I do not believe we will have a huge decline in most housing markets see: Housing and the Economy. Still the article below is packed with great information. Definitely worth reading. Other related posts: 30 Year Fixed Rate Mortgage Rates – Europe and USA Housing Price Boom – How Not to Convert Equity – Beginning of the End of Housing Bubble?
The Coming Collapse in Housing November 17, 2006
by John Mauldin
I am convinced that the housing bubble is gigantic and will burst before long with massive implications here and abroad. In fact, it’s the key to the global economic outlook.
Setting the Scene
House prices in recent years have leaped well beyond their normal relationships to the CPI.
Even when the increasing size of houses–the McMansion effect–is excluded, inflation-adjusted house prices have jumped as never before in over a century.
Update: I would not even consider using Vonage. Any company that takes you money using there online site and then refuses to cancel your service without you call them is exactly like the traditional phone companies they try in ads to say they are different than. Then you call and then force your through a ridicules voice mail tree and then they tell you you have to call back between 9-5 on weekdays to have the privilege of not having them take your money. Completely unacceptable behavior. You can get VOIP phone service without a monthly free now via Ooma by purchasing a device to plug your broadband internet connection into (I got mine for $203 via Amazon).
old post:
Cutting expenses is a great way to free up money to add to savings.
A couple years ago I switched to Vonage for my phone service. They provide phone service through my DSL high speed internet line. I play just $18/mo for local and long distance calls (this is for 500 minutes or less – for $29/mo you can get unlimited calling in North America and Europe). I still use my same phone (I just plug my regular phone into a modem they provided). You do lose the ability to make phone calls when the internet is down which happens if the power goes off – people can still leave you voicemail). I have been very happy and get free voice mail and free caller ID.
More recently I picked up a prepaid phone from Virgin. I pay only for the time I use (no monthly charges) – 25 cents a minute for the first 10 minutes any day and 10 cents a minute thereafter. There are no fees for calling from out of your service area and you have a regular cell phone number. They require I add a minimum of $15 every 3 months to the account but if I don’t use that much the balance just keep growing. This is ideal for anyone that doesn’t spend much time on cell phones. Now some people are very attached to their cell phone. Then this isn’t a good way to save money but for those that don’t feel the need to to stay in touch at all times this is a good option to stay connected when you want without having to pay high monthly fees.
Together I save at least $35/mo. (over $400 a year) and loose nothing I value. I would have to earn an extra $700, or so, to have the same impact (I have to pay taxes on additional earning).
Here is a great tool to see how rich you are: Global Rich List. It drives home the point I made yesterday about how rich almost everyone in America is. Most people (not only in the USA) will probably be surprised how rich they are compared to everyone else in the world.
People in the USA make a great deal of money. There are many who make huge amounts of money so many who make a great deal think it is unfair they don’t make more. And many of those just decide to buy what they can’t afford. Then they create their own financial weakness.
Why Living in a Rich Society Makes Us Feel Poor
I guess that would be me. I don’t mind if people spend what they earn, but I do mind when people that are given huge amounts of money and spend beyond their means and then complain that they can’t have their cake and eat it too. I am not saying that people don’t have to make tough choices but there are hundreds of millions of people alive today that have real tough economic lives. People that want to live beyond their means in the USA and then complain that life is not fair need to realize that yes life is not fair. And the biggest truth is that hey have been given the advantage over most everyone else in the world (yes some small number that happen to live near them may be even richer).
If they want to spend more – go earn more first. This option, available to most in the USA, is not available to most people alive today. Most people in the USA should be helping those less fortunate than themselves not complaining that they don’t get to buy enough toys compared to this person they see on TV or that they know…
Charities to consider: Trickle Up – Accumen Fund – Grammen Bank – Habitat for Humanity
re: Born Suckers – The greatest Wall Street danger of all: you by Henry Blodget.
Henry Blodget mentions two profoundly (though simple) important factors that lead to poor investment decisions: Prospect Theory and Outcome Bias. He lists 7 factors, I find two profound.
Prospect Theory (more details) essentially states people are eager to “lock in gains” (sell positions with profits to realize gains) and hold losses (deffer selling positions in which they have losses so as not to “realize” the loss). Like many profound ideas the simplicity of the idea undermines the importance. This factor can make a huge difference in investment results. Many of the most successful investors understand the importance of this idea. And they repeat the importance of taking action to avoid falling into the patterns prospect theory predicts.
William O’Neil (founder of Investors Business Daily) – “Remember, 7% to 8% is your absolute loss limit. You must sell without hesitation – no waiting a few days to see what might happen or hoping the stock rallies back; no need to wait for the day’s market close” page 90, How to Make Money in Stocks: a winning system in good times or bad, 3rd Edition, 2002.
Read more
One of the goals for this blog is to help people protect themselves from predatory behavior from corporations. I love capitalism and love being able to benefit from the innovations created by the marketplace. I wish companies tried to do well financially by providing value to the customer. This is what Google, Toyota, Berkshire Hathaway, Apple… do.
However there are many that seek to trick and take advantage of gullible customers. This is especially true of financial companies. If a company tries to trick you by selling you on a less than truthful description of their offer (such as $1 for the first month, or 1% interest for the first 6 months) my experience leads me to believe they don’t have faith that they offer a real value. They don’t believe people would buy what they offer for the real price, so instead they try and trick people with misleading information. And there are plenty of financially illiterate people that fall for these bad deals – don’t let yourself be one of them.
Credit card companies seem to be especially bad at this type of behavior. Most often they just take advantage of people that don’t bother to understand what the real fees and interest rates are. The consumer obviously should accept some of the blame. But tricking people that are not financially literate is not an honorable way to make money. But there are many who don’t seem to mind taking advantage of those that don’t educate themselves.
Business Week has a good article on this topic: Cap One’s Credit Trap. And PBS, Frontline, has a good show on it too: The Secret History of the Credit Card.
Continue your financial literacy education by visiting both those sites and reading and watching (you can watch the entire PBS show online) and learning. If you don’t make the effort to increase your financial literacy it will cost you as others take advantage of you.
The TIAA CREF site has some valuable retirement planning advice (link updated since some pointy haired boss doesn’t know that web pages must live forever – when are we going to get competent people running web sites?). Take some time to read one of their articles (or read more), for example: Retirement Strategies, a 48 page overview. Yes it requires some time to read but the money involved in retirement is huge. Making the wrong decisions can cost you not $2-5,000 but $100,000, and more, easily. Don’t avoid the steps you need to take to learn cost you.
The key is to get started. If you are relatively young you are lucky, you have decades to learn more and improve your plan. Don’t wait until you are only 10-15 years from retirement. The early you get started the better for you and the more money you will make by choosing wisely. The documents TIAA CREF puts together make it much easier to succeed. We will continue to point out resource to aid your continual quest for financial literacy. It is a long term project.
Fraudulent web click are friction in Google’s business. Fraudulent clicks ad costs to the system without a benefit to the performance of the system. Google’s profit is derived from improving the system (of finding customers for advertisers) and taking a cut of the profits that their system creates. Google makes a great deal of money because their system of matching advertisers with dollars to spend to customers. Google does this through ads on their search results pages and on third party web sites. Google engineers will do whatever they can to find ingenious ways to reduce that friction.
There have been many stories over the last few years about click-fraud. But none I have seen explain the simple idea that Google is the company with the most to gain by eliminating it (and Yahoo next). They often point to companies suing Google about fraudulent clicks instead.
Companies like Google run ads on web sites and charge the advertisers for each click (anywhere from a few pennies to several dollars for each click). Advertisers want to get potential customers when someone clicks on their ads, obviously they don’t want to pay when there is no chance the “visitor” is going to become a customer. Obviously, fraudulent clicks are bad and those that engage and encourage such behavior are acting unethically and immorally and should be stopped and punished.
Read more
We will be posting messages on various terms and concepts in investing and economics. Here we offer some information on cash flow.
Earnings per share include many adjustments to reflect the standard accounting wisdom, beyond the cash taken in and spent by a company (depreciation, expensing options, expensing long term investments over the expected life, writing off inventory…). Cash flow is a measure that tries to more closely measure the increase (or decrease) in cash for a company over a period of time.
An advantage of looking at cash flow is it is more difficult to distort than earnings per share (though it is still very possible). A disadvantage is that standard accounting practices exist for a reason and often give a better picture than a simple view provided by the cash flow. Therefore cash flow is normally useful in conjunction with the earnings statement – not instead of.
Operating Cash Flow attempts to eliminate such non-operations impacts (like selling or buying stock) and give a cash flow figure for the operation of the business. Free Cash Flow is equal to “operating cash flow” less “net capital expenditures.”
Like many accounting terms, cash flow is more complex in execution than it seems but this gives you a start on understanding cash flow.
More from the Curious Cat Investing Dictionary on Cash Flow
The 2006 Nobel prize has been awarded to Muhammad Yunus and Grameen Bank (which he founded). Trickle Up has long been my favorite charity. It is based on a model similar to the Grameen Bank where small micro-loans help people help create an economic future for themselves out of poverty (Trickle Up makes small grants instead of loans).
Trickle up and Grameen bank are amazing studies in financial literacy. They provide both seed capital and training to help people create businesses and have an absolutely amazing track record. Interview on the Noble Prize web site:
Muhammad Yunus: The one message that we are trying to promote all the time, that poverty in the world is an artificial creation. It doesn’t belong to human civilization, and we can change that, we can make people come out of poverty and have the real state of affairs. So the only thing we have to do is to redesign our institutions and policies, and there will be no people who will be suffering from poverty. So I would hope that this award will make this message heard many times, and in a kind of forceful way, so that people start believing that we can create a poverty-free world. That’s what I would like to do.