You may have noticed I tend to harp on some simple concepts over and over again. Here is a brief list of quotes I tend to use again and again, as I think they illustrate basic important concepts:
The more complicated you can make any financial transaction, the easier it is to fleece the consumer.
Simply stated, any financial transaction where the price is obscured, or tied to some other unrelated transaction (a free toaster) or several different priced items or features are tied in (interest rate, trade-in, etc.) the easier it is to confuse you as to the fundamental terms of the deal.
It is always best to simplify transactions - you hand someone cash, they give you a good or service, period. Any transaction more complicated than that inevitably confuses you and robs you of hundreds, if not thousands of dollars.
They throw pennies at us, hoping we spend dollars.
Promotions based on "free" things, giveaways, cash back, airlines miles and the like are almost always bogus. They want you to concentrate on the ancillary deal, not the primary one. So you think you are "making out" on free airline miles, and fail to realize you are getting screwed on the interest rate.
They give you tiny discounts or incentives, hoping you spend thousands of dollars over time. Again, it is better to focus on the terms of the underlying deal than to focus on their game - the cash-back bonus or whatever. They would prefer that you play their game, of course!
Generate your own Normative Cues!
Don't rely on society or television to decide what is "normal" - if you do, you will spend yourself to the poor house, as most Americans do this - and think it is "normal" as well.
To break free from the trap of our consumerist society, you must learn to think for yourself - think differently and analytically - and realize that much of the messages you are bombarded with daily are commercial messages that are designed to get you to act in a manner that is diametrically opposed to your own self-interest.
Create you own norms and live with them, despite of the inevitable ridicule you will receive from people who have literally "bought in" to consumerist norms.
Any business relationship predicated on a lie, no matter how trivial, will inevitably go downhill from there.
Liars play their hand early. When you answer the phone and someone says "how are YOU today?" they are lying to you, as they really don't care about how well you are doing. When you get a piece of mail that says "urgent!" when it is just an ad, or is faked-up to look like a tax refund check or something important - to get you to open it - they are lying to you. When a commercial says you can "lease a new car for $199 a month!" and you get down to the dealer and realize it will cost far more than that, they are lying to you.
People who lie to you at the get-go aren't going to become more honest over time. Just walk away from deceptive advertising, practices, and come-ons. Every time you send business to people to operate this way, you encourage more people to do it - and drive out of business the few honest people left.
If someone tries to sell you " Peace of Mind" , keep one hand on your wallet.
Peace of mind doesn't come from extended warranties, alarm systems, insurance, or other material things. If you are worried about possessions breaking down, being stolen or damaged, perhaps a better solution is to own fewer possessions - or own less expensive stuff.
Buying a $50,000 car and then getting an expensive "extended warranty" because you are paranoid it will break, is a sure sign that you can't really afford a $50,000 car in your price bracket.
When someone says they are selling "peace of mind", just walk away. Because what they are really selling you is one acre of blue sky in fee simple, and that just can't be done. What they are usually selling is a bad bargain - either something wildly overpriced, or just a complete rip-off.
So when someone asks you to cheat, chances are, it is because they want to cheat YOU.
If someone approaches you with a business deal or a transaction of any type, and either suggests or insinuates that you "cheat" somehow, just walk away. The best "cons" out there are where the "Mark" (the sucker) is conned into thinking he has "pulled one over" on someone. Once they get you thinking that way, they can fleece you solid.
For example, the car salesman will tell you that he "put a fast one over" on the dealership and got you a car for an incredibly great price - but don't tell anyone! Otherwise the salesman would get in trouble. In reality, he doesn't want you to tell anyone, as they would tell you that you've been conned.
People patrol eBay asking you to "end the auction early" and sell outside eBay to "avoid the fees" - what they are really doing is asking you to sell outside eBay so they can rip you off - and the minimum protections provided by eBay are non-existant.
Similarly, the Nigerian Scammers insinuate you are illegally laundering money - so you won't raise the red flags that their scheme should raise. Or the "too good to be true" car price is so low because you are "cheating" the seller - when in fact he is cheating you, as there is no car - but you sent him the money anyway.
Any time you are encouraged into a crooked deal, chance are, the only crooks involved are not you, but the people stealing from you. And when it all goes horribly wrong, you can't complain about it to anyone, as you were trying to steal in the first place. This is why con-men like scams like this - it keeps the victims silent!
Using the tax code as an investment guide is a bad idea
The IRS tax code is designed to tell you what your tax bill will be, and what are considered legitimate deductions from income, or what tax credits are provided as incentives to do certain actions. If you do these certain actions, you should take advantage of tax credits, and of course take all legitimate deductions.
But doing things only because there is a deduction or credit is stupid. Yes, you get a deduction for mortgage interest. No, it is not smart to take on as much mortgage debt as possible in order to get a bigger tax deduction. Yes, they give you a tax credit for buying an electric car. No, this does not mean you can make money by buying an electric car.
You Can't deduct your way to wealth!
As the name implies, a tax deduction merely adjusts your income, which lowers your taxes by the marginal rate times the deduction. It does not lower your taxes by more that the deduction. So if you pay $3000 a month in mortgage interest, this may knock $1000 off your taxes, if you are in a 32% bracket, but it won't pay for your home.
Even juicy tax credits are often no bargain. Occasionally, people come out ahead on some deals, but usually the government closes those down right away. A couple of years back, there was a tax credit for buying an NEV. So astute business people made NEVs from golf cars and sold them as "free" NEVs, as the cost of the vehicle was less than the tax credit.
And as you might guess, the next year, that loophole was closed, and the tax credits for NEVs is a lot less.
A better approach, I think, that obsessing over the tax code and your deductions, is to think about what you really want out of life and then go and do that, and let the tax consequences fall where they may. Because in the long run, you will be happier chasing your dreams than chasing sections of the tax code.
Act Rationally in an Irrational World
All it takes to become wealthy in the United States is to act rationally in an irrational market. If you put money aside, diversify your investments, and stop drinking the get-rich-quick Kool-Aide, you will do OK. If you can be the one who makes investment decisions based on math, careful study, and rational thinking, you will make out like a bandit.
Most of the other players in the marketplace are buying and selling based on reputation, hype, news stories, projections, or worst of all, jumping on the bandwagon. If you just do the opposite of what they are doing, you will be OK.
So when the media hypes buying Gold, chances are, it is not a sound investment. If you think about it for even a minute, if it was such a good deal, why are all these celebrity talk-show haters hyping it? They would be buying it for themselves, not selling it, right?
But that is rational thinking. Irrational thinking is "Glenn Beck is right! Obama is going to turn America in to a Socialist State! I'd better buy gold just in case!"
Of course, these folks don't think this through. How is owning gold bars going to combat Socialism? Or help you when Armageddon comes?
A far more likely outcome, and what they don't want you to think about, is that the bubble will burst, and you will be left holding the bag when the price deflates, as it did in the past.
Think rationally and act rationally (or as rationally as you can) and you will flourish economically.
All advertising is based on the simple premise of persuading a consumer to act in a manner that is NOT in their own financial best interest.
Advertising sells products. That's the whole point of it. And products you need - that are good bargains, sell themselves.
But bad bargains and outright rip-offs, well, they have to be SOLD to the consumer. And advertising is the way companies persuade you to act in a manner that is diametrically opposed to your own personal financial interests.
So, for example, the car company doesn't sell you a car that is "good solid basic transportation" but instead appeals to your ego, telling you that a hot performance car will make you appear sexy, that the big brawny 4x4 pickup more manly, or the high-mileage hybrid more politically correct, or the intelligent European car more sophisticated and worldly. And they have to do this in order to move iron off the lot, as all cars are sold new for 10-20% more than their real value on the resale market.
Advertising should never be viewed as information - it is, at best, a minor entertainment, and at worst, a horribly bad normative cue.
While it may be safer in the center of the herd, the grass is all trampled down and pooped upon.
Herd mentality and thinking is part of our DNA. Animals herd together or school like fishes, to avoid predators. And at the center of the herd, you are pretty safe - but there is darn little to eat, as the other cows have eaten all the good grass, and trampled and pooped on the rest. It is only at the edge of the herd - where there is more risk - that there is good eating.
In a similar manner, our society rewards risk-takers, and the "good eating" is to be found at the edge of society, not in the center. Of course, you have to make sure you are on the leading edge of the herd, not the trailing edge. With the latter, there is darn little to eat, and all danger, with no reward.
But in reality, what many in the herd may perceive as risk, may not materialize. People over-insure themselves for petty or trivial losses that are often long-shots, while ignoring greater risks that are far more likely. People obsess about having glass breakage coverage on their home or car, but few bother with an umbrella liability policy to cover their real catastrophic liability risks.
And what the average citizen considers risky, often isn't. People who make huge amounts of money in risk-taking ventures often do not seem themselves as risk-takers. When I bought investment Real Estate, I thought I was doing something ridiculously easy and risk-free. The only thing that worried me was that it appeared to be too easy.
My friends at the time (1995) thought buying Real Estate was risky, as they had lost their shirts in 1989, when the herd stampeded off a cliff. So they avoided the perceived risk. It was only when the herd started to stampede again in 2005, that they decided it was "safe" to get in on a "sure thing". But by that time, I found the grass being trampled and pooped upon by the heard, and decided to go in a different direction. And the results, well, you know what happened.
And yea, many of my friends thought I was "crazy" to get out of Real Estate at that point, as the herd said it was the best thing ever!
So being risk averse not only yields smaller gains for individuals, it often yields higher risks, ironically.
Never confuse getting lucky with being brilliant.
It is tempting, when you make a decision that turns out right, to think that you are a bloody genius. And this reflects, I think, why we learn less from success from failure. Oftentimes, success is due largely to luck and circumstance - being in the right place at the right time.
Some young tech hotshot forms a company that grows like topsy and is "the next big thing" - and investors hang on his every word. But it turns out that the dude was no big genius of computers or the Internet, but just some guy who was in the right place at the right time, and whose product, for one reason or another, became popular. Bill Gates is no "computer guru" who "invented Windows" but rather a Harvard business school dropout who was in the right place at the right time when IBM needed an operating system, and no one else picked up the phone. You're going to take tech advice from this guy?
On a personal level, it is tempting, once you've made some money on stock picks or maybe Real Estate investing, to think you are a financial Superman. But Supermen are vulnerable to kryptonite, and in the financial world, this kryptonite is overconfidence. Everyone is going to make right decisions on occasion and make a lot of money - this does not mean you have discovered the "secret" to the market or investing. An eventually, if you keep on with this type of investing, the law of probability will catch up with you.
On Wall Street, the same effect happens. A young hotshot at an investment firm seems to pick all the right stocks and is hailed as a genius. But like any group of people flipping a coin 100 times, there will always be one guy who flips more heads than tails. That doesn't make him an expert coin-flipper, but merely an outlier on the bell distribution curve. And eventually, his winning streak will cease, at which point the prognosticators will shake their heads and say "Well, he certainly has lost his touch, hasn't he?" when in fact, his touch was the same, but probability kicked in. Being lucky isn't the same as being brilliant.
The same goes for business models or other plans. When you ask someone a direct question, and they hem and haw and use buzz-words and happy-talk, and 10 minutes later, they finish their answer, and you still have no idea what they said, well, you are being bamboozled in the classic sense.
And it doesn't matter if it is a job applicant, a prospective tenant, prospective employer, or whatever. When you get the bamboozle, watch out! Because they have started lying to you, and it is going to go downhill, fast.
I had a prospective tenant do this to me once. "What do you do for a living?" I asked, and 10 minutes later, they finished their long-winded story, and I was none the wiser as to what they did. When I ran their credit history, it was blank - no history at all. The conclusion? Whatever it is they did, it was either illegal or under-the-table. Either way, a bad choice for a tenant!
When a "dot com" whiz-kid asked me to write some Patents, I asked them what the invention was. 10 minutes later, I am none the wiser, although I have been treated to a litany of buzzwords and some of the vaguest white-board diagrams imaginable.
Asking simple, direct questions is best. And if someone throws buzzwords at you in return, just walk away. You could ask for clarification, but in most cases, it never works - they just blather on some more.
The Internet is a powerful tool. And increasingly, it is being co-opted by marketing people. Facebook is the latest and greatest example of this. They want you to "like" products and also share, with other users, what you buy and where you buy it.
But it goes beyond that. Various rating sites, from Angie's List to TripAdvisor to ePinions, all offer unfiltered recommendations, supposedly from consumers like you. But every site can be spammed and shilled and otherwise skewed to the advantage of a company listed - or its competitor.
And of course, there are an increasing number of phoney sites that are faked-up to look like consumer evaluation sites, but are entire put-up jobs for the company being evaluated.
Use your common sense. If something sounds too good to be true, it probably is. If you go to a website and all the recommendations are positive and vague ("what a super (place/product/service)!") then chances are, it is just a shill.
These are just a few of the basic principles I have developed over the past two years - based on over 35 years of being a "consumer" in America. My only regret is that it took over three decades to figure this out....