7 + 1 Life Lessons from the Very (and Not So Very) Wealthy

June 20th, 2011

Over the weekend Barry Ritholtz published an excellent column in the Washington Post listing 7 lessons he’s learned through his interactions with high net-worth clients.  The lessons reflected a number of the values we have at Below Your Means.  Under #3 – Memories are better than material objects, he writes:

The rule of diminishing returns is a harsh mistress with luxury goods. Do you really think $100,000 audio speakers sound 20 times better than a pair of $5,000 speakers? (They don’t). Is a $250,000 sports car five times faster than a $50,000? (It is not). These days, you can buy quite a lovely home for $1,000,000 (and much less in the country’s interior). Those $10,000,000 manses are not 10 times roomier. Anyone who has owned a $10,000 Rolex will tell you that a $39 Casio keeps better time.

We like this one a lot – and it’s a common problem.  As your income increases, there is no requirement to increase your spending!

Ritholz continues (emphasis ours):

When discussing the benefits of wealth, I have heard again and again about amazing experiences, family get-togethers, vacations, shows, sporting events, weddings and other events as these people’s most important life experiences. While these things cost money, nearly every family can afford reasonable versions of them.

This leads to our addition to the list:

8.  Don’t think you have to have money already to start living richly

As with anything that requires discipline (losing weight & getting in shape, for example), too many people make the mistake of thinking “this would be so much easier if I already had X”, where X is being at a certain weight, or fitness level, or having a certain income.  It is just as easy to blow through a $100K/year salary as it is to blow through a $50K/year salary.  Now, if you are reading this and trying to make ends meet on a $50K/year salary, this statement may make you angry.  But trust me (and the experience of many people who have seen their expenses grow as their income grows) – it is just a matter of making a decision to live within your means.  Of course, if you are dealing with large medical bills or a house that you can’t afford after a job loss, you have an immeidate problem that requires more complex solutions than we are offering here.  But for a large portion of the population, the issue is more choosing to start living within your means, finding ways to increase your means, and growing your net worth than it is one of mere survival.  We’re not saying money doesn’t help, but it isn’t a requirement.  The authors of this blog certainly started before they had the incomes that they enjoy now.

Another point Ritholz makes that we love (emphasis added):

I am struck by how many very wealthy people I know — especially tech entrepreneurs – have expressed being grateful for their good luck. Again and again, I have heard the phrase: “Being smart is good, but being lucky is better.” Rather than leave you with the impression that success is simply a roll of the dice, I am compelled to remind you what the Roman philosopher Seneca the Younger was reputed to have said: “Luck is where preparation meets opportunity.” I don’t know whether it’s better to be smart or lucky, but I would suggest that making the most of the opportunities takes more than just dumb luck.

Opportunities will come your way all the time.  Living within your means is one way to ensure that you have the freedom to take advantage of those opportunites.  The second – don’t be too proud.  The most successful people we know will do everything from negotiate a seven-figure deal to dig a ditch, if that is what it takes to sieze the opportunity in front of them.

Over to the Washington Post for more…

7 Life Lessons from the Very Wealthy | The Washington Post

Below Your Means Favorites of the Week (Grease Fire Edition) – June 17

June 17th, 2011

While the world of personal finance is interesting, I think what is going on in Greece and the rest of the Eurozone will have a far bigger impact on everyday American’s lives than they may realize.  This weekend, along with Monday and Tuesday are going to be extremely telling for how bad things could get and how quickly.  It will also tell us if the powers that be are able to “kick the can” a little further.  Please note, of all events going on in Greece right now… NONE of this is about fixing anything or evening attempting to fix things.  It is only about delaying the inevitable, which is a Greece default.

With so many great posts in the world of Personal Financial Blogs, it is hard to keep up with them all. Here are a few of our favorites from the week:

Personal Finance / Etc.

Economics / Investing


  • Congrats go out to the Bucksome Boomer on their 500th post.

SEC May Charge Ratings Agencies with Fraud

June 17th, 2011

The Wall Street Journal reported this morning that the SEC is considering fraud charges against the ratings agencies that were responsible for evaluating the CDOs, or collection of loans, that ultimately led to the sub-prime mortgage crisis.  For those of you who may not be familiar with the issue, part of the strategy of selling the mortgages was to bundle a variety of loans into a single package (the CDO).  The bundles contained high-risk and low-risk loans, but because they were bundled up in a package, the ratings agencies gave the package a solid rating despite the high-risk loans bundled within.

According to the paper, lawyers point out that regulators commonly accuse financial firms of fraud if they intentionally or recklessly misrepresent information.  The WSJ reports that the ratings agencies under investigation could face allegations that they “relied on incomplete or out-of-date information supplied to them on the pools of loans in the mortgage-bond deals or ignored clear signs of problems” in the mortgage industry.  By doing so, they rated the products too high and misled investors as to their quality.

The Big Short: Inside the Doomsday Machine a fascinating book about the mortgage crisis by Michael Lewis, paints the ratings agencies as naive rubes who fell prey to the sophisticated selling tactics of the Wall Street trading firms.  In it, he points out that ratings agencies are paid to rate securities, and their customers (in this case, banks) want good ratings.  To us, the conflict of interest is obvious.  According to the Wall Street Journal (emphasis added):

To be sure, the credit-rating companies aren’t responsible for the accuracy of the data supplied to them to rate securities. But they could be accused of ignoring obvious flaws in the data, such as it failing to reflect the deterioration of the mortgage market, according to lawyers.

We’d add to that: or failing to conduct enough of their own research to establish independence from the organization submitting the security to be rated.

The continuing lesson for us at BYM: Wall Street deals are naturally stacked in favor of those who are closest to the market and the deals (and therefore know the most).  Much like the recent round of tech IPOs, it’s the traders who are going to make the most money.  Organizations like Moody’s are merely selling their opinion, which may be as uninformed as the man on the street.  In fact, when these agencies are dead wrong, they use the first amendment as defense.  The WSJ reports:

In May, the credit-rating firms notched a legal victory when a U.S. Court of Appeals ruled that they can’t be held liable for their ratings of mortgage-backed securities. Their ratings, the judges wrote, were “merely opinions” and protected by the First Amendment, a defense the firms have often used in the past.

And all of this is fine.  It’s just business, and we shouldn’t stop people from running businesses.  Our objection is when these businesses are treated like civic institutions, to be trusted implicitly, and rescued at taxpayer expense.  While Moody’s and Standard & Poor’s didn’t get bailout money, there were definitely part of the problem, and part of the system that we’ve propped up.

As always, let the buyer beware.

Raters Drawing SEC Scrutiny (premium content) | The Wall Street Journal


Apparently We Don’t Have Enough Fraud at Home; We Import It Too

June 17th, 2011

Clare Baldwin of Reuters ran an interesting article yesterday describing the swagger of two investors attending DealFlow Media’s annual conference, who say they are making a fortune shorting the stocks of fraudulent Chinese companies.  The conference dealt with so-called “reverse mergers” in which a (usually larger) private company is able to become public without going through an IPO by merging with a (usually smaller) public one.  Apparently, according to these investors at least, since the process avoids an IPO, it’s a ripe for fraud.

“It’s not a matter of whether they are fraudulent companies, it’s just a matter of who they are cheating,” 62-year-old Texas-based investor John Bird, who has been very public about his short positions, told a panel at DealFlow Media’s Reverse Merger Conference 2011.

and another:

“The realization I have come to recently is that it’s a giant Ponzi scheme. It’s all going down,” declared Rick Pearson, another investor who holds short positions on some Chinese stocks.

The article continues, pointing out that others at the conference feel like the whole issue is overblown, especially since the Chinese are easy targets:

Some pointed out that highly regarded companies — such as Warren Buffett’s Berkshire Hathaway — were created through reverse mergers.

They also argued that while some U.S.-listed Chinese companies may have had some problems, that is the exception and not the rule, and suggested China is an easy target because of American resentment about its growth as an economic power and its clout as a big owner of U.S. debt.

“I think with China, there’s a total overreaction,” said David Rees, a partner at Vincent & Rees law firm in Salt Lake City, Utah. “It’s an easy target.”

And of course, the motives of those bringing the reports of fraud to the market were called into question:

Most attendees were quick to say that they wanted fraud rooted out, but they became uncomfortable or even angry at the thought that someone could profit even if their allegations ultimately proved false.

“What it comes down to is, is the information truthful and accurate? And, also, do you have an economic motive or an opportunity, assuming it’s false…to profit personally because you’re intentionally putting out this false information?” asked Perrie Weiner, international co-chair of DLA Piper’s Securities Litigation practice.

Whether you are tempted to believe the shorts or the longs, this article reminded us of our general attitude towards the markets: it’s hard to know what is going on with any of these companies unless you are close to the deals.  Let the buyer beware.

Insight: For short sellers of Chinese stocks, it’s time to reap | Reuters

Thumbnail Photo Credit: Carmela Songer

Pandora’s Stock Is Not Looking So Hot

June 16th, 2011

Cue the shareholder lawsuits in 3, 2, 1 …

Yesterday we posted about Pandora’s IPO and how the price action looked very similar to LinkedIn (LNKD).  Unfortunately, things just went from bad to worse.  The stock is down again hard today, with shares plunging almost 25% just today!

I think the “Investing Wisely” lessons learned here are simple:

  • The current wave of “Dot Com 2.0” IPOs are very risky at best
  • I would avoid being an early buyer of any future IPO such as Facebook or Groupon
  • Don’t try to “catch a falling knife”, based on fundamentals some analysis are calling for Pandora to got o about $5.80 a share!

Sick Pandora Chart


Site Update and News

June 15th, 2011

We’ve made an increase in the number of posts here at Below Your Means, and are looking to get on a regular schedule.  Our new schedule will be:

  • Mondays & Wednesdays – Feature article tied to the month’s theme
  • Tuesday – Research article
  • Thursday – Frugal Fail
  • Friday – Moment of Zen & Best of the Week

In addition, we will be making at least one additional news/opinion post per day.

A few other quick updates on the site:

We certainly hope you enjoy the new content and changes.  We also welcome feedback.


Great Job, GE!

June 15th, 2011

I love it when a company does what they say they are going to do.

My wife and I are remodeling our house and putting in a new kitchen.  We bought GE appliances, and at the time of the purchase they had a pretty good rebate deal – $500 back if you buy 4 appliances (which we did).  The forms to claim the rebate were pretty simple, but we had one problem.  The rebate forms had to be postmarked by a certain date, and because the kitchen wasn’t ready for appliances yet, we didn’t have the serial numbers to submit.  So, we filled in the forms as best we could and sent them (registered mail) by the postmark date.

A few weeks later we had a few of the serial numbers (but not all of them), and we received an email from GE’s rebate center saying there was a problem with our submission.  So far so good – at least they hadn’t thrown it in the trash.  When I called the 800 number, the person I spoke with was very polite and helpful.  It turns out because we bought the appliances from multiple vendors, they had multiple cases set up for us.  He consolidated all of our submissions onto a single case number and told me to call when we had all the appliances in house and knew the serial numbers.

Last week we got all the appliances and serial numbers, but before I made time to call, we received a $100 card.  I thought this was a bad sign… they decided our submission had gone too long and gave us the 2-appliance rebate amount instead of the 4-appliance rebate amount.  Expecting an argument, I called the 800 number again.  The first woman who answered the phone listened to my story and promptly, without my asking, transferred me to a supervisor.  The supervisor took down the 2 additional serial numbers, told me to feel free to use the $100 rebate we had already received, and promised the remaining $400 would show up in 2 weeks.  No arguments and no issues.

Great job, GE.