Tuesday, April 16, 2013

Cargo Cult Riches

Over the last few weeks, we've seen gold drop. We've seen Bitcoin ramp up then drop a little bit.

I have an idea of one of the forces behind things like this, besides deliberate manipulation.

Most "investors" seem to be working from a cargo cult mentality. They don't understand what they're doing or why they're doing it. They only have one or two data points from which to figure "I better do this!"

They see people "getting rich" in stocks and think "OK, I just need to get into stocks, and I'll be rich too!" Or they see people "getting rich" in real estate, and think "OK, I just need to get into real estate, and I can be rich too!"

But they don't know what the people "getting rich" in stocks or real estate (or yet another investment) are doing or why they're doing it. All they see is people "getting rich".

Gold is about the same. People listen to Glenn Beck and other gold pitchmen and freak out and buy gold. I used to listen to Alex Jones. He pitched for gold almost hourly. Wouldn't shut up about it. Now he's in some  MLM pyramid scheme selling overpriced vitamin powder.

Let's look at stocks. People buy stocks to "get rich", but don't understand why stocks might make them rich. As I said above, the same applies in real estate. People have a flipper mentality. They think "I buy the stock (house) low, and I sell it high! Preferably within 15 minutes." They don't understand that the reason people in stocks and real estate "get rich" is not because they buy the "right" stock or house and flip it right away. People in both "get rich" through long term holding. You aren't supposed to buy a stock you're going to sell in the next 15 minutes. You're supposed to consider stocks based on what kind of dividends they'll pay you.

For this part, I'm talking out my ass because I don't really own any stock so we're going with my limited understanding of the theory. My employer sponsored retirement is in "funds". Lets say you buy a single share of stock for $15. Your $15 in your bank account has been transferred in value to the single share of stock, so your net worth remains the same. You can sell the stock for $15 and walk away even. But this share of stock pays $.15 in dividend. Over the course of a year, if the stock holds steady, your net worth is still $15 in the stock, but over the course of the year, you'll have earned $1.80 in dividends. So next year, you buy another $15 share of stock int he same company, and now you're earning $3.60 in dividends. By the way, this dividend income is only taxed at 15% because Warren Buffet.

Obviously, a serious investor will buy enough shares of stock to at least get a cup of coffee at Starbucks (after taxes). Let's say you could pull off enough stock investment to ensure approximately $60,000 per year in dividend income. Your income taxes on this are 15%. In some areas of the country, you could live on this alone. That means no commute; no job; none of that BS.

The same principle goes for a house. Say you purchase a house for $100,000. You put 20% down like a SMART investor. At 5% interest, $80,000 financed over 30 years will come to about $550 per month. Tack on taxes and let's say we're at $900 per month, which is probably unrealistic outside a shithole like New Jersey (where I own an upside down house that can't sell that charges me $5500 per year in property taxes on a four bedroom cape cod on .18 acres).

You rent the place for $1000 per month. That's $12,000 per year.

Now lets say you "flip" the house rather than rent it. You put $20,000 worth of work into it and "flip" it for $130,000. I doubt that's possible, but this is theoretical. Which option gives you more? A one time theoretical $10,000, or $12,000 per year in rental income?

Most investors don't think that far, which is why I call them "cargo cult investors". They scream bullshit like "I just have to find the RIGHT stock." "I just have to find a house and flip it!" "I have to buy gold 'cause Glenn Beck says so!"

Yet they don't understand why. And when prices go south, they flip the hell out and sell off. They are incredibly prone to market manipulation. On one hand "I have to buy gold! You need gold too! If the economy collapses, gold will save us!" On the other hand "Oh, crap! Gold is dropping. Sell! Sell! Sell!"

That's what happened in 2008. The stock market dropped, so people dumped their retirement plans. And lost a buttload of money. Those who stayed in saw their plans come back up. A friend showed me the Excel graph he keeps of his retirement account. There was a drop in 2008, followed by a SHARP increase in 2009-2010. Not only did he maintain the monthly retirement contribution; he upped it. So while the price of shares were down, he was buying more for the same amount. Then when they came back, his value soared.

Today's lesson is, don't be a cargo cult investor. If you don't know what you're doing, ask somebody. Preferably somebody outside of your family and social circle. Don't take advice from people who can't demonstrate success in the area in which they're offering advice in. Just smile nicely while you say under your breath "You're full of shit. You've never done this. You just read it in a mass-market paperback bestseller aimed at idiots like you who will eat this up and never act on it. I'm not going to listen". 
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