The Worst Financial Advice I Ever Received

The Worst Financial Advice I Ever Received

I’ve received so much good financial advice I barely know where to begin. I’m much more sure of the worst financial advice I ever received, however.

The year was 2008, and I was a struggling Realtor/mortgage broker. When I got into the business, I decided I was going to wear both hats as a value proposition to my customers. I’d use mortgage marketing to get them in the door, pre-qualify them, and then go show them houses in their price range.

It was a fine theory that didn’t quite work out, for a couple of reasons.

First, I was a really terrible marketer. To be successful at something like that, you need to spend thousands of dollars per month in marketing to bring in a steady stream of interested folks. I was barely spending $100 a month on a crummy little ad in the newspaper, which generated about four phone calls a year.

Second, people would only phone me when they had exhausted their options with their bank. Sometimes I’d be able to help them (usually by taking the mortgage myself), but most of the time these people had no money and a terrible credit score. I was just wasting my time even talking to them.

Related: living life with a terrible credit score is easier than you think

I was having a little more success actually selling houses, but not a whole lot. I went from working at a grocery store to selling real estate, and the first year I made about 75% of what I made at the store. That wasn’t really what I had in mind, but it wasn’t a bad result. It takes time to get established in the business.

This wasn’t fast enough for my broker, however, which lead to all sorts of innovative motivational techniques.

The worst financial advice ever

One night he took me out for dinner to try and teach me how to drum up more business.

He suggested a number of ideas to get my name out there, including walking around to every business in the downtown core to introduce myself and hand out candy canes, since it was close to Christman. He also recommended I spend an hour each day walking around and ringing doorbells in nice neighborhoods.

I would have none of this. The last thing I wanted was to, and I quote “act like a used car salesman.” I viewed a lot of that kind of stuff as despicable. Talking to randoms all day long was (and still is) my own personal version of hell.

Looking back on it, it’s easy to see why I was a terrible salesperson. I like talking to you guys through a screen. I would hate doing it on a person-to-person basis all day, every day. When I type, I can proofread and change stuff I don’t like. It’s hard to take back misspoken words.

In his haste to help me — and to help himself, since he got a portion of my commissions — my broker suggested the worst financial advice I’ve ever gotten. He said my problem was I had low expenses, and therefore had no motivation. If I created a bunch of new expenses, I’d have no choice but to hustle to meet my obligations.

His main suggestion? Replace my perfectly reasonable used car with a brand new, bigger vehicle, that came with a substantial car payment. Yes, this was said with a straight face.

It’s been a decade since I received that advice, and it still makes my head hurt. It is, by far, the worst financial advice I’ve ever received.

Minimize expenses, don’t create them

Us here at Financial Uproar (me and 46 pet rats) are big fans of maximizing our incomes. It’s the whole reason why I advocate investing in everything from trailer parks to blogs.

But in order to have capital to invest in these things, you have to create a huge savings rate. Earning more is a big part of that equation, but it also helps to minimize expenses. Do both and you’re laughing.

That’s exactly what I intended back in 2008. I took steps to spend as little as possible so I could focus on investing the biggest percentage of my income as possible. The only problem was the income didn’t come. Primarily because I was terrible at my job.

The solution to this wasn’t to add more expenses. Are you kidding me? The solution was something I figured out a couple of years later, when I became a potato chip salesman. I needed to find something I was good at.

I can think of very few personal finance problems that can be solved with increasing expenses.

What is the worst financial advice you’ve ever received? Comment away, yo.


Just Say No to The Latest IPO

Just Say No to The Latest IPO

The Snap Inc. (NYSE:SNAP) IPO happened last week, giving millennials yet another reason to prove to older generations that they will forever doom our planet to a premature death, probably from explosion. They delivered, snatching up shares with all the gusto of me buying up North Korean currency.

What? You gotta admit that country only has one direction to go. Nukes!

The issue was supposed to debut at $17 per share, but strong interest before the open shot shares up to $24 before the first trade was made official. It went all the way up to $29.24 during trading the next day before falling faster than my chances to make friends with the rest of the PF blog-o-net. Shares trade hands for $22.71 as a write this, a major bummer for anyone who bought during those first couple of days.

Snap’s IPO wasn’t the only one to go nuts over the first little while and then fall below their issue price. The Facebook IPO popped during the first few hours of trading before retreating quickly.

Twitter exploded higher after its late-2013 IPO. By May, 2014, it was trading under the issue price.

LendingClub soared after its December, 2014, IPO. Just over two years later shares are down 78%.

Not every big IPO has been a disaster, of course. Long-term investors who bought Facebook during its first day of trading don’t regret the decision. The Alibaba IPO went relatively well, too. And Shopify is up about a million percent since its 2015 IPO. That math is 100% right. No reason to check it.

Still, buying the latest IPO is a pretty bad idea. Here’s why.

The logistics of IPOs

Basically, an IPO works like this. A company decides it wants to go public, usually for one (or more) of the following reasons:

  • Prestige of trading on a major stock exchange
  • The chance for employees to cash out stock
  • Pressure from investment bankers looking to make a buck
  • Easier to raise money in the future
  • Valuation gap between public and private investment money (i.e. retail investors giving it a richer valuation because they’re suckers)

A company wishing to go public will contact several investment bankers and ask them to draw up some sort of plan. They’ll discuss logistics like the size of the deal, the potential offer price, and so on.

Once the company picks one or two underwriters to work with, it’ll start discussing the real details of the deal. Say a company wants to raise $100 million, consisting of 10 million shares at $10 each. The underwriters will then ask for a bonus allotment, which they’ll exercise if the deal goes well.

The company then gets to work on its prospectus, which is a long and boring document investors are supposed to read before they plunk money down. Spoiler alert: they never do. The prospectus is half sales copy and half risk factors, and is designed to give investors an idea of what they’re buying. It’s a lot like an annual report.

Up next is the road show, where the underwriters and company management go and sell the deal to potential investors. It’s usually only big investors who are invited to such a thing. The road show will last 10 days or so, and hit every major market. Depending on the size of the deal, they might even make a stop in Europe or Asia. OOOH EXOTIC.

After speaking to investors on the road show, the underwriters decide where to price the deal. Say demand for my imaginary IPO is strong. They’ll come back and recommend a price of $11 or $12 per share. The opposite happens if demand is weak. Remember, the underwriters want to under price the IPO so it pops on its first day of trading.

Finally, the big day comes. Demand usually outweighs supply, so it takes the stock exchange anywhere from a few minutes to over an hour to start matching up buy and sell orders. If the stock is up, the underwriter will exercise their bonus allotment. If the stock is up, usually everyone is pretty happy.

What happens after the IPO?

Study after study have looked at IPOs a year or two after they debut on the stock market, and they all say pretty much the same thing. On average, IPOs underperform. You’d be better off to buy a boring ol’ index.

The reason for this is pretty simple if you think aboot it. When the underwriter does their job, they’re creating a huge demand for shares. The IPO usually represents peak demand.

A few months after the IPO, the same investment banker will often quietly arrange a secondary offering, which usually allows more insiders the chance to cash out. This will also help push the share price down.

Investors who get a piece of an IPO aren’t stupid, either. They usually only hold for a few hours, flipping their shares to some other sucker amid the frenzied first day. If the IPO is hot, CNBC or BNN will cover the hell out of it. This attracts retail investors. The cycle completes itself a few months later when they get bored and sell.

The Snap IPO is the perfect example. It’s more overvalued than popcorn at the movies. Eventually the people buying shares will sit down and realize that.

The bottom line? Just avoid IPOs. At a minimum, give any new shares six months before taking a look, just to let the dust settle.

The Actual Way to Invest In (or Against) Donald Trump

The Actual Way to Invest In (or Against) Donald Trump

Ever since Donald Trump SHOCKED THE WORLD and upset Hillary Clinton on that Tuesday night in November, approximately 53,923,109,477.627 man hours have been dedicated to the issue that will impact all of us, greatly:

Where in the hell are my keys? Seriously, guys, I’ve looked everywhere.

(3 hours later)

They were in my pocket.

The financial media (including this guy), have been consumed with telling you kids how to invest in a Donald Trump world. We focused on things like infrastructure spending, an improved market for coal, and oil, TransCanada finally getting Keystone XL approved, and so on. Basically we just looked at Trump’s campaign promises and made educated guesses.

That’s the hard-hitting journalism you kids are getting these days. I saw the stats, and people ate that ish up. It was amazing.

Most of the advice was pretty predictable. You should do absolutely nothing, it said, because Donald Trump is just a small part of a big machine that mostly functions the same no matter which jabroni runs it. He’s not going to screw it up so badly, in other words.

Or you could have followed this guy’s advice.

I will cry real tears if this ever gets deleted. What a tweet.

There are still millions of people out there who are convinced Trump is going to get us all killed, even though it’s been months since the election. There’s nothing you can say to convince these people, either. They are still 100% invested in the Trump is an evil, dumb, giant crook theory. Cruise Eichenwald’s Twitter feed if you don’t believe me.

If you’re one of those people, may I suggest putting your money where your mouth is?

An actual bet on Trump

Buying a U.S.-based index fund is, at best, an indirect way to bet on Trump. No matter how much he tries to meddle, there are various checks and balances in place.

Besides, the American economy is strong. It’s going to take more than Donald Trump to squash it. It’ll take at least two Donald Trumps. Maybe even three.

There’s an actual way to bet on (or against) Trump, which is to place an actual bet with a bookie. Here are the updated odds:

trump odds

Let me translate the odds for those of you who don’t speak gamblor:

  • A $1 bet on Trump to not be reelected in 2020 would pay $1.50
  • A $1 bet on Trump to be impeached or resign before the end of his first term would pay $1.25
  • $1 bet on Trump to serve his entire first term would pay out $2
  • $1 bet on Trump to visit Russia would pay $2.50
  • And a $1 bet on Trump to win the Nobel Peace Prize would pay $26 to the winner

Let’s think about those odds for a second. You’re getting far more value by betting Trump will serve his whole term (100% potential payout) versus betting he’ll impeached or resign in disgrace (25% payout).

Keep in mind that there’s only been one president that has ever resigned in disgrace. Most politicians find a way to make it through their entire term, even the really bad ones. Hell, if Trump is as evil as everyone says he is, he’ll find a way to make himself dictator and you win.

Thinking about investing as betting

It’s no coincidence many good investors are also good at gambling. Warren Buffett was big into horse racing. Ed Thorp conquered blackjack before moving onto managing money. And so on. There are plenty of other examples.

Value investing is essentially the search for asymmetric odds. If you invest $1 in something that goes to zero 50% of the time and increases to $3 50% of the time, the implied value of that investment is $1.50, or a 50% return. That’s a good investment, provided you’ve got more than one opportunity to make it.

In other words, not all of your portfolio should be in things that could legitimately go to zero. And those bets should be spread out.

There’s also sentiment to think about. Bookies are saying bets against Trump are coming in about five times faster than bets on him. A gambling house doesn’t want that kind of action. It wants equal betting on both sides. It doesn’t care about the odds of something happening.

Both professional gamblers and professional investors have that in common. Both are taking advantage of asymmetric odds. They just have different ways of doing it.

This is the end

The Trump odds are clearly weighted towards the less likely thing happening. Identify those situations as a value investor and you’re already well on your way to making money.

Oh, and I’m curious to know. Which side of the Trump bet would y’all take? Let me know in the comments (without getting too political, please!).

Realtors (and Traditional Financial Advisors) Will Never Go Away

Realtors (and Traditional Financial Advisors) Will Never Go Away

Let me tell you kids about the average real estate buyer.

This person, likely buoyed by hours and hours of the kind of experience one can only get watching HGTV, thinks they know everything. They’re able to identify a kitchen that needs remodeling a million miles away. They know if that flip is going to be a flop (spoiler alert: it never is). And they sure as hell can tell which house those pesky House Hunters are going to choose.

There’s just one problem. The lessons on HGTV don’t translate into the real world.

A recent example

I recently met with a woman who wanted some private mortgage financing. Most people who come and talk to me are looking to borrow against a house they already own. This woman was looking to buy a house. She had a minimal down payment with the plan to either a) take out a loan to make her application at the bank seem better or b) have me finance 98% of the value of her new property.

The more I talked to her the more it was obvious she had no idea about the actual nuts and bolts of home buying. She couldn’t understand why I was saying no. I explained the concept of equity and just how much equity I needed as a margin of safety. I would have had more luck if I was talking to a nine-iron.

What came next was equally shocking and hilarious. I asked her if she had a house picked out yet.

I hit a nerve there.

What came next was a five minute story about how she was “forced” to buy privately by several local Realtors who REFUSED to show her houses? The reason? Each asked if she had been pre-approved for a mortgage. When she said no, they all told her to pound sand.

She then found a private seller who would sell her a place for $120,000. This was the house she wanted me to finance.

I did a little research after she left. It turns out the property had been previously listed for months before the frustrated seller took it off the market. The list price?


That woman needed a Realtor. She would have gladly overpaid by 33% doing everything herself.

Professionals are a mixed blessing

Before y’all accuse me of being pro-Realtor, I fully agree with the all the negatives.

Most Realtors don’t care about getting you the best price. They care about getting the deal done. There are a lot of semi-competent real estate “professionals” out there, too, who find ways to screw deals up. And we’ve all heard the stories about crooked Realtors who actually try to steal from their clients.

I get all that, and I do firmly believe a well-educated home buyer can do just as well on their own.

The key word there is educated. The average home buyer doesn’t know anything about houses.

It’s the same thing with investment advice. I firmly believe the average reader of this here blogening can build their own portfolio of ETFs. I think they can even pick individual stocks if they acquire the needed knowledge. But we are not representative of the population as a whole. Not even close.

There’s just one problem, as I’ve alluded to before. There’s no decent option for financial advice for somebody just getting started. Paying $1,000 or $1,500 for fee-only advice is silly when you’ve only got $10,000 to invest. We all know mutual funds aren’t a good idea. Small-time investors are left to getting their advice from books and blogs.

Financial middlemen will always exist

Robo-advisors have seemingly filled this niche, and low-cost real estate companies will now sell your house for a fraction of the price charged by full-service agents.

In other words, both of these so-called “dying” industries have adapted.

Mutual funds will be next. The average robo-advisor charges a little less than 1% in total fees. There’s still an assload of money to be made in the fund business if the average mutual fund charges a little more than that. A fund can charge 1.1% or 1.2% and still make enough to pay the advisor and deliver a healthy profit to shareholders.

And there will always be the investor who thinks they can beat the market using actively managed funds.

The average person needs a financial middlemen. They’d be lost buying a house without a Realtor or buying an investment without an advisor helping them. These people will always make up the bulk of the population. You can either accept it and pay the price (remember, both real estate commissions and fee-only financial planners are open to negotiation), or educate yourself to do without. But be warned; option B is much tougher than you think.

The Fallacy of “Shop Local”

The Fallacy of “Shop Local”

I live in a small town in Alberta. Let’s call it Lower Sackville because that has to be the best name for a town in the history of mankind.

Lower Sackville is like a lot of sleepy towns. It has a Wal-Mart and a Canadian Tire and a McDonald’s and so on. Depending on your perspective, these businesses either are a welcome sight or a personification of everything wrong with this world.

Consumers tend to love it when a Wal-Mart comes to town. It’ll undercut every other local retailer, especially for the first few months. Many existing shops can’t adapt, and you know what happens next.

Small businesses, naturally, hate it. “You should shop local,” they say “because that money helps to support local businesses. I take that money and put my kid into hockey or some other nonsense. Shop local.”

The whole shop local movement has got to be the worst idea I’ve ever heard. And believe me, I’ve heard a lot of crap over the years. Here’s why.

The lunacy of small town shop owners

Let me invite you to every small town clothing store, art gallery, shoe shop, kitschy kinck-knack store, electronics reseller, and antique shop. They’re all identical. Every damn one of them.

Each one is ran by a frustrated employee who decided they were sick of working for THE MAN. These people want all the benefits of working for themselves without any of the associated responsibility. They will insist on only working Monday to Friday (9-5, naturally), despite knowing many of their customers also have similar hours. If the place is even open on the weekend, hours are sporadic.

Prices are never even close to competitive, for a number of reasons. Small shops have terrible buying power. They also do no volume, so each item has to have a 100% markup to make up for it. Shops are cluttered, poorly laid out, and are filled with second-hand fixtures.

But it’s okay! Service is where these stores shine, you dummy. The whole reason why you shop local is because a local store is going to go above and beyond! When was the last time that mouth breather at Wal-Mart helped you carry your purchase to your car?

How do they do that?

Is the owner more knowledgeable? Sometimes, but it doesn’t take a whole lot of knowledge if you’re selling knick-knacks.

Is the owner nicer? This one is really hit and miss.

Is the return policy better? L to the O to the L. Have you ever tried to return something to a locally-owned shop? They want to murder you. Nobody at Wal-Mart gives two craps if you want to return something.

But hey, better service! Somehow!

How small town merchants insult your intelligence

Let’s think about the whole shop local movement here for a second.

There’s a local business person out there, somewhere, who is doing a shitty job. They charge too much for their stuff, but try to make it up with some sort of imaginary elevated level of service. And yet they expect a reasonably educated consumer in 2017 to buy stuff from them.

This is why the whole shop local thing exists. These store owners know deep down inside that they have absolutely no competitive advantage over a big box store. So they force you to pity them.

“My product is virtually identical to the one you can buy on Amazon, but 20% to 50% more. The only reason to buy it from me because you feel sorry for me.”

Consumers have a responsibility to their dollars. They need to exchange them for the greatest value possible. Amazon understands that. Wal-Mart understands that. Your average business owner not only doesn’t believe is, but then they also insist you specifically light money on fire just to support somebody who isn’t very good at selling things.

You know how every organization thinks they’ve got the best employees? Some do have great employees. Others? Not so much. It’s the same thing with service levels at small town businesses. Some really do go above and beyond. Most barely go through the motions any better than a local schleprock manning the electronics department at the local Wal-Mart.

Why are we rewarding it? Why do we let small business owners get away with it? Compete better, dammit.

So no, don’t shop local

I’ve gotten to the point where I buy very few things locally. I still support both my town’s grocery stores (especially since I used to work at one), but the majority of my food gets bought at Costco. I buy my clothes, my shoes, and damn near everything else either in the city or online. Until local stores stop insulting me and stop offering the exact same damn products I can get elsewhere for 20% to 50% more, I will continue to go where I can get the best value.

Sheesh. No wonder retail is such a terrible business.