Weekly Blog - Financial Literacy

How to spot a stock “value trap”

A value trap is a stock that appears to be trading at an attractive price, luring in unsuspecting investors. But instead of being cheap, it turns out to be a losing company or investment. The stock price will be trending downward, leading to capital losses for investors who purchased it by thinking it was a good value. This came up recently when a casual investor I know said he was considering buying Philip Morris because its current dividend yield is a very attractive 7.8%. Plus, analysts are projecting this year’s and next year’s earnings to be higher. I explained that, in my opinion, this is exactly what a value trap looks like.

When a stock has been trading within a certain range for metrics such as:

  • Stock price
  • Price/earnings ratio
  • Price/sales ratio
  • Book value
  • Dividend yield (the Siren song for retirees and beginning investors)
  • Etc.

And when the stock price/metric falls below that range, many investors think, “Hey, it’s cheap now, I better jump on this bargain price before it disappears!” What these investors are failing to see is that there may be a material reason, something fundamental to the company that is creating a dim future for the business. It appears cheap only because the company may be at the beginning of a slow downward contraction. These material reasons can include:

  • This industry is being replaced, disrupted, or slowly disappearing
  • This company is simply unable to grow revenue or find positive investments
  • This company is on an unsustainable path of new debt or stock buybacks
  • The company has poor accounting or ignores capital asset and restructuring charges
  • The company has flat or dropping revenue but earnings are increasing only from cost cutting – a tactic which cannot last forever
  • The company makes a large acquisition for its size – and is starting to not go well
  • This closed-end fund with a high payout yield is actually returning capital, lowering its net-asset value, and has an unsustainable business model. So it will dilute your equity position, reduce the dividend, or worse – all of which will create capital losses as the price drops.

There are many classic examples of large and successful companies that became value traps to any investor that bought them on their slow path to zero: Eastern Airlines, Eastman Kodak, K-Mart, Blockbuster Video, General Motors, Toys R Us, Compaq Computer, Zenith Electronics, Radio Shack, and many more. In the case of Philip Morris, it has several red flags for being a value trap: revenues are not increasing; smoking is becoming more unacceptable around the world; and their JUUL investment into vaping is rapidly deteriorating as legislatures are banning its sale. The stock is priced high for big growth and if that doesn’t arrive, sooner or later, the stock will be re-priced lower. Perhaps Philip Morris can re-invent itself, as so many successful companies have. But until then, in my opinion, it is a potential investment value trap that I would avoid.

Self-imposed success tax

When you make more money, you move up into higher income tax brackets. This progressive tax rate has been called a “success tax,” because the more you make, the higher the rate you are taxed. But this isn’t the only success tax, the other one is your increase from lifestyle spending.

When you were age 19, whatever level of quality you were content to own (from socks to cellphone) or consume (from alcohol to shampoo), it ratchets upward as your income increases. The items we buy today serve the same function as their cheaper competition, but we no longer consider purchasing the cheaper versions. This is called “lifestyle inflation” and it consumes an increasing amount of your income. An article by Derek Thompson highlights data indicating that on average, no matter what your level of income, 50% is spent on housing and transportation. So whether you make $40,000 or $400,000, the average American spends the same: half on housing and transportation. (This ratio is similar for Canada and UK as well).    

Increasing your financial stability would be greatly advanced if instead, you controlled your lifestyle spending. Not just housing and transportation, but all areas. The average person does not control their spending and many require credit cards to pay for all of their over spending. It is always best if your personal ratios for any spending be FAR below the ratios for the average person (because the average person is always a very-poor money manager).

Let’s examine an item that most of us purchase – shoes.

  1. Were you content or in utter agony with a cheap pair of shoes when you were age 19?
  2. Sitting alone at your kitchen table, does it really matter if you have an expensive logo on your shoes?
  3. Are you able to experience appreciation for a new pair of shoes you just purchased, or do you immediately search for an even better pair to add to your large collection that you rarely use?
  4. Would you prefer to own a cheaper pair of shoes today or when you are elderly, being forced to wear a cheap pair of shoes when you need a more expensive pair with support and comfort?
  5. At the end of each month, do you have plenty of money to save and invest or do you increase your credit card balances?

The more perspectives and long-term thinking you can apply to each purchase that you make, you may be better able to distinguish between the proverbial “wants vs. needs” and make better financial choices.

To help control your spending, avoid the usual budget busters:

  • Moving to a neighborhood where your income is well below all of your neighbors
  • Failing to meal-plan each week out, in advance, and eating out for a much higher price and convenience instead
  • Keeping up with the Joneses (whose credit cards are maxed out)
  • Trying to impress others with your glamorous Instagram lifestyle
  • Routinely spending time at bars or mindless shopping
  • Leasing cars or borrowing most of the money for new cars

The best thing you can do for your financial stability is to NOT impose a success tax upon yourself by ratcheting up your lifestyle just as fast as your income grows. In particular, keeping your housing and transportation below 50% of your income.

Are your loans Hogs or Hummingbirds?

Loan efficiency refers to how much cash a particular loan takes out of your monthly budget. Some loans are relative Hogs while others are relative Hummingbirds. It is best to have flexibility in your financial life, and having loans with high efficiency enables this over low-efficiency loans. You can usually make extra payments on a loan to pay down the principal balance sooner.  However, the loan Hogs require you to do this and the loan Hummingbirds do not. Your financial position may change and having flexibility is helpful.

Let’s examine a scenario, let’s say you need a $10,000 loan. You could get a 4-year installment loan (with an interest rate of 8%) and your monthly loan payment would be $244. Or, you could get a line of credit (with an interest rate of 8%) and your only monthly payment would be just the interest of 8%, or $66. In this scenario, the $66 payment would be the Hummingbird and the $244 payment would be the Hog.

For loan efficiency, in general:

  • The longer the term, the higher the efficiency
  • The lower the rate, the higher the efficiency

The objective way to categorize your loans (and potential loans) is to divide the outstanding balance by the monthly payment. This equalizes and indexes each loan to a single discrete number. This allows you to rank and compare alternative funding, payoff , and re-financing possibilities. The higher the ratio, the higher the loan efficiency. Likewise, the lower the number the lower the loan efficiency.

Similarly, investments can also be ranked for efficiency, the criteria is just flipped upside down. Again, monthly payments to you is better than quarterly or annual payments. You can rank investments with similar risk by their payment efficiency.  Unfortunately, you need a financial calculator that includes compounding, called ‘discounted cash flow.’ For example, if you are paid monthly, you have that cash that can earn a little more money for you by reinvesting it, rather than one payment at the end of the year. An online calculator can perform these discounted cash flow calculations for comparison: https://www.calculatorsoup.com/calculators/financial/present-value-cash-flows-calculator.php

Whether you are borrowing money or making investments, you want to replace inefficiency with efficiency, and these calculations reveal exactly how to rank your options. So, if you’re on a debt-reduction plan, start paying down the low-efficiency Hog loans first. Or if you’re trying to increase your investment income, move your money into higher discounted-cash-flow investments.

The difference between savings and reserves

The concept of a financial reserve will make or break your actual savings and financial goals. When you save money, it is set aside from your current spending. This savings could reside as cash or in your checking or savings accounts. However, what is this money’s exact purpose? If it does not have a very specific assignment, then any financial need or desire may consume it: a medical bill, car repair, attending an out-of-town wedding, replacing worn-out shoes, or used for being a tech ‘early adopter.’ Then, poof your savings are gone. So when a large expense comes along without savings assigned to cover it, the money to pay for that must be borrowed money. And borrowed money with interest charges turns you around in the wrong financial direction. There is one way to make sure this does not happen – it is to employ the concept of reserves.

A financial reserve refers to an assignment of money to serve a specific purpose. Simply living life requires many expenses, and many of these are known in advance and can be roughly estimated for both price and timing. For example, if you are currently driving a vehicle then it is a certainty that, sooner or later, it will require:

  1. Maintenance (oil & fluids changed, new tires, spark plugs, battery, brakes, wax and detail, etc.)
  2. Repairs (failed water pump, new muffler, or minor damage from a parking lot incident)
  3. Replacement (once your current car is no longer viable or serves your needs)

These three types of expenses are known in advance and can be estimated. We know today that we must pay for these expenditures, sooner or later. The way to prepare is to assign some of your ongoing additions to savings to: vehicle maintenance, vehicle repairs, and vehicle replacement. So when the brake light appears on your dashboard then you will have the money waiting on standby to pay for new brakes without going into debt or financial struggle. The rate of adding money to these vehicle reserves should be estimates based upon the age, type of vehicle, mileage, etc. For example, a brand new car will need no maintenance for a few years while a 15-year-old car will need a lot of repairs as parts fail.

If you fail to have savings assigned to vehicle replacement, what happens when your car dies? You make the financial mistake of a car lease or loan, making you poorer from interest charges. An accounting supervisor I spoke with did not understand this and was SO happy that she was just 3 months away from finishing off the car payments on her car loan. As kindly as I could, I pointed out, “You still have the vehicle expense for your next car. As long as you are using a car, your vehicle assets are depreciating and you have to replace that depreciation in an ongoing manner.” Sadly, she replied, “That is just for rich people, I can’t afford that.” I later learned that most of her family and relatives go from car loan to car loan, or car lease to car lease. Over their lifetime, they are transferring a huge amount of money to lenders, money that they could really use. And this extra expense is unnecessary: if only they would delay buying their next car until they could afford it from their car replacement reserve. If they could do this just once, and get ahead of their expense, then it would save them the remainder of their lifetime in car payment interest and extra lease fees. With one car replacement with cash, you can break the loan-to-loan cycle. This way, you will buy your subsequent car from building up your vehicle reserve and earning interest each month instead of paying that interest to a lender.

What are some other expenses, known in advance, that should have a reserve and a place in your budget? You may include medical bills, apparel, vacations, holiday gifts, home repairs, appliance replacements, emergency fund (for losing your job), and the big one: retirement. When you financially map out all of these potential expenses for the first time, it can be a shocking amount of money. True, but it is also the financial REALITY of your current lifestyle. You are viewing your financial life, in numbers, perhaps for the first time. These expenses can either be funded with savings up front or with debt after the fact. Which option do you think is best for your financial future? If you do not have reserves for those categories, when these expenses arise they will drain your “savings” to zero, and beyond.

More importantly, if you fail to reserve money for known expenses and your savings is constantly under pressure, then you will likely never have a meaningful amount of investments to fund your future. Having little or no investments will eventually translate into no retirement for you, or a retirement of financial struggle. My net worth did not start making notable advances that were sustained until I began fully reserving money for all of these known and common expenses. Use paper, a spreadsheet, or any manner to list out all your physical possessions and then estimate how much money is required for normal maintenance, repairs, and eventual replacement. For a simple example, if you’ll need to replace your lawn tractor in around 3 years, find the model you will want (and we’re estimating it may be $2,000) and divide that by 36 ( $2,000/36 months= $55), and you’ve calculated how much money you need to set aside in a reserve to replace your lawn tractor in 3 years. Your reserve list will have both dates and amounts for each item to replace, along with an estimate of annual maintenance and repairs until then.

If you want to protect your savings from life’s expenses, and thereby avoid unnecessary interest charges, then you must have allocated financial reserves. Setting up and maintaining these reserves needs to be involved in any budgeting or financial planning that you perform. There can be notable problems when you do not have specific reserves, in retirement for example. I know someone who retired with an imminent need to replace his dilapidated roof and one of his two cars – but his financial planner failed to point this out (and he didn’t ask me). So within one year of retiring, he was forced to go back and get part-time work, at a lower wage, to make payments for some of these obvious expenses where he had no reserve to cover them. It is my best advice that you begin to fund specific reserves for your lifestyle and refrain from spending that reserve on anything else.

Wall Street’s IPO darling WeWork blows up in 5 weeks

How wary should you be with Wall Street and new business models without sustainability? The shared workspace company, WeWork, was moments away from an initial public offering (IPO) valued at an unbelievably large $50 billion when it all quickly vaporized. Just a few weeks later and the company is worth less than 10% of that, and will certainly go bankrupt before December if it isn’t bailed out by former investors (like their largest investor, Softbank). It was finally revealed that there were staggering operating losses and the founder, Adam Neumann, had a rats-nest of personal siphons to the business (unethical conflicts of interest), plus he contractually obligated the company to IPO through loan covenants. A long line of top investment banks (lead personally by JP Morgan’s CEO, Jamie Dimon) were all set to sting the public and pension funds with this quagmire of certain bankruptcy, while raking in a few billion for themselves.

WeWork sought to build a business around shared office rentals from freelancers, business incubators, co-working and home-worker office arrangements. Instead of owning the buildings, WeWork was gambling with long-term leases while their own customers had very short-term leases. This is a business 101 mistake of mismatching the timing of your liabilities and assets. In addition, WeWork was competing with the building’s owners, who have far lower costs. This is partly why WeWork was losing so much money in a spectacular economy. Business writer Dan Alpert wrote, “WeWork’s entire business model seems to be a prank. Their business is taking on unhedged risk that no one sober would make.”

After filing for their IPO on August 14th, investors finally got a look at their financials, hidden among the New Age hyperbole, and discovered:

  • For each of the last 3 years, their losses nearly equaled their revenue (For example, in 2018 they had $1.8 billion in revenue but lost $1.6 billion)
  • The founder, Adam Neumann, would purchase properties and rent them back to WeWork
  • Neumann trademarked the word “We” and sold it to the company for $6 million
  • Neumann’s wife setup a money-losing training business for the company called WeGrow
  • Millions were loaned to Neumann and top executives, and subsequently forgiven
  • The founder cashed out over $700 million in equity just ahead of the IPO, a blaring red alarm!
  • Neumann setup his stock shares to have 20X the votes of regular shareholders
  • The company had a dozen HR officials quit in just a couple of years, blaming the toxic culture from Neumann. Some complaints include: non-stop emergency-meetings and chaos, lavish parties, chanting slogans to music, all-nighter business retreats with sex-capades, and promised bonuses that were never paid
  • Within hours of the document release, the company was being openly mocked, competitors began preparing to take over their leases after WeWork defaults on them, and employees were looking for an exit and getting the company name off their resume’.

As investors mulled these problems, in early September the company considered cutting the IPO valuation by 50% to prevent more investors from souring on the company. Instead, they first made a quick succession of company changes:

  • Neumann’s wife, the Chief Brand Officer, was let go and removed from the board of directors, her right to name a CEO successor was removed, and her WeGrow was closed
  • A new female board member was hired to turn around the company culture where there was an increasing number of sexual harassment claims by former employees
  • Neumann returned the $6 million he ‘stole’ for the “We” trademark
  • Neumann would resign as CEO but he would still remain Chairman of the Board
  • Neumann’s share’s voting rights were reduced to 10X votes per share
  • Neumann claimed he would pay back profits from real estate deals he ‘stole’ from the company
  • Neumann agreed to a tiny limit on the amount of stock he can sell after the IPO

With this, the company was hoping they could IPO with a lower valuation of just $10 billion. But none of those governance changes did anything to convince any investors that the company could ever become profitable. So the IPO became unviable and was postponed indefinitely – just a few hours after Neumann recorded his video for the investor roadshow. At that announcement, some of WeWork’s bonds dropped to 7% of their par value and their credit rating plummeted two levels. Then a WSJ reporter detailed how Neumann is a big pothead and drinker, he and his wife fire employees on the slightest whim, there was wasn’t any cyber security for tenants’ data, plus 20 of Neumann’s family and friends were on the payroll for doing nothing.

In desperation for cash, WeWork is trying to sell Neumann’s G650 Gulfstream private jet for $60 million and several acquisitions the company made (but they are all money losers).

Some of this has shades of another “almost IPO” which nearly occurred back in 2015 that turned out to be a scam by a fraudster. This was the infamous Elizabeth Holmes’ company called Theranos. A silicon-valley biotech company built upon lies and valued at $9 billion until a WSJ reporter actually tried to verify Holmes’ claims about what the company was up to. It turns out, they were all false claims and Holmes’ best skill was getting soft interviews and being put on magazine covers. She was a great liar and surrounded herself with people that simply wouldn’t question her (those few that did were fired and sharply reminded of non-disclosure documents they had signed).

Everybody wants to invest in the next “disruptor” company started by someone young and hip (Apple, Facebook, Tesla, Amazon, etc.). That is fine, but remember: investors were just about to pay billions to buy the WeWork IPO – which would have gone to zero. Until you get financial statements that have been audited by an outside independent company (which was the mechanism that revealed and imploded both Theranos and WeWork), then you have no idea if what you’re buying is a polished diamond or a rotting fish.

Wait, what’s that? Another company is already trying to copy WeWork’s business model. In San Francisco, Selene Cruz raised a couple million in seed money to start a “shared retail space for tiny startups,” called Re:store. There are promotions that, “It will be a totally brand new disruptive model making a Store Front as a Service, like WeWork for retail businesses.” Maybe it will succeed, but I think that model has been around a while: like farmer’s markets, flea markets, shopping malls, kiosks, and stores with individual-company products like Sharper Image and Brookstone. I recommend avoiding gambles on “new” business models and leave that to the venture capitalists to sort out.

Wire transfer scams

The bank manager of a large Florida branch told a friend of mine that, “Every day we stop one of our elderly customers from trying to wire $1,500-$4,500 to a Nigerian Prince who will send them millions of dollars in return, that will never arrive.” But this isn’t the only wire transfer scam. Business servers are often targeted, and lately, an increasing number of real estate wire transfers to purchase homes are being intercepted by thieves.

Thieves target and hack into the e-mail accounts of realtors and title companies. Once they discover an upcoming purchase, they send an e-mail (posing as the realtor or closing agent) to the buyer stating: “The home closing has been moved up, we need your funds today, wire the money to this different account.” Once you send it your money is long gone – because there is almost no law enforcement you can turn to for help to recover any money. The local Sheriff isn’t equipped to chase down the money, and the FBI isn’t successful and tells some victims that they are too busy.

My own bank branch recently warned me about wire fraud for a recent transaction that I was making; but I had already dealt with this party several times before. The banker told me that a few days earlier, she had stopped a customer from making a wire transfer who was buying a home. The banker asked the customer a few questions before finalizing the wire, which prompted a quick phone call to their realtor. It turned out that the customer was just about to unknowingly transmit a little over $400,000 to a scammer. 

When sending or receiving wire transfers, triple check with everyone involved to make certain the money is going to the correct account and routing number. Make arrangements in person when it is possible, verify over the phone, and then be on alert for any fake instruction changes from a last-minute e-mail.

You just won the commission war

The race in lowering commissions is over, and the customer is the winner. Last week, the giant brokerage firm Interactive Brokers lowered their stock and option trading commissions to zero. They were quickly followed by other giants like Charles Schwab, TD Ameritrade, and E*trade. Several banks already offered zero commissions for a period of a year for new investment accounts. Unlike tiny zero-commission firms that give you very-bad price fills to survive (Robinhood, for example), these are the real big boys that now let all their customers trade stocks and options for free, from now on.

The first cautious question is, “How will the brokers make any money? Is there some dark sinister side to this?” The answer for these large brokers is ‘no’ because they all knew this day was coming, have been planning for it, and earn far more money from selling their large order flow. Most high-volume stocks and ETFs have a penny-wide spread between the bid and ask prices – and that will not change. Now that commission comparison between brokers is gone, the question now is: who has the best trading platform for you. Which one is easiest, closest to the market, and offers all of the best technology features that you are looking to employ.

I expect zero-commission trading to change the market in this one way. Since the cost to trade is now zero, some traders will experiment more with trading strategies live in the market instead of paper trading them; use more complex option positions (like 4-6 legs) that were too expensive to get in and out; and tiny profit scalping tactics may become more common. And the average trader may increase their frequency of trading and hedging. For example, if there is going to be a big news announcement (Fed meeting or employment report), it costs you nothing to buy an inverse ETF to hedge your portfolio for the day. If the announcement is at 2pm, buy some ticker symbol SH or DOG to short the general market in case of a large down move, and then sell it later before the close or first thing in the morning (to avoid day-trading violation for accounts under $25,000).

So congratulations, it now costs you nothing to trade the stock market!

Overnight anomaly in treasury-lending

Large banks and companies borrow money amongst themselves for overnight cash flow planning and reserve requirements by their treasury departments. This is called the overnight repo market and is a trillion-dollar market (repo refers to repurchasing government treasury debts). There was such a shortage of available money last week, that overnight interest rates spiked from 2% to 10%. This spike was so high that the U.S. Federal Reserve injected billions to stop the overnight market from freezing up.

What is going on? Since the 2008 financial crisis, the U.S. Federal Reserve has put trillions into the U.S. financial markets by purchasing all kinds of bonds. This provided liquidity to all of the large U.S. money-center banks that were insolvent at the time, and boosted the economy. Over a decade later, in order to draw some of that extra trillions back out of the economy, the Federal Reserve has been selling bonds and allowing some to mature, pulling billions out of the financial system for about the past two years. This contraction of money will slow the economy, and banks hitting cash shortages resulted in last week’s overnight spike.

When a bank cannot get money in the overnight repo market from other lenders, then the lender of last resort is the U.S. Federal Reserve’s ‘Discount window.’ For several nights in a row the Federal Reserve had to buy $75 billion worth of bank assets to support the banks. Granted, it was not a normal day (corporate tax payments were made plus U.S. debt auction settlements – both of which sucked money out of the banking system), but all of this was known well in advance.

There are two views of this event:

1) The Fed now knows that they need to provide a much higher level of liquidity in the repo market, and they are doing that, so everything is operating normally.

2) This highlights that the banking system is so fragile that it could collapse any moment! The repo market is the canary in the coal mine for the rest of the banking system. (The average treasury security is re-collateralized 2.2 times so 3 people can believe that they each own the same asset. It is a game of musical chairs that isn’t well tracked.)

My view is that opinion #1 is correct in the short-term, that this was no big deal to the banks or the economy. However, it is still a colossal amount of money and I expect the Fed will have to lend around a half a trillion over a 3 week period. The size of this repo problem is unsettling, which leads to opinion #2: it may also be correct in the very-long term. As money manager Mitch Feierstien says, “You cannot taper a Ponzi scheme” and the Federal Reserve has been kicking this can down the road since its founding in 1913. They ramped up money printing in 1971 (when the U.S. went off the gold standard), and supercharged the money printing in 2008 with over $4 trillion. Just retracting a little of that extra money sloshing around the economy nearly seized up the overnight lending market. It appears that permanent money printing (called quantitative easing by the Fed) may not be reversed without adverse consequences. We all know how Ponzi schemes end, but I do not see signs that it will happen soon. (Although JP Morgan just informed their wealthiest retail banking clients that the U.S. dollar is losing it’s world reserve status so they should begin diversifying their assets into gold and Swiss Francs). Prudent risk management of your money is always important. Planning for unfavorable economic scenarios, even during these current times of high employment, is highly advised.

What will a financial crisis look like? The same as they usually do:

  • Liquidity will freeze in a specific market (buyers will step away from making a price in an industry that is in a speculative bubble at the time, and those asset prices will fall).
  • That liquidity crisis will begin a credit crisis (lenders will withdraw from making loans, it could begin in junk bonds, overnight repos, real estate loans, corporate bonds, or loans in industries in a speculative bubble like student loans or small oil frackers).
  • The lack of lending will begin loan defaults from companies relying too heavily upon them.
  • Those defaults will begin a cascade of secondary and tertiary defaults as solid loans are called-in by banks to be paid off immediately.
  • The expectation of further defaults will cause the stock market and bond market to fall.
  • The cascade of defaults will begin a currency crisis as demand for the dollar will fall.
  • Jobs are quickly reduced, financial markets fall, businesses retreat, and a recession begins.

Much of this volatility will occur simultaneously, over hours and months, as government officials get in front of any camera, repeating that, “The problem is contained, there is absolutely nothing to worry about,” (exactly as they did throughout 2007-2009).

The critical element in retiring wealthy

There is an audio recording of personal finance expert Dave Ramsey talking about a study that he had read. This was a large study of retirees that had become wealthy and the researchers looked into the most important element that made that happen. Some of the usual suspects for building wealth for retirement are: a high rate of return on investments; low fees and costs on investments; or choosing a specific type of investment, such as stocks or real estate. None of these mattered as much as the #1 predictor of retiring wealthy.

This very important element is: how much money you add to investments each year. Obvious, of course, but most people skip right past this concept. Instead, the average investor focuses upon growing their money with unrealistic returns and beating up their financial advisers to lower their costs and fees. Or they think they will add money later, in a few years when it is easier but rarely actually do so. Meanwhile, sitting there, clear-as-day, is the simple practice of adding more money.

This exact lesson was repeatedly driven into me by my father as he built up his net worth:

  • “Your return is a meaningless amount of money until you reach over $100,000 in your account, so focus on adding money and not fantasy returns,”
  • “Everybody gambles and loses on risky stocks and exotic mutual funds while the tortoise passes by ALL of them. I see this happen over and over with speculators for capital gains falling behind the simple income investors,”
  • “Just use prudent investments earning a stable 4-6% return and you’ll do great; passing by the stock index investors after a couple big market downturns,”
  • “There is always an investing bubble-of-the-day and nearly all bubbles collapse. Just keep adding money and seek a reasonable return. Then, after the collapse, you’ll be well ahead of any average investor,”
  • “Compound interest isn’t anything of note until you’re 20 years in, so you have to build up a meaningful balance well before then. Speed matters – and the fastest way to do that is adding new money,”
  • “Stop looking for the quick buck and pile it up in a few solid stocks that grow their dividends, or even a stock index fund,”
  • “Don’t even think of putting money into an individual stock until you have over $50,000 to $100,000. Just put your money into a safe very-short term bond fund and keep adding,”
  • “The most important thing for wealth accumulation is to keep putting in money. Otherwise, you have nothing to compound over the years,”
  • “Wealth is not a dollar amount, it is your perspective about how you view money and manage it. $100 can be spent on a concert ticket – or – it could kick off a new investment and habit to build an early retirement.”

This critical lesson of “keep adding money” was highlighted when a former neighbor gave me a recent update. He had retired 5 years ago but was recently forced to get a part-time job at a library because money was too tight. He says, “We had saved very little for retirement and unexpected expenses were killing us.” Since he had earned a very-good salary, his lack of retirement savings was not due to a lack of income or some hardship; it was because of his spending priorities. (This is common: 68% of Americans age 55-65 have less than one year’s salary in a retirement account). It is my best advice that you make it your priority to continually add new money to your investments.

Mismanagement at any income level

No matter what level of income you may have at the moment, there are businesses ready to take advantage of your financial situation. There are billion-dollar industries designed to extract the maximum amount of money from your financial decision making. These businesses are dependent upon poverty, poor cash management, poor financial planning, or pressing your weaknesses. Even with a very-low income, if you have any financial literacy then you can sidestep these vultures and remain on your upward financial trajectory. Below are a few examples of these businesses.

Money extractors of the poor:

  • Pawn shops
  • Payday loans
  • Car title loans
  • Check cashing
  • Cash for gold/jewelry

Money extractors of the middle class:

  • Credit cards
  • No-money down sales
  • Car leases
  • Tax refund loan
  • Layaway

Money extractors of the wealthy:

  • Over spending from lifestyle creep
  • Bad financial advisers
  • Public philanthropy
  • Multiple homes, cars, and boats that isn’t financially sustainable for you

I understand that an unusual set of circumstances can warrant stepping on one of these financial land mines. But if they become a routine part of your life, you are heading in the wrong financial direction. It is a red alarm that you need to make some drastic changes in your life and improve your financial literacy and capability.

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