is up (usually after six months or a year). If you want to keep the rate, you have to keep calling to ask for the original rate every so often. It is practically impossible for any consumer to find out what the real price of the service will be a year from now and compare that against the other choices you may have. Sullivan also recommends that you not rent cable or DSL modem equipment. You can almost always buy equipment like that at a deeply discounted rate online. The problem with renting the equipment is that it is often a barrier to removing yourself from the contract. If you have to actually return the cable box, you might not change your service when the time comes to do so.
Rental Car Trickery: Are you at all familiar with the gas trick? If you even think of not filling that baby up before you drop it off, the gas magically becomes the most expensive gas on the planet. And then there’s this one: To buy the rental car insurance or not to buy? Sullivan says it is not necessary but that you should call your credit card company and make sure you understand what’s really covered. They will often provide you with gap insurance, and you are often already covered by your own personal automobile insurance.
Hotels: Don’t touch the mini bar or the telephone. Not only will you pay $3-$4 for the bottle of water or a bag of chips, but sometimes you don’t even have to consume an item before being charged. Sullivan cites The Wynn Hotel in Las Vegas as an example. If you even take the item out to look at it for more than 60 seconds, you’re charged for that item…no, really. And as for the telephone, some hotels now even charge you just to call the room next door!
Bank Fees: Here’s a scenario we’re all familiar with. Let's say that you're running late and realize you need some cash. The first bank with an ATM you come across is, say, Bank of America. Since you’re not a Bank of America customer, it’ll probably cost you $5 to get $20 of your own money. What’s more, when you ask for the money, the machine won’t really tell you that it’s going to cost you $5.00. It’ll give you half the fee, the Bank of America fee, which is $3. Sullivan jokes, “These ATM's can do all kids of great stuff like figure out what your PIN number is or what your balance is, but somehow it cannot figure out what the true price of trying to get the money is.” Sullivan says bank fees are the worst of all. Banks are probably making a third of their revenues from fees. Some banks make more money from fees than they do from interest…no, really.
Sullivan says that reason that the fee scam has become so common is that a few decades ago, the pricing structure of things began to slowly morph. Companies realized that they could essentially trick us with low teaser prices and then sneak in after-charges. And the reason that people don’t protest more? Sullivan says companies have perfected the amount they can ding us for. It’s usually about $10 a month, and people are just too busy to fight about $10. He also cites the fact that the agency that would deal with fee complaints, The Federal Trade Commission, has about half the staff they once did at a time when the U.S. population has grown to more than 300 million people. This presents a workload of ever-increasing consumer issues that the FTC simply cannot keep up with.
So is there actually anything you can do about these fees? Here’s a link to 10 tips for avoiding some of the worst fee offenders. I, for one, plan to use tip number nine more. "Follow this overriding principle: Just ask. It really is OK to ask for deals that aren’t widely promoted or that initially may not seem to apply to you." Companies count on the fact that most people aren't going to take the time to look more closely but you might just save a bundle if you're willing to.
-Alison Abney
Source: Sullivan, Bob. Gotcha Capitalism: How Hidden Fees Rip You Off Every Day and What You can Do About It. New York: Ballantine Books, 2007.
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
January 10, 2008
No Retreat, No Surrender
"What's your exit strategy?"
This is probably one of the most asked questions we hear in the Snider Investment Method workshop. It is undoubtedly born of an instinct deeply woven into the fabric of our DNA. It's a survival question in the same vein as "What are my chances of outrunning that mountain lion?" or "How long will I need to hang out in this tree before I can safely come down again?"
The problem is that having an exit strategy will serve you well if you are trying to survive, but it is deadly if you're investing for retirement. The question usually surfaces sometime around the end of the famous Checkfree example. CKFR was a stock Kim held for a little more than four years through some very tough market conditions including September 11, 2001. Those who understand the folly of the exit strategy get why it doesn't make sense. Those who are not quite there yet see this example and think "Oh dear God! That could happen to me. I could get into some stock that I buy at $50 and it could go all the way down to $8 a share."
Yes, you could. The truth is that any stock is capable of an extreme movement, given the right set of circumstances or the wrong set of circumstances -- or really any set of circumstances that may or may not be rational at all. And the point of showing the CKFR example is to illustrate that the stock was by all accounts a winner despite its longevity and despite its hair-raising ride on the market roller coaster.
If you don't have a system or a plan -- or if more likely, your plan is "flexible"-- you're going to be really miserable, and you'll probably decide it's time employ your exit strategy once the going gets tough. But what does that really mean? What exactly is an exit strategy?
It sounds quite sensible, after all. It isn't. All it really means is that you're panicking out of the market at the bottom. You really have no strategy; you're just really scared. Later on, when the dust settles, you'll go ahead and sheepishly find your way back into the market when it's high again and you have no choice but to pay top dollar for some new stock. Or worse than that, you stay in cash and now instead of losing principal you're looking at your safe bond portfolio or money market being chewed up by inflation.
We've all been there, having that heart-to-heart with the financial planner. It's that softball question that gets us every time, "How much risk can you tolerate?" People's responses vary, but mine was usually: "None!" (I am not a gambler by nature). The financial planner patiently explains what you'll be looking at in this case, and it isn't much. Finally, you concede that the only way to beat inflation is to take some risk. So you do, but you don't like it unless risk means your portfolio value will always trend upward.
But that's what you'd experience in a perfect world, and let's face it, we don't live there. Or as author Walter Updegrave's book is titled, We're Not in Kansas Anymore.
Chapter 6 of the book is titled, Invest with Your Head, Not Your Gut. The Snider Method asks you to do the same thing, meaning you have a plan that is meant to be followed even when your gut wants you to activate the parachute or employ the ill-fated exit strategy.
Mr. Updegrave's retirement advice follows:
"Wall Street Likes to Make Things Complicated but Complications Divert Attention from What's Important: Listen to the analysts and pundits and you get the impression that successful investing involves following every wiggle in the financial markets. Retirement investing has nothing to do with trying to react to the markets on a nanosecond by nanosecond basis."
"Wall Street Loves Fads...but Fads Are Dangerous for Us: Fads are great for generating fees, but they usually fizzle leaving the investor holding the bag."
And perhaps most applicable, given this latest round of market turbulence:
"Don't Be Swayed by Market Euphoria or Pessimism: Remember the late 1990's?"
Investors were sure the good times would never end, until they did. So from 2000 through 2002 people were running from losses and going into their cash caves. This was a mistake. If you're going to be in the market, remember those times as if they were yesterday. I know we would rather forget them, but retirement investing is a long-term gig, period. Your retirement investing is a commitment with no exit strategy, no matter how tempting it may be to climb that tree and hang out until it's all clear.
Here's a related blog post on this topic from the Generation X Finance Blog.
Source: Updegrave, Walter. We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World. New York: Crown, 2004.
-Alison Abney
Kim Snider, Kim Snider Financial Communications and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
December 19, 2007
This is Time Well Spent
I know how much some of you love Sudoku, People Magazine, or the latest novel on Oprah’s Book List so I may be writing this at my own peril, but may I make a suggestion? If you find yourself having to wait in long lines, on long flights or in a car for more than an hour this holiday travel season, put down the Sudoku and pick up something more useful: a book. In this case I want to share some of the best financial books (this is the short list) that I have read or plan to read this year. I am a far more informed investor for having read them and I believe that you will be too. The list includes some classics, as well as new offerings from 2007.
-The Wealthy Barber by David Chilton. This is the book for anyone who has no idea how to manage money. The author makes a noble attempt at not boring the reluctant investor to death -- but that also means it’s a little thin on details. The story centers on three young characters who befriend a local barber (hence the title). The friends meet once a month at the barber shop, where the wealthy barber shares his hard-won wisdom on saving, investing, buying a home, insurance needs and much more. The advice is sound and the advice timeless.
-A Random Walk Down Wall Street by Burton Malkiel. This one is a classic and a must-read for anyone who’d like to retire some day. Malkiel cuts through Wall Street hype, dispels some common investment myths and provides a step-by step guide to investing using a variety of investment types from employer plans to personal savings vehicles. I particularly enjoyed his historical look at the madness that can ensue when a particular investment becomes trendy. There was the Tulip-Bulb Craze, The South Sea Bubble, The Nifty Fifty, The Biotech Bubble, The New-Issue Craze and the list just goes on and on. It is truly fascinating reading.
-Personal Finance for Dummies, 5th Edition by Eric Tyson. This one picks up where The Wealthy Barber leaves off. I’ve often heard the criticism levied against schools that they fail to teach people how to manage money. This book does just that. Here’s a sampling of the wide range of topics the book covers: How to avoid fake financial gurus, how to develop good financial habits, how to arrive at your actual net worth, understanding your credit score, how to reduce the interest rates on your credit cards, how to tame your taxes, and my favorite section: the survival guide for ten life changes. In other words, this book covers it all.
- The Age of Turbulence by Alan Greenspan. Anyone who lived through the Greenspan era must read this. It contains a mix of personal history with mini-lessons of economics, first starting with his childhood in New York, then moving to his teen years, his Ph.D. work, and his eventual move into government service. The book is broken into two parts: the first recounts Greenspan’s learning path through the years, and the second concerns the application of these lessons learned toward attempting to understand the new global economy. The sweep of the story is extensive, allowing us to peer into Greenspan's thinking concerning the fall of the Berlin Wall, the role of Russia in the 20th century, the rise of China in world economics, the dot-com bubble burst and the effects of globalization. In it, Greenspan not only makes his formidable knowledge of all these subjects known, but he also tells us his beliefs about many of them. I enjoyed the end the most as Greenspan gives us a glance into how the world may look a quarter of a century from now.
-A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation by Richard Bookstaber. I have seen it recommended by Nick Murray as well as a variety of other financial web sites. Mr. Bookstaber runs an equity hedge fund in Connecticut. He was the director of risk management at Ziff Brothers Investments and at Moore Capital Management, one of the largest hedge funds in the world. He served as the managing director in charge of risk management at Salomon Brothers. He also spent 10 years at Morgan Stanley in quantitative research, and he has a Ph.D. in economics from MIT. Clearly, this one is more academic, but it’s one that will challenge you. The last time I was in Manhattan, I was next sitting next to a group of very slick looking young guys. One of them asked another what he planned to do after college graduation. I found his response intriguing: “I’m going to look for something with a hedge fund.” Why do you suppose he chose that? My guess is he and his buddies graduating with finance degrees have heard that’s where the money is. It seems to me that any time something becomes fashionable in the financial services industry, it may be time to take a closer look.
Enjoy!
-Alison Abney
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
November 27, 2007
Why Are We Such Poor Investors?
If they're honest, most people will admit that they’ve made some fairly poor investing decisions at one time or another. Well, there’s a pretty substantial body of evidence to explain why we are so bad at investing. As it turns out, we can thank our biology. We are built with a backward-looking, pattern-seeking brain that wants us to buy when prices are irrationally high and sell when prices are irrationally low. We are built to be exactly out of sync with financial opportunity.
Behavioral economists have proven that our financial decisions are often irrational. The obvious question is, why have we been built so badly at something so important?
One source of our troubles lies in the discord between our modern world and that of our ancestors. Our brains reflect the world of our ancestors. To illustrate the idea, Terry Burnham, author of Mean Markets and Lizard Brains: How to Profit from the New Science of Irrationality, divides the brain into two parts: the prefrontal cortex and the lizard brain. Of course, this is a dramatic simplification of an incredibly complex organ, but he wants people to understand that abstract cognition occurs in the brain’s prefrontal cortex. And the lizard brain is shorthand for the parts of our brain that are less abstract. They're great for finding food and shelter but horrible for investing.
We also come to the investing game with an analytic tool kit that lacks some of the key elements required for investment analysis (try his puzzles on page 16). It turns out that we are overconfident about our mathematical skills, and that overconfidence leads us to believe we have better investing skills than we actually do.
Another problem is that the lizard brain is built to look for patterns in a world of markets that are highly irrational. He says that if we work at silencing the lizard brain, we can learn to look for the sweet spots in the market. To be successful, we must be willing to be diligent, introspective and disciplined. To do that, Burnham says that you have to get extreme. You have to shackle the lizard brain and throw away the key. Here are a few of his suggested techniques to do that:
-Don’t trade emotionally, unless you’re Tom Cruise.
Cruise’s character Maverick in the movie Top Gun uses his exceptional flying instincts to execute risky, death-defying stunts. While he impressed his fellow pilots, his instructor used him as an example of what not to do. She tells the others to instead be like the unemotional pilot, Iceman, who is able to get the job done but without risking life and limb. In other words, there is a very small number of people who can make vast fortunes in the financial markets, but most of us aren’t equipped with those skills.
-Never trust anyone, not even yourself
Again, the lizard brain is at work when we have one of those pressing needs to trade right now. We tend to think this is our golden ticket, not to be passed up under any circumstance. Burnham says to wait at least a week between any trading idea and actual implementation. Perhaps you’ll miss a great deal once in a while, but you’ll also save yourself a bundle on bad decisions. And NEVER trade on other people’s tips, ever.
-Do not open your statements
When it comes to investing, our inability to ignore extraneous information costs us money. By the time news is available and you decide to hit the sell button, it’s probably already too late. As much as possible, turn off the TV during the day and don’t look into your portfolio. Stick to the plan you started with.
-Do not get the key to the mini bar
Burnham says when he checks into a hotel, he avoids the temptation of the mini bar by simply refusing the key. In other words, if frequent trading is your peanut M&Ms®, find a way to remove that temptation. Arrange your finances so that impulsive trades are not possible, otherwise you’re costing yourself money.
Taming the lizard brain is not easy. But, as Mr. Burnham reminds us, making money is not really all that easy either. If it were, more people would be doing it and they’d be much better at it. He also believes that financial success does not require a degree from MIT (he has one) or a genius level IQ. It requires emotional intelligence in the form of self-knowledge, confidence and mental toughness. Sometimes the successful investor will face ridicule and underperformance. But that’s all part of the process.
-Alison Abney
Source:
Burnham, Terry. Mean Markets and Lizard Brains: How to Profit from the New Science of Irrationality. New Jersey: John Wiley & Sons, Inc., 2005.
DISCLAIMER:
No statement in this email should be construed as a recommendation to buy or sell a security or to provide investment advice unless specifically stated as such. All investors should consult a qualified professional before trading in any security. Stock and option trading involves risk and is not suitable for all investors. Past performance does not guarantee future results. Investment objectives, risks and other information about the Snider Investment Method™ are contained in the Snider Investment Method Owner's Manual; read and consider them carefully before investing.
