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5 Foolish Things Americans Believe About Money and Investing

by Darwin on June 23, 2013

There are all sorts of misconceptions about finance, business, taxes, investing and economics that people believe. ┬áSometimes I’ve been guilty myself. ┬áSo, here are 5 of my current pet peeves and I’d like to hear what yours are as well:

  • “He Only Donates to Charity Because He Needs the Writeoff” – This is utter nonsense. I’ve heard this enough times now that I have to call it out. No good deed goes unpunished and that certainly goes for virtually anything that well-off people do. A lot of Americans are under the mistaken belief that it is somehow financially beneficial for wealthy Americans to use the tax code to their advantage by donating to charity. No matter what your tax rate (even if it were 100% confiscation!), you would never have a net positive by donating money. You simply get to avoid paying taxes on the “amount” you donate. I’ll make it simple. If you made a million bucks and paid half in taxes (sad but true with state, local, Obamacare, etc.), you’d be left with $500,000 net cash to spend. But if you donated $100,000 as well, you’d get to deduct $100,000 off your income, so you’d only have been taxed on $900,000 from federal. Assuming only federal writeoff of ~40%, then you’d pay $40K less in taxes. So, you’d take home $$460,000 after that deduction. But that’s still a hell of a lot less than $500K! See how that works? Whoever thinks it is some sort of loophole or benefit to the rich to donate money, please forward this to them.
  • “My Car Payment Will Stay the Same!” – People do all kinds of dumb things when buying cars. Aside from the complete fear of doing research in advance and negotiating hard, they are also under the mistaken belief that as long as their car payment on the new car is the same as their old car payment, they are somehow “winning”. They just look silly, really. If you had a 4 year loan on a car, drove it for 2 years (while paying 2 years of loans and probably just barely breaking the depreciation loss barrier) and then trade it in, a typical car salesman tactic is to ask what your old payment is, or what your budget is. That’s one of the worst (and most offensively stupid) questions someone could ask me during a transaction. Aside from the fact that what you have available in your budget is irrelevant to whether you’re getting a good deal or not, salesmen can modify all sorts of terms to get your new monthly payment to match your old one – all at YOUR EXPENSE! They can extend the term out to 5 years, they can have you increase your down payment, etc. This is foolish thinking. Once you’ve selected a make and model that you want, you should research what other people have paid to get a sense for what you should expect to pay. You can use all sorts of resources online and tactics like going dealer to dealer or even online pre-bidding before even setting foot in a showroom, and then shoot for that final sales price. Basing a purchase on a monthly number is only going to cost you more than what you’re getting in the long-run.
  • I Can Beat the Market – Stop. Just stop. You can’t and you won’t. So, you bought Apple at $300. That’s great. I bought it at $90. And I’m still not beating the market over a decades-long period. Have I picked some winners? Sure! I used to make occasional stock recommendations and I’m down to just 1 per year now (my 2013 stock pick is up 23% (more than double the S&P500) and it’s the only stock I bought all year). But people mistake discreet small successes with long-term average returns. When you factor in that nobody talks about all the stocks they’ve lost money on, all the commissions and taxes on capital gains along the way, most of us would be better off in low-cost index ETFs and mutual funds (see ETF Base to learn all about ETF investing). And if there’s a “stockbroker” who claims he beats the market? Run. Because aside from that fact that he or she can’t either, you’re going to pay for the priveledge.
  • I Heard the Market’s About to Crash – Should I Sell out of Stocks? – My mom just sent me this email. She said she just watched a video online about a pending market crash and wanted to know if she should liquidate all the equities in her retirement account. I didn’t see the video, but these videos are usually by idiots with no accountability for all their horrible calls and probably trying to sell gold. How’s that gold trade worked out for all the permabears anyway? As of this week, gold is now as low as it was 3 years ago, and sinking fast. Listen, the world is full of blowhard idiots with a really great-sounding thesis. CNBC rotates them in and out. They’re all losers. Every last one of them. They come on and tout a stock thesis or asset class thesis and then they cite their past “successes” when one call comes true. But there’s no mention of all the bad calls they made. People need to have a long-term strategy and stick to it, no matter what their stockbroker friend told them, Jim Cramer, or the 79th version of “end of America” ads I used to hear on Sirius daily.
  • Multi-Level Marketing – This is the worst. MLMs are the sleaziest of sleazebags and they’re legal because they sue the crap out of anyone that criticizes them – and they lobby hard to ensure there’s no legislation to take them down. They also send their minions to harass and attack anyone that criticizes them (at a prior blog, I was threatened by both lawyers and members for pointing out their ridiculous scheme, and of course, the company’s fizzled out by now). So, I won’t mention any by name, but there are hundreds of them. They tend to prey on lower income and minorities which is even more appalling, but we have a few more affluent friends who are part of one of these “business ventures” (jewelry?, early mortgage payoff “system”, etc) and while they’ve given up hitting us up to join or buy their overpriced and useless products, it’s still frustrating that smart people continue to fall for them. It goes like this. There’s this “new, exciting business venture”. You can get in on the ground floor. You can become “financially independent” and work out of your home. You’ll be a small business owner! (they all use the same language). It’s a load of crap. With most of them, you’re not selling real products that anyone wants (or you could buy similarly themed/similar quality products elsewhere for less) and they make most of their money simply by recruiting more members. These companies usually last a couple years during the growth phase and then when their members stop paying their fees and drop out because they realize they’ve invested a TON of time and money into something with no return, then the companies fade away and the same schemers behind one MLM just start up another. If you research who’s involved in past and present MLMs, it’s often the same cast of characters from the founders to lawyers, etc. The big pitch that often entices people to sign up is that “you have to act now!”. Because then you’ll be higher up in the pyramid (even though they avoid that term). It’s so slimy, I’ll never be part of one. You basically have to hound your friends and family to join so you can have some underlings to at least break even initially, and in the end, they’ll all resent you for getting them involved in the scheme. First off, recognize an MLM when you see one. And then run.

What Are The Most Foolish Things Americans Believe?

What Did I Miss?

{ 13 comments… read them below or add one }

freebird June 23, 2013 at 5:56 pm

On beating the market, back at the end of 1998 I funded and sealed a discount brokerage account with a year’s pay. Since then no money or securities went in or out of that account, fees and expenses were paid from the cash balance in that account, but any income taxes incurred by dividends or capital gains I paid out of my wages. Over these past 14+ years I traded hundreds of times and never took any position that was larger than 10% of the account value. My strategy has been mostly focused on small cap value investing by fundamental analysis, as best as I could follow from what I read in books in the library. Anyway this account is now six times its original YE98 dollar value according to my May statement. I believe 6^(1/14.5) works out to 13% per year annualized. By comparison the S&P500 has risen about 4% per year over this time interval, so 7% per year including dividends. The Russell 2000 has risen about 6% per year over this interval. So I would claim that I did beat both of these indices. Not by a huge amount, but statistically significant I think.

Is it luck or skill? I think there’s likely to be some element of both involved because the number of trades I made was relatively large, so sampling error should be less. I believe there’s some validity to the basic approach that I’m using, which if I understand correctly is similar to what famous successful investors have done (Benjamin Graham’s students). Obviously I’m not anywhere near their level of skill because my returns only edged the market, while they trounced it (if we believe the return numbers that are reported in the media).

As for foolish things, these are usually easier to see in hindsight, but let me venture one prediction. There’s a saying that once everybody believes that a trade is a no-lose proposition, that that trade is doomed. From what I read everyone and their brother is now completely convinced that index investing will always beat active stock selection. I’m continuing to take the other side.

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Darwin June 23, 2013 at 10:03 pm

Sounds like you’re one of a kind! Data shows most retail investors (and pros) would have been better off passive for varying reasons. More power to ya! I admit, in my Roth IRA, I’ve tried various strategies to beat the index with high yield stocks, covered calls, etc.

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krantcents June 23, 2013 at 7:14 pm

Good list! I don’t know if I could add anything, but I will try anyway. I think Americans (although I hate generalities) seem to think that they are owed something. You have to work for everything you get!

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Darwin June 23, 2013 at 10:01 pm

Oh, that’s a great one. It’s really gotten out of hand – the free shit army. People are shameless.

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Moneycone June 24, 2013 at 8:10 am

I’m glad your section on MLMs is bigger than the other ones! I hate MLMs with passion. I actually attended a ‘session’ a really long time ago and was so put off with the shallowness, I don’t think I can ever join one.

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Darwin June 24, 2013 at 9:50 pm

Gotta love the “exploding offer” – join now or you’ll miss out! Gotta sign on the dotted line NOW! (that’s called negotiating from a position of weakness, trying to prevent one from researching on the web quickly to see what a scam it is)

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David Leonhardt June 26, 2013 at 9:44 pm

Agreed.

Agreed.

Du-oh.

Du-oh with a generous covering of maple syrup and a cherry on top.

You bet! Any business whose main goal is to sign up more sales staff rather than to move product is fraudulent. Invoking a religious or quasi-spiritual rapture, as many of them do, is disingenuous.

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JoeTaxpayer July 1, 2013 at 9:43 pm

From everything I read th average investor lags the market by so much that my own indexing to purposely target S&P less .05% puts my return in the top 10% of investors. Anyone can do it, few do.

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My Financial Independence Journey July 5, 2013 at 10:17 am

I agree with you on all those points except the one about not being able to beat the market. If you focus on finding under or fair valued stocks rather than spraying money across everything you can beat the S&P500. I’m beating the S&P500 by around 5% right now (38 months of investing experience), so I know it can be done. Whether I can keep up this pace for another 3 years remains to be seen.

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Jeremy Streich July 12, 2013 at 4:09 pm

Agreed on Dontations.

With cars, I love when they ask me, “What’s your current car payment?”
And I answer “0.” They look at me like I just turned green and grew horns. Then I ask, “Can you beat that price?” Then, we proceed to dispense with the “find the right one” because we know what we came in for, “We want a , your website says you have two. We’d like to test drive them.”

Then, when they bring us into the office to negotiate, we ask “What can you do for me?” and we wait. When we keep getting a numbers that we think is too high, “We have $X in cash right here. Right now. Take it or leave it.” And we always find what we are looking for, at the price we are expecting, and in good condition. Getting there does have us walking out of a dealership or two with just the money we walked in with, but that isn’t any skin off our nose.

My “foolish thing” to add to the list is debt. It’s “other peoples money” and “I can pay it off over time.” I personally don’t borrow for anything anymore. We do still have a mortgage, and won’t yell about someone I hear taking out a mortgage (unless they take out a mortgage they can’t afford, take out an ARM, etc.), but besides that what are people thinking? Consumer debt seems especially stupid, how many months are you going to paying off that last trip to the mall. I hear a lot of “But I pay it all off every month,” but if that were true for everyone I’ve heard it from credit card companies would be broke. Financing temporary creature comforts on the back of tomorrows work is reckless and dangerous. The worst offense though, I think, is pay day loans. They get people who are in a tight spot into a parasitic relationship with lenders who are one step away from being loan sharks.

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Chris July 13, 2013 at 6:08 pm

I think it is mathematically impossible to make money in a multi-level market system, unless there are people losing money somewhere in the “downline”. The exception would be if you are getting something in return for your money, but like you said, the products are usually overpriced.

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Suzie July 17, 2013 at 11:16 pm

I have to disagree somewhat with your first point. Donating to charity has saved us money on taxes. We donate clothing (mostly) and other items to reputable charities, as well as cash. Because we itemize we are able to take advantage and get more of a break when we include our charitable contributions. My husband used to sell cars so I already know about the “what is your current payment” scam.

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Darwin July 18, 2013 at 11:02 pm

If you’re donating things you would have thrown out anyway, that’s not like someone that gives 100K to a charity and then someone criticizes them for “having to do that for their own benefit”.

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