The worst financial advice from around the web! (Today only)

January 22 44 Comments latest by Richard

[Updated below! 10:58am PST 6:14pm PST]

Today is going to be awesome. As you may have seen, stock indexes are dropping all over the world. That means that the kooks are coming out today! There will be lots of pundits mouthing off about what this world is coming to. Oh, doom and gloom!

Image from the New York Times.

As you know, I have a very low opinion of Chicken Little Kooks and the media’s horrible performance at predicting economic performance. And I’ve previously written about how hilariously frantic the media behaves during “global corrections.”

So today, I’m going to catalogue the worst financial advice from around the web. If you see something, add a comment!

* * *

From this thread on Reddit:

When you buy things like index funds and mutual funds, what do you think you’re really getting? Both the good AND the bad companies, all piled together, with no way for you to separate them. The whole point of buying individual stocks is to minimize the number of bad stock in your portfolio.

Let’s say you buy an index fund, and you also know that there’s a company within the index that is not only terrible, but where you know that they’re about to completely go out of business. You’re watching their stock, and it’s tumbling, day after day. You know what you, as an index fund investor, can do about this? NOTHING! You just sit there and watch that bad stock flush your money down the toilet.

Or let’s say there are 3 industries within the index (manufacturing, technology, and retail), and you know without a shred of doubt that the retail industry is going to take a severe beating for the next several years, and you wish you stopped owning all those bad companies. You have no power! You’ll just watch your money burn, while hoping that the other two industries in the index pick up the slack.

Now, sure, in the end the good stock may outweigh all the bad apples in the index. But the fact that you can’t get rid of the bad apples is also the reason why the profits on these things, while generally consistent, are so low.

If you have the time and the inclination to perform detailed research into where your money is going, and if you’re smart enough to read books on how to do this correctly and minimizing the risks, then buying individual stocks is a great idea, and sticking your head in the ground and buying an index fund or ETFs becomes a gigantic waste of your money.

This Marketwatch column, by Mark Hulbert, is so incredible that I just decided to paraphrase it for you. I strongly encourage you to open it in another window and follow along.

‘Now and 1987 were very similar.

Of course, things are different.

To be sure, I am not sure what I am saying (and I use double-negatives to confuse you into thinking I am writing something coherent).

Now I am going to quote someone who says something inconclusive.

I will add some quotation marks now.

The “expert” I am quoting says things are pretty good.

But even if they go bad, they won’t be bad.

Ahh, my work here is done.’

[Updated, 10:58am] From this forum (forums are the best for these kind of quotes):

As the bubble market bursts, I predict a recession with an extra added bonus of inflation running close to 10% - before the end of 2008…If Bush continues to shovel shit on the dollar right up to the end of his term in January 2009, the inflation rate could hit 15%-20% by 2010.

[Updated, 6:14pm] Ahh, Fortune, you never fail to tell me your kooky forward-looking predictions. In this delightful article on real estate (”Real estate: Buy, sell, or hold?”), they say the following:

Our exclusive calculations can help you figure out what your house will be worth in coming years.

“Exclusive?” Really? This sounds promising! Only a few lines later, they write this:

Take a deep breath. We can’t tell you what your house would fetch tomorrow. But we can help you through the fog of whipsawing prices and vacillating views to develop a clear picture of what your house will most likely be worth in five years or so.

The key word is likely. See, I can predict anything to be “likely” if the time horizon is long enough. For example, I predict that you will likely gain weight in the next 20 years. I furthermore predict that you will likely have gray hair and that you will likely need to take some sort of medicine! HOW DID I DO IT??! I AM A GENIUS!!!!!!!!!!!!

Please add more horrible financial advice you find to the comments. I’m especially interested in finding people who recommend buying gold and tin cans full of oil and butter. They are the best.

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44 Comments latest by Richard

Measure yourself using the same techniques the Fortune 500 uses

January 21 35 Comments latest by greg

[RSS readers: Click here to see the embedded spreadsheets in this post.]

I have a very attractive single female friend who’s convinced that she needs to lose weight to get a boyfriend. I took one look at her a few months ago and said, “You’re crazy.” She looked great. Despite my comments, she decided to spend the last six months being ultra-disciplined about her diet and exercise. She’s lost weight and looks even better now.

The thing is, she’s still gotten 0 dates.

If she were being intellectually honest, she would have kept a spreadsheet that looked like this:

It’s hard to ignore data as objective as this. Sure, maybe weight matters, but it’s clearly not the most important factor to work on. So today, I’m going to show you how I track spending, eating, etc — and give you templates to do the same.

See, I don’t understand people who do increasing amounts of work without measuring the results. I want to invent a time machine, go back in time, find a stegosaurus tail, come back, and beat these people in the face with it. At least then I can be hailed as a hero for inventing a time machine.

Seriously, why would you spin your wheels without figuring out a way to analyze what’s working and what’s not? After analyzing my own time, I’m convinced that about 30% of what I do really matters, 30% might matter, and 30% is completely worthless. The key is finding out which of your efforts are producing big results. As Tim Ferriss wrote in The 4-Hour Workweek,

Out of more than 120 wholesale customers, a mere 5 were bringing in 95% of the revenue. I was spending 98% of my time chasing the remainder…The end result? I went from chasing and appeasing 120 customers to simply receiving large orders from eight…my monthly income increased from $30K to $60K in four weeks and my weekly hours immediately dropped from over 80 to approximately 15.”

(Read my review of The 4-Hour Workweek, which led hundreds of people to buy a copy of the book.)

Now that’s measurement. And while 2007 was the year of conscious spending, 2008 is the year of measurement. Here’s how to use measurement to persuade yourself to change.

* * *
So, what should you track?
It’s important to track the right things. My friend could have tracked the color of her socks or the saltiness of her almonds, but I bet that wouldn’t have had a very strong correlation with her getting men. Here are 10 ideas for items to track, but I’ll bet you capture 90% of the bare necessities if you track just these things:

• What categories you spend money on (and how much)
• How many calories you eat
• How often you work out

How to track: Use the Think, Want, Do Technique
This is a technique I came up with a few years ago when I started tracking a bunch of things in my life. Let’s use monthly spending as an example.

First, write down what you think you spend.

Second, write down what you want to spend.

Third, write down what you actually spend. (This is where you track it and add it daily.)

Then compare the “actual” chart to the other charts. I guarantee you, the numbers will stun you. When I first started tracking my spending, for example, I discovered that 70% of it was going towards eating out. In one final move of disgust, I wanted to kill myself by buying a bag of cheetos and stuffing every single morsel in my mouth at once. I would then ask Alanis Morrisette to give my eulogy, during which time she would learn the actual meaning of irony.

Why bother tracking any of this?
Yes, it would be easier to do nothing. But I’d rather do less and get more results. That means having a little short-term pain while you build up an infrastructure to track what’s actually working out of all the things you’re doing right now.

Also, you can’t track this stuff in your head. We’re not properly wired to remember how much we ate or spent — even though, if you ask someone how much they ate/spent last week, they’ll confidently give you an answer. They don’t know what they’re talking about. We chronically mis-estimate for a variety of reasons.

Tracking actual data strips away ideology to show us reality. My friend, for example, was convinced that weight was the impediment to getting dates. Now she knows that weight alone doesn’t have a very big effect.

* * *
How to get started tracking today
The most important thing is to start tracking today. The point isn’t to set up the fanciest tracking system. it’s to learn from the results and change your behavior. (I aim for the most lightweight system I can create — mine has been going for years and is still a creaky collection of Excel, PBwiki, Quicken, Mint, and scraps of paper.) Forget being perfect. Just get started today.

1. Pick one thing to track and do it for four weeks (Use my templates below if you want). Use my templates for tracking spending, eating, or gym attendance.

2. Pick a place to track your progress. For money, I recommend any personal-finance software (try Mint, Quicken, or Excel). For anything else, create a free password-protected PBwiki. You’ll be able to type in your progress from anywhere you have Internet access.

3. Don’t worry about making the data structured so you can sort/analyze it. A few weeks ago, I found myself spending hours creating a fancy model to track how much I travel. I realized how stupid I was being, so I dumped the raw data into a plaintext PBwiki. After a month of data, I had my virtual admin go through it and analyze it. It cost me about $20 to have it professionally restructured and analyzed.

Here I’m tracking my commute times to see the optimal time to drive to work. Ghetto, but it works.

4. Use public commitment to maximize your chances of success. When I bet my friends $225 that I could gain 15lbs in 3 months, I invited them all to a wiki and updated it every week. This was incredibly motivational to me: The money was nice, but I didn’t want to publicly lose after posting my progress for all those weeks.

To use public commitment for your tracking, post a link to your spreadsheet here in the comments. I’ll pick out a few and highlight them on this blog. And if I choose yours, beware: I will make fun of you one month from now, on February 18th, if you don’t follow through.It’s up to you now!

Other resources to read: My NPR interview about measurement, an earlier post called How a beggar in Grenada uses data to optimize donations, and my delicious links on psychology, data, and optimization.

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35 Comments latest by greg

When iwillteachyoutoberich readers miss the point

January 16 25 Comments latest by Malcolm

Just got this email:

My name is XXXXX XXXXXX and I am the Senior Marketing Analyst with [XXXXXXX.com]. I have looked over your blog…and I think there is an opportunity for the both of us. I would like to offer you a partnership with our Company. The partnership is 100% FREE and the link to sign up is at the bottom of this page….

[…]

I see that you write a lot of articles about credit cards, you even have one up today “Free Pepsi for signing up”. If you were to tie the link to the application of that card in the article, let the $$$ flow in.

[…]

He is talking about this post — the one where I mock ridiculous credit-card offers.

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