Why the lady sitting next to me should pay $2,000 for a computer class

April 22 28 Comments latest by FollowSteph.com

I’m sitting at my neighborhood coffee shop listening to two women talk about their careers. Yes, I eavesdrop.

One of them is complaining about her job, but says that she can’t get another one because she’s uncomfortable with her computer skills. Which led me to this post.

If you take a $2,000 computer class and it lets you get a job with a $10,000 salary bump, you should do it. No question.

If you buy one book per week, for $20 each, that’s $1,000 per year. If you get one good idea per week, my friend Paul told me, it’s worth it. If you apply that idea, I can’t even guess how much it would be worth.

If you buy a new car for $8,000 more than a used car, it can sometimes be worth it.

Put the numbers in context and look at value, not just cost. A $2,000 conference sure sounds like a lot. But if you make $80,000 off it, it sure looks like an investment. (Which is exactly what another friend, Erica, just did.)

Of course, the excuses will come. I don’t have that kind of money. (Answer: Save up.) How do I know if the class will get me that better job? I could probably take the same class for $100 somewhere else. All this stuff is free online, anyway.

You don’t know. That’s part of deciding what’s valuable and what’s simply a cost. But remember, buying something is not just about a number. If the value exceeds the cost, do it.

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28 Comments latest by FollowSteph.com

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

January 22 41 Comments latest by Noah Davis

[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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41 Comments latest by Noah Davis

My friend was about to buy a million-dollar house with no research

January 7 52 Comments latest by Shaun Rosenberg

Note: I’ve created a new category called “Real estate” (see the other categories on the right side of the blog).

One of my friends is 28 and she’s looking to buy a house in San Francisco pretty soon. Now, as you know, I’m not a big fan of real estate for investment reasons, but because I’m not an expert, I’ve been researching it more and more (see my links here). So when she mentioned wanting to buy a house, I asked one question: “Why?”

This is where things fell apart.

Her responses included things like:

“I don’t want to waste money paying rent.” I’m convinced this awful phrase was invented by Realtors BECAUSE IT’S SIMPLY NOT TRUE FOR EVERYONE. YOU ARE NOT WASTING RENT IF YOU LIVE IN AN EXPENSIVE AREA. Here’s a good article with more details.

I asked what she thought about the real-estate market right now, considering many of the ARM resets are still coming. One response: “The market is already bad, so there’s upside potential when I sell? what do you think of that logic? Prices are supposedly lower right now as a result.” I don’t think logic is enough to justify the biggest purchase of your life.

I also pasted a couple of the best articles on real estate: This one (Yahoo Finance) and this one (New York Times).

The result was interesting. She hadn’t seen these, so she asked me what I would do with my money. At this point, I was at a coffee shop and one of them lived near me, so she came over to talk about this in-person. I looked over her finances and realized she had tens of thousands of dollars just sitting around, earning hardly any interest. Even putting it in an ING savings account would have gotten her hundreds of dollars a month (open an ING savings account in 10 minutes).

The first thing I did was suggest three books to her on investing (more books I recommend). We talked for a while, and I suggested some things she could do to improve her finances and start earning more. After about 20 minutes of back-and-forth, I asked her what she was going to do for her next steps. “I’m going to be honest,” she said. “I’m not going to read those books.”

I thought this was really fascinating. Here’s someone who has tens of thousands of dollars earning 0.5% interest and she’s so resistant to the idea of reading investment books that she almost bought a million-dollar house instead. Five years ago, she had a significant amount of money. What if she had invested it in the stock market?

And five years from now, wouldn’t she be happy that she spent 5-10 hours reading a few books to get her finances in order?

Why young people still think of real-estate as an investment
One of the best things to happen from the real-estate bust that we’re undergoing is to make people think twice about real estate as an investment. That’s right — to actually consciously think about why they’re making the biggest purchase of their lives, rather than just buying a house because “it’s the next thing to do.”

And yet, I’m still stunned when I hear about my friends “investing” in real estate, especially in the Bay Area. (Yes, real estate can be profitable and great, but in some areas of the country there are far better investments).

I thought about it over the weekend, and I think there are a few reasons why real estate still seems to appealing to my friends:

1. They have some money lying around and know they should be doing something
2. They don’t know anything about investing, and the barriers to knowledge seem high
3. Real estate represents something tangible — and something their parents probably keep reminding them about
4. Society still explicitly and implicitly rewards homeowners (just think about a young friend who owns a home — are others impressed?)
5. THEY HAVE BEEN IGNORING EVERYTHING IN THE NEWS EVERY DAY FOR THE LAST 1 YEAR ABOUT REAL ESTATE (???)
6. It’s easier to do new things than to look back at old things, like reading books or handpicked articles about real-estate (Seriously, how many people will click and read through those links?)

Research for gargantuan purchases = good
Here’s the point: Buying a house is the biggest purchase you’ll ever make. When you do it, you need to understand exactly why. That means an extensive amount of research. When I bought a car, for example, I spent months learning about every trick under the sun. I had 17 dealers negotiating with each other to get my business. And that was to save a few thousand dollars! Now, I’m Indian and I’m weird, but I did that for buying a car. When I buy a house, I expect to enlist the help of several third-world researchers for months of research and, when I walk into the final negotiation, I will be accompanied by a large hairy man, a metal baton, and a chimp. IT’S THE BIGGEST PURCHASE OF YOUR LIFE. WHY WOULDN’T YOU SPEND TIME UNDERSTANDING THE PROS AND CONS OF IT?

You know, on one hand, much of this site is about getting started and not spending too much time doing endless research. But there’s a balance, as I describe in my article on conscious spending — you need to know the basics, and you need to know much more for real estate, which you can’t just sell the next day if you decide you don’t like it. When I pointed out sites like Patrick.net to my friend, she had never heard of them.

As usual, there are lots of ads and media influences to buy, but ultimately we make the decision on how much to research our real-estate purchases. I’m not saying it’s a bad decision — although my real-estate colors are clearly showing — but when I read a real-estate blog like SocketSite, I realize I’m not nearly as knowledgeable about real estate as others.

The 3-Book Solution
For many, what seems like an intimidating amount of research can be broken down by buying 3 books and reading them. Instead of coming in with a blank slate, you go to Amazon, find the highest-rated books in your area, and read them in a couple of weeks. I’ve done this with books on marketing, venture capital, and psychology. I keep a notepad and write down my questions. After 3 books, you’ll have very targeted and specific questions to ask someone. (Instead of “what should I do???” you might say, “Should I choose a Roth IRA or Roth 401(k)?”)

In July, I wrote about how asking targeted questions can get you targeted answers. To get the right answers about investing, pick up a few books — whether these ones or other ones — and get started by asking the right questions. Here are the three best books to get started investing.

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52 Comments latest by Shaun Rosenberg

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