The single dumbest industry in the universe.

Of course, if you've devised a "system", then this blog post is void.

Dumb from the customers’ perspective, that is. Ingenious from that of the industry itself.

Gambling. Dumber than alcohol, dumber than tobacco, dumber than network TV. At least drinking gives the user an inflated feeling of self-worth, and at least cigarettes make a statement (“I enjoy slowly killing myself while rendering the radius around me uninhabitable.”)

As for gambling, however, it just impoverishes its practitioners. Nothing else.

We’re not counting football bets between friends here, or a night of poker with the fellas. Those are zero-sum games. Unless you’re exceedingly horrible at reading an injury report or you insist on drawing to inside straights, you’ll end up neither making nor losing money in the long run when you bet among your friends. You’re essentially moving bills back and forth as a form of camaraderie.

Casino gambling is different, thanks to vig. That’s the cut the casino takes from every wager, which will ultimately bleed you dry. On the roulette wheel, the casino takes 3% of every bet. On straight sports wagering (i.e. a single game per bet), the casino takes 5%.

If someone offers you an investment that pays, say, 10%, would you take it?

The correct answer is “I don’t know.” A rate of return needs to be quoted with a time period for it to mean anything. If the investment takes 20 years to pay 10%, that’s .5% annually. You might as well leave your money in a savings account.

What if the investment pays 10% per day?

Say you invest $1. You’d have $1.95 by the end of the week, $17.45 by the end of the month, and $28 million in half a year’s time. Within 11 months you’d be earning more money than the rest of the world combined.

(That being said, when you read an interest rate quoted in a financial publication – or on any Control Your Cash post other than this one – assume the rate is annual unless otherwise specified.)

So an investment’s duration is always as important as the interest rate, with one exception – negative interest rates. These are always bad, for obvious reasons. If the reasons aren’t obvious, understand that having less money today than you did yesterday is something you want to discourage.

So let’s rephrase that earlier question:

If someone offers you an investment that pays, say, -3%, would you take it?

Which returns us to casino gambling. And for today’s example, the casino mainstay of keno. Keno, if you’re not familiar, is a type of lottery. Some states even incorporate it into their idiot impoverishment plans official lotteries.

In keno you pick twenty numbers from 1 to 80. The casino then draws twenty numbers, and you get paid depending on how many you got right. The game appeals to idiots for several reasons:

-it requires zero skill.
-it offers an outlet for superstition (“My granddaughter was born on the 17^th day of the 11^th month. I was 48 when I joined Oprah’s Book Club. I have 2 eyes on my head, which are currently looking at 77 collectible miniatures,” etc.)
-it provides a margin for error (for instance, if you mark 6 numbers on your ticket, you get paid even if you get only 3 right. If you mark as many as 15 numbers, you get paid if you get only 6 right. What’s not to love about a game that still pays you even if you get more numbers wrong than right?

The vig on keno would be criminal, except that keno players engage in voluntary exchange with the casino and know the rules going in.

Say you play the simplest possible keno ticket; one where you select just one number. The chance of you getting it right is 4-to-1. Most casinos pay 3-to-1.

Which means you just found an investment that pays -25%.

We showed how an investment that pays 10% every 24 hours can make you legitimately rich within a few months, and richer than the rest of the world in less than a year.

Meanwhile, a keno ticket pays -25% in about 7 minutes. (The length of time the casino takes to draw its numbers, then set up for the next game.)

By the way, that one-number ticket is the safest (well, “least dangerous”) keno bet in existence.

Say you play a two-number ticket. The chance of getting both numbers right is about 17-to-1, and pays 12-to-1. Here the casino takes a 28% cut.

Like any good (for the casino) game, the dumber players are, the worse they get punished. Take the average keno player, who isn’t there to win a lousy $4 on a $1 one-number ticket, or even $12 on a $1 two-number ticket. Not when she can WIN UP TO $50,000!!!

One Nevada casino doesn’t require players to perform the toughest feat in keno – correctly picking all 20 numbers on a 20-number ticket – to claim its biggest prize. Instead, in a nod to ease and simplicity, this casino offers its biggest prize even to anyone who can just pick all 14 numbers on a 14-number ticket. Again, for a sweet $50,000 prize.

Care to guess what the odds are on getting 14 numbers right out of 14?

“Well,” you’re thinking, “Control Your Cash has already demonstrated that the casino takes a gigantic cut, somewhere in the 25-28% range. So the odds are probably around…65,000-to-1.”

Higher.

100,000-to-1?

Higher.

You’re telling me the casino actually keeps most of the money wagered on said tickets, paying the player less than half? That’s horrible.

Yeah, we know. Back to the original question: what do you think the odds are?

110,000-to-1?

Look, we try to keep these posts down to a reasonable length. Stop pussyfooting. The chance of getting all 14 numbers right is…

38,910,016,282-to-1.

It’s as if the casino said, “We chose a random person, somewhere on the planet, and got that person to roll a die. Who did we pick, and what number came up?” In other words, you’re going to lose.

We understand that the casino must take some cut for its expenses, like say the 3% it takes on roulette bets. If the casino were taking a similar cut here, then a winning $1 ticket should entitle you to Warren Buffett’s net worth. Or the entire market capitalization of Ford Motor Company. Or the gross domestic product of Costa Rica.

But instead, you get $50,000. Which makes the vig 99.9999%.

But hey, it’s only a buck. And you could win $50,000!!! Which is a big number! And aren’t all big numbers basically the same?

Below is the vig the casino takes on each keno bet. The Roman numerals refer to how many numbers you chose on your ticket. So for instance, if you play an 8-number ticket and get 5 right, the casino keeps 84% of your money. Happy reading.

I	Vig (%)
1 right	25
II
2 right	28
III
2 right	86
3 right	43
IV
2 right	79
3 right	87
4 right	63
V
3 right	92
4 right	90
5 right	47
VI
3 right	87
4 right	91
5 right	71
6 right	81
VII
4 right	95
5 right	84
6 right	70
7 right	80
VIII
5 right	84
6 right	78
7 right	76
8 right	92
IX
5 right	90
6 right	76
7 right	80
8 right	85
9 right	99
X
5 right	90
6 right	79
7 right	77
8 right	86
9 right	97
10 right	100
XI
6 right	80
7 right	73
8 right	84
9 right	94
10 right	99
11 right	100
XII
6 right	68
7 right	79
8 right	80
9 right	92
10 right	99
11 right	100
12 right	100
XIII
6 right	86
7 right	84
8 right	83
9 right	82
10 right	96
11 right	99
12 right	100
13 right	100
XIV
6 right	87
7 right	82
8 right	85
9 right	82
10 right	95
11 right	99
12 right	100
13 right	100
14 right	100
XV
6 right	91
7 right	76
8 right	85
9 right	87
10 right	94
11 right	97
12 right	99
13 right	100
14 right	100
15 right	100

May the salesman curse your name II

Casio sells this for $9. It'll pay for itself in the first millisecond.

Negotiate a price first. Not “a price and a financing percentage.” Not “a price and a cash back amount, available only to friends of the dealership, like you.” A price. A fixed, solitary number of dollars that the dealer is willing to accept in exchange for its vehicle. That’s all you need, and all you want, before negotiating. Why? Because you can’t negotiate multiple quantities at once. It’s too complicated.

“You can have the car for $20,000 cash. Or we’ll discount it 10%, with 4.9% financing for 5 years. Does that sound fair?”

It doesn’t take a mathemagician to know that subtracting 10% from the price of a car and adding finance fees of 4.9% means a net savings of 5.1%, right? In fact, while the dealer would probably never go for it, you might even want to ask for a 20% discount with 9.9% financing.

Let’s look at the three scenarios:

a) $20,000 cash. Cost to you, $20,000.
b) $18,000, with 4.9% financing. Cost to you, $20,331.
c) $16,000, with 9.9% financing. Cost to you, $20,350.

Price first, terms later. Welcome to another illustration of compounding interest and how it can screw the unprepared. Always start any negotiation with a raw dollar figure and no financing terms. If you don’t, it’s too easy to just accept an interest rate on faith without bothering to do the math.  Besides, interest rate numbers often seem so innocuously small that you’d think they couldn’t possibly damage your checking account balance that much. But they can.

Want to know how much a particular nominal price coupled with a certain interest rate will cost you? Well, you could guess. And you’d probably be as wrong as you were when you guessed that a 20% discount with a 9.9% interest rate was a good deal. Write this formula down. You haven’t even seen it yet, so stop bitching about how complicated it looks.

abc((1+(c/12))^{b
—————————-}
12 (((1+(c/12))^b-1)

Where

a = nominal price
b = number of monthly payments
c = interest rate

“Waah, it’s got parentheses and double parentheses and triple parentheses and those little numbers that go up top. “

First, they’re called exponents.  Second, this is not hard. Let’s demonstrate:

Say the dealer offers you yet another scenario: $18,500 (thanks to “$1500 bonus cash, direct from Dearborn!”) with a 4% interest rate. Plug the numbers in.

18,500 x 60 is 1,110,000.
4% of that is 44,400. That’s your “abc” term, from the numerator. That monstrosity to the right of it isn’t much harder.

4%/12 is .0033333….
Add 1.
Take that to the 60^th power, that’s 1.22099659…

Save that term, you’ll need it later.

44,400 x 1.22099659 is 54,212.25.
That term you saved? It appears in the denominator (with 1 subtracted from it) giving you .22099659. Which, when multiplied by 12, gives 2.651959.

Divide that into 54,212.25, and you get…
$20,442. Among all our examples, that’s the worst deal yet.

The car salesman hasn’t put this much thought into it, of course. He simply gets a list of approved price/interest rate combinations from corporate and tries to sell you on the worst possible ones. But if you insist on having him quote you a cash price, and don’t even listen to the financing options, he’s forced to negotiate on that and that alone.

Once you’ve got your cash price – say $20,000 from this example – you’re in the figurative driver’s seat. Most car buyers don’t even think about this, but…

If you want to borrow money, you don’t have to borrow it from the dealer. Even though you’re physically in his building, that doesn’t make him the only lender in existence.

Call your bank. Talk to the friendly teller, the one you flirt with every time you go in and would ask out if it wasn’t for the unflattering androgynous khaki uniform pants, and request the name of a loan officer. Tell the loan officer that you want to know what rate they’ll let you borrow $20,000 at. If you’re really smart, you’ll do this before you even start car shopping. (So pretend this paragraph appeared at the top of this post.)

At the very least, talking to your bank gives you options. If your bank offers to lend you $20,000 at 3% and the dealer is offering 3.5%, tell the dealer to beat the bank’s price. The dealer will be infuriated by this, because

a) you didn’t accept his financing offer blindly;
b) you’re asking him to come down a little, which he could interpret as a blow to his pride;
c) you went behind his back and dealt with another party. The nerve.

The dealership floor is not the place for decorum and etiquette. You’re there to spend as little money as possible, so you can buy assets with what you have left. You’re not there to make friends, especially not with a salesman who doesn’t care if you live or die once you’ve signed the paperwork. Stand your ground. Even if the dealer brings his sales manager in to play good cop/bad cop and berate you for insulting and making a mockery of the car-buying process, you can just sit back and smile. Remember from last week: there are 17,999,999 other cars out there. If you feel slighted, you can get up and leave.

(That is, if you didn’t hand your keys to the valet or your driver’s license to the salesman when you entered the dealership. Oh, you didn’t, did you? Good Lord, do we have to do everything for you? Next time, park on the street and bring a photocopy of your license.)

May the salesman curse your name

What would I have to do to get you to walk off this guy's lot, TODAY?

Walk away.

That’s the primary piece of advice we offer to anyone shopping for a new car.

The Control Your Cash book devotes an entire chapter to how to buy a new car. Here’s an extremely brief summary, starting with a critical point: every year, 18 million new cars are sold in the United States.When you fall in love with one on the dealer’s lot, regardless of whom else looked at that same car this morning and is at this very moment racing home to grab a checkbook, 17,999,999 other cars are available.

You see a car you like, or even one you’re lukewarm about. The dealer wants to get the car off the lot. That is not your problem. Most car buyers get suckered in by the personality of the salesperson. Don’t. Keep it cold. There’s no more blatant example of why it’s important to look at every transaction from the other party’s perspective.

You occupy several roles in your life. In which ones is it important to you that you succeed?

Spouse?
Parent?
Child?
Employee?
Profit center for a car dealer?

Your financial obligation is to yourself, your dependents, and no one else, regardless of how radiant the salesman’s smile is. Some dealerships are so gauche that they actually keep each salesman’s monthly figures on a whiteboard where clients can see them. Think about that.

Occasionally, it makes sense to overpay for something – like a rising stock whose fundamentals make it likely to rise even more, or a house in a great location that can’t help but eventually appreciate. But there is never an excuse to overpay for a vehicle. Ever. Why?

Buy assets, sell liabilities. Unless you own Michael Jackson’s 2006 Bugatti Veyron, your car will never appreciate. Therefore it’s not an asset. You can add the swankest sound system and the snazziest white sidewalls, it won’t make a difference. As far as Control Your Cash is concerned, a car is a liability. A necessity most likely, and something you have to spend money on (which might make you think it’s an asset), but it isn’t.

Think of a car the same way you think of your mobile service plan. Determine what features you want, which ones you can live without, comparison shop, then get your outlay as low as possible. Only a moron would brag about how big and powerful his monthly phone bill is.

You’re only at the mercy of the dealership if you want to be. The dealer should be at yours. Most buyers have no idea how much power they wield in this relationship. Once you agree on price, you can refuse to buy.  But the dealer has to sell. Advantage, you. Your livelihood doesn’t rest on the exchange of cars for money; his does. This should be obvious, but you might be naïve: the salesman is not your friend. Stop laughing at his jokes, even if doing so makes you feel more comfortable. Is filling an awkward silence really so important to you that it’s worth thousands of dollars?

Once you’ve decided on a model, take one step back and expand your horizons. Look at that model’s competitors. You have to have a Honda Civic? Fine, but at least see how much the reasonably similar Volkswagen GTI is going for.

Do that at KBB.com. That’s Kelley Blue Book, the standardbearer for pricing cars. KBB gives its information away, for some reason. Sure, the company’s numbers aren’t exact, but they’re somewhat internally consistent. If KBB says a 2010 Tacoma Tacoma double cab 4-door 4WD Pickup costs the dealer $24,344 and a Ford F150 Regular Cab 2-door XL Pickup costs the dealer $24,916, it’s reasonable for you to assume that the latter should cost you ~$600 more than the former.

Car dealers usually make their lots available during non-business hours. If you want, you can look at their cars’ window stickers on a Sunday or late at night and figure out how closely the numbers affixed jive with KBB’s numbers.

Oh, that sounds like too much trouble? Fine, then find something else to do for that hour or two that’ll net you hundreds of dollars.  Heck, many dealers even post the stickers online, making your job that much easier. The dealers’ rationale for this is that they’d rather get two sophisticated buyers out the door quickly than spend that same time negotiating a few more dollars out of a single, less-sophisticated buyer.

This is the perfect time of year to buy a new car, too. Think about that prominently displayed sales board and use it to your advantage. Car salesmen have monthly and annual quotas. We know of one dealership owner who would fire his lowest-producing salesman every month. (Which has two benefits: it tells struggling tyro salesmen that they should find a new line of work, and it really motivates them. Not every dealer uses this tool – most bad salesmen rapidly flame out on their own without ownership’s help – but the ethics of it are not your concern. Your concern is to save as much money as possible when buying a liability like a car, then use those savings to buy assets with.)

The most motivated man on Earth is a car salesman at 7 p.m. on the 31^st who still hasn’t made his monthly quota. If you threaten to walk, it’s almost funny how much more “wiggle room” a desperate salesman can find. And remember, even then you can still walk. Getting emotionally attached to a car is like getting emotionally attached to a pencil or a carton of milk.

Next week: financing!

Featured at this week’s Carnival of Personal Finance

Stock quotes, demystified

Math is hard. Poverty is harder.

Q: Dear Control Your Cash, how do I read a stock quote?

A: Considering that you’re just a literary construct and not an actual person, it doesn’t really matter.

Q: Thanks. You know how to make a girl feel special.

Tickers and charts are easy to understand if you know what you’re doing. Take stock ABC, for instance.

That’s not an idiom. Take stock ABC. That’s the ticker symbol for AmerisourceBergen, a drug wholesaler based out of suburban Philadelphia. ABC trades on the New York Stock Exchange, which is what the “NYSE” represents on this page.

The first line tells you what price a share of ABC last traded at (as of 1:49 p.m. ET today), and how much ABC gained or lost from the previous trading day (last Friday).

That covers everything down to the Previous Close line in the first column. Open means what price ABC first traded at today. That gives you an idea of what direction ABC’s price was heading in earlier, but it’s not as important at what ABC closed at.

Bid and Ask are a little more complicated. For large, heavily traded companies, Bid and Ask usually don’t apply. But for companies whose stock trades sporadically, they’re important. That’ll require us to look at a different company for a while; DEF.

DEF is Claymore/Sabrient Defensive Equity exchange-traded fund (more on these later), which is operated by Claymore, a Chicago financial firm. DEF trades on NYSEArca, a smaller, online-only exchange that features the stocks of small companies.

You’ll notice it’s been a few hours since someone bought DEF. For a decently sized company, that’d be all but impossible. Shares of DEF last traded at 20.77 (these numbers will obviously have changed by the time you read this.) But since then, no one’s been willing to buy it at that price, nor has anyone who owns it been willing to sell it for that little. Buyers are offering 20.77 for more shares, but there are none left at that price. Because no one’s willing to sell it for less than 20.79. The broker who bid 20.77 a share for DEF was willing to buy a lot of 3500 shares at that price. The broker who was asking 20.79 a share for DEF was offering a lot of 2500 shares.

Alright, back to ABC. The 1-year target estimate is what some analyst thinks the price will be a year from now. Treat this with the skepticism it deserves.

Day’s range and 52-week range are self-explanatory. Volume is the number of shares that were traded today. But you can’t multiply Volume by Last Trade to get the dollar value of the number of shares traded today, because not all the shares traded at 24.60. (Of course not, they fluctuated between the numbers listed in Day’s Range.)

The (3m) after Average Volume means 3 months.

Market Capitalization is essentially what the company is worth. There are several ways to value a company, the most obvious one being what someone would be willing to pay for it. But since there’s probably no one who wants to buy every last share of ABC, the best we can do is multiply the price of a share by the number of outstanding shares. Makes sense, right? The chart tells us that ABC is thus worth $7.2 billion.

Which means we now have an idea of how many outstanding shares of ABC there are, which would be 293 million (give or take a tenth of a percent or so, thanks to rounding.) Not that that’s important in and of itself, but it does tell us that about .42% of ABC’s outstanding shares have changed hands today. Which means that 99.58% of ABC’s outstanding shares stayed right where they were. (When the hotties on Fox Business say that “trading was heavy today”, it’s relative. Trading is always pretty light.)

The next two items should be reversed. Let’s start with EPS, which is earnings per share. It’s how much money the company made (according to its annual income statement), divided by the number of outstanding shares. A little multiplication shows that ABC made about $486 million last year, which is excellent, especially considering ABC’s market capitalization. (ttm) means trailing 12 months; in other words, looking at the company’s earnings over the past year.

P/E is price/earnings ratio, which is a indirect measure of what investors think a company’s stock will be worth. It’s the stock price divided by EPS.

ABC investors are willing to pay $14.79 for every dollar of income the company generates annually. In other words, it would take about 14.79 years for the stock to earn enough to pay for itself.

Which isn’t bad. Say you have another investment, like a $100,000 house that you rent out. If it took you 14.79 years to collect enough rent to pay for the house, that’d be an annual rate of return of 6.76%.

P/E ratio is important enough that it warrants its own post, but for now just know that a high number (usually >17 or so) means that the stock is either overvalued, or investors think it’s going to earn a lot more in the future. A number from 0-10 means that the company stock is a bargain, or the company’s going to start earning less. (A negative number means the company’s losing money.) ABC’s P/E ratio just happens to be right around what’s normally considered fair value. P/E ratios depend hugely on what industry a company is in. For instance, a healthy electric utility will usually have a lower P/E than will a barely profitable tech company. Governments regulate utilities heavily, and while they’re profitable, they cost a ton to start up and their profits are usually limited if steady. 

That leaves Dividend and Yield. Successful, consistently profitable companies pay shareholders a dividend – sometimes annually, sometimes quarterly, sometimes even monthly. It’s a piece of the profits earmarked just for this purpose. If that sounds unduly generous, keep in mind that the shareholders own the company: it’s their money. They authorize the board of directors to hire executives who’ll authorize dividends, and those directors and executives hold shares themselves.

To keep things uniform, dividends are expressed annually. So if a company happens to pay a quarterly dividend, the number listed here is 4 times that. Yield is the dividend divided by the share price.

Q: Wow, Control Your Cash. You’re really smart. Did I mention that I’m tall, blonde, statuesque and lonely?

A: Very funny.

The visual opposite of a Code Pink rally

If you’re male, then there is no excuse for being financially illiterate. Thanks to Fox Business Network.

Control Your Cash can make financial knowledge fun, accessible, and easy to digest, but Fox Business Network gives it a transcendent visual appeal that even a blog as good as this one can’t touch. In other words, the network is home to the most stunning women on television. All of them. They didn’t even bother hiring a Candy Crowley-type token to keep the other ones honest.

Yes, Control Your Cash makes no bones about how much we loathe news readers and their sensationalizing ilk. But the FBN women are hardly journalists in the “Miss County runner-up who does nothing but read a TelePrompTer and look confused when the weather guy throws it back to her with a joke” sense. Case in point, Shibani Joshi:

She’s a former Morgan Stanley investment banker with a Harvard MBA. Her father is vice president for manufacturing and engineering at Lucent, her mother is IT manager for an auto parts company, her husband is a vice president of a venture capital firm, and her father-in-law is a partner at one of the Big Four accounting firms. (So if you’re searching for the one non-industrious Indian on the planet, you’re going to have to keep looking.) In an ordinary gathering of several thousand people, Ms. Joshi would be easily the best-looking woman in the vicinity. On Fox Business Network, it’s all she can do to crack the top six.

This is Jenna Lee, who appears on the U.K.’s SkyNews in addition to her Fox Business duties:

Her father used to quarterback the Los Angeles Rams. Her mother is therefore the kind of woman whom a pro quarterback in Los Angeles in the 1970s would pursue. Ms. Lee is the beautiful one in the black dress.

The other beautiful one in the black dress is Alexis Glick, who also serves as the network’s vice president of business news. This woman is so confident that despite being blessed with a name seemingly engineered for a media personality (Alexis Donnelly), she adopted her husband’s onomatopoeic Dutch monosyllable/punch line surname. Here’s a more flattering picture:

What the hell, here’s all three of them:

Caption this photo. The best we could come up with was

“’Ladies, you’re hired. It’ll be the absolute worst Three Stooges remake ever, but who really cares?’”

At Control Your Cash, we understand money, not Nielsen ratings. Which is why we’re flabbergasted that CSI or NCIS or CDSIN or TCNIDS somehow manages to pull numbers on the order of dozens of times higher than that of the highest-rated Fox Business show.

We’re not close to done. This is Rebecca Diamond, nee Gomez.

Think of her as a slightly-but-not-overwhelmingly Hispanic version of Rachael Ray, only with a penchant for short skirts. And the body to carry it off. And an infinitely more agreeable voice.

She cohosts a show called Happy Hour, which begins when the market closes. The show is shot in a bar (the Bull & Bear, inside the Waldorf-Astoria.) With the exception of Front Sight Challenge, which was shot on a rifle range, the Bull & Bear is the single greatest set ever devised for a TV show. Nor would Mrs. Diamond’s outfit fly on a rifle range.

This is Sandra Smith, who on first appearance looks like she might be your garden-variety vapid news anchor:

Or not. She was director of sales at Terra Nova Institutional. That doesn’t mean she sat in a corner office reading the Neiman-Marcus catalog while sending slightly less attractive women out to call clients. It meant she handled investment management and hedge fund accounts. She traded equities and options, analyzed portfolios…all the stuff you can’t be bothered to do, which is why you’re reading Control Your Cash in the first place.

This is Nicole Petallides, who broadcasts from the NYSE floor every afternoon.

This woman is the Bob Costas of floor reporting. Impeccably coiffed, looks younger than her years, never makes a technical mistake, shops in the junior men’s section. Alright, 3 out of 4.

That leaves the undisputed queen of Fox Business’ groundbreaking coverage.

This is Liz Claman, who manages to fill out every positive stereotype of the brassy and voluptuous redhead. Ms. Claman, a spirited 45, (that’s her age, not our assessment of her looks on a scale from 0 to 10) serves as a daytime anchor with the irrepressibly professional David Asman, who clearly must be married to the most gorgeous woman in the universe.

Also, Ms. Claman’s Twitter feed is a wonderful mélange of upcoming interview tidbits coupled with stories about leopard-print pumps and her attempts at pole dancing. Hey, we’re just reporting, not editorializing.

Seriously, though, Claman’s responsible for interviewing some of business’ most insightful and renowned titans, everyone from Warren Buffett to Roger McNamee. She’s also made it into the pantheon of Historic World Smiles, joining the Mona Lisa, Ernie Banks, Cheryl Tiegs, the Cheshire Cat, the Ultra Brite Killer, and Michael Strahan.

Thanks to Mitch Kelly (Twitter.com/MitchKellyKDWN), who carries no credit-card debt and boasts a fixed-rate mortgage on the 2-bedroom house he bought at the bottom of the market, for inspiring this week’s post. Now email your cable company or watch DirecTV channel 359.

(See, it’s possible to write 800 words about hot women without being the least bit lecherous.)

Reading this post will make you sound 477% more financially literate

The Oklahoma/Texas border, as drawn by Muhammad Ali

“The Dow gained 50 points today.”

“The market broke 10,000.”

Do you know what either of those statements mean? To most people “The Dow” and “the market” are somewhat synonymous, but those above numbers remain abstract. Control Your Cash surveyed some of its smartest friends to see who could define the Dow. Here are a few of the answers:

“The volume of industrial stocks traded.”
No.

“An average rating (or price level) of a bunch of important stocks. I think of ‘Fortune 500’ the same way, but I figure ‘the Dow’ includes more stocks, or just stocks that are somehow related to ‘industry’.”
Yes and no.

“The big number that is quoted after the bell every day is an aggregate/average of all the stocks available for public purchase.”
No.

“Isn’t that number somehow based upon the average share price the Dow stocks traded at?”
We’re getting closer.

Things the Dow has nothing to do with:

-strength of the U.S. dollar
-price of gold
-unemployment rate
-bonds
-prime rate
-taxes
-interest rates
-how many stocks were traded yesterday, or how many shares of them were traded.

The Dow’s proper name is the Dow Jones Industrial Average. It’s a number that fluctuates throughout the trading day as particular stocks trade on the New York Stock Exchange. The number is the product of a simple calculation involving the prices of the stocks of a certain 30 companies. Though the companies, and the index, are called “industrials,” that doesn’t necessarily mean that they operate big brick factories with smokestacks. The companies are called industrials to distinguish them from transportation companies, which used to be an important distinction. In 1884 when the Dow was first calculated, railroads and steamships comprised a huge chunk of the economy. (The Dow Jones Transportation Average still exists, though few people outside the airline and trucking businesses pay attention to it.)

The Dow is simply the share prices of those 30 big stocks, added together and multiplied by 7.557486. (We’ll explain the multiplication later.) The companies aren’t the 30 biggest revenue generators in America, or even the 30 most profitable, although there’s lots of overlap. The stocks, with their prices at the close of trading on Friday, October 30 are:

3M 73.57
Alcoa 12.42
American Express 34.84
AT&T 25.97
Bank of America 14.58
Boeing 47.80
Caterpillar 55.06
Chevron 76.54
Cisco 22.81
Coca-Cola 53.31
Dupont 31.82
Exxon Mobil 71.67
General Electric 14.26
Hewlett-Packard 47.46
Home Depot 25.09
Intel 19.11
IBM 120.61
Johnson & Johnson 59.05
JPMorgan Chase 41.77
Kraft Foods 27.52
McDonald’s 58.61
Merck 30.93
Microsoft 27.73
Pfizer 17.03
Procter & Gamble 58
Travelers Insurance 49.79
United Technologies 61.45
Verizon 29.59
Wal-Mart 49.68
Walt Disney 27.37

Those sum to 1285.44. Multiply by 7.557486 to get 9714.69, and you’re done.

Most people are surprised to find out how few stocks comprise the Dow. After all, 1400 other companies trade on the NYSE, to say nothing of the additional thousands that trade on NASDAQ and other exchanges. You won’t find America’s 14^th, 15^th, 19^th and 20^th most profitable companies (Philip Morris, Occidental Petroleum, Oracle and News Corporation) on the Dow. Corning, Bristol-Myers Squibb and PepsiCo aren’t far behind, either. Still, the companies on the list represent about ¼ of all the publicly traded market value in the country. The Dow consists of the stock prices of only 30 big corporations because a) there weren’t many more than that back in 1884, and b) if it’s the 19^th century and you’re using a pencil, the more companies you add, the longer the average takes to compute. Even with the advent of calculators, for some reason the unrepresentative Dow has remained the benchmark for the market.

Nothing’s permanent, mind you. General Electric is to the Dow as Chester Pitts is to the Houston Texans or Dave Mustaine is to Megadeth: the only remaining original member. On average, a company gets replaced about once a year. Two gigantic and gigantically mismanaged corporations, General Motors and Citi, were politely asked to leave the premises this past year. That’ll happen when your stock falls 99%. They were replaced by Travelers and Cisco.

There are far more comprehensive indices out there. The S&P 500 tracks…well, you can probably figure out how many companies. There’s also a Russell 3000 and a Wilshire 5000.  That last one measures the worth of almost the entire market for publicly traded stocks.

Besides exclusivity, the Dow has other limitations. Look at the prices above. Some companies’ stocks trade at 9 times the price of other companies’, yet they’re all weighed equally. The chance of Pfizer stock rising $1 tomorrow is greater than that of IBM stock, simply because Pfizer is so much cheaper and its price thus more volatile. But whether IBM goes up $1 (or .8%) or Pfizer does (5.9%), the Dow rises 7.55749 points either way.

Why the 7.55749? Because of stock splits. Throughout history, some companies – Dow components or otherwise – have tried to attract more investors by doubling (or tripling, decapling, whatever) the number of outstanding shares. This is just an accounting construct that doesn’t change anybody’s actual holdings. If you own 500 shares worth $2 each before a 2-for-1 split, you’ll own 1000 shares worth $1 each after the split. Stocks normally trade in units of 100 shares, so if you wanted to invest in the company for as little money as possible, you’d only have to pay as much as you would have had to before the split.

Another thing to keep in mind regarding the Dow: the price of a stock doesn’t tell you anything about the health of a company. That’s what financial statements are for. Non-Dow member Google closed at $536.12 Friday. That doesn’t mean Google is 31 times stronger than Pfizer is. For one thing, Google might just happen to be divided into fewer shares than Pfizer. Remember that the Dow, in its simplest terms, reflects nothing more than what people are willing to pay for the stocks of 30 large but disparate companies.

The Dow tells you only a sliver of what’s happening with the economy. Unemployment could reach 25%, an ounce of gold could cost $10,000*, the Chinese could finally cash in that gargantuan IOU and put us all to work tilling yams for Jiang Zemin’s dinner table, but the Dow could still conceivably rise if enough people want to buy enough of the underlying stocks.

There. Now you’re educated.

*Or a dollar could be worth 3.11 Aumg. See the post from 2 weeks ago.

Someone should do something about how much money I spend

A vehicle to encourage responsible spending.

**This post is featured at the 28th Carnival of Money Stories http://bit.ly/25C5cF**

This is the fusion of two of our bugbears, each indirectly related to personal finance: media idiocy and public panic. The photo is of an application for a credit card issued by First Premier Bank of South Dakota. The interest rate on purchases and cash advances is:

79.9%.

A reporter from San Diego’s NBC affiliate* with some air minutes to kill manufactured a story out of the application. Here’s his impassioned defense of an innocent viewer who was just blindly applying for credit cards one day when he ended up getting impoverished. Actually he didn’t, all he did was open an envelope, but news wouldn’t be news without a little embellishment:

Hageman acknowleged that his credit isn’t perfect, but he said it’s about average. He said the pre-approved offer didn’t mention the actual interest rate on the card — for that, he had to read the enclosed fine-print disclosure. (Editor’s note: the disclosure is the pre-approved offer. The offer is the disclosure. This is a distinction without a difference. “Your honor, I didn’t hit her, my fist did.”)

“I think you’re beginning to border on deception there,” San Diego State marketing professor Michael Belch said.

No, Professor Belch. Deception would be charging 109.9% or 139.9% while listing a rate of 79.9%. What you’re commenting on is candor, the opposite of deception. Which is apparently beyond the grasp of the overeducated.

So, serious question: is a credit card with a 79.9% interest rate an atrocious deal? There are two possible answers:

1) Not really.
2) No.

Let’s examine them in numerical order. [For you people who would pay interest on a 79.9% credit card, that means we’ll do 1) (ONE), and then we’ll do 2) (TWO).]

1) NOT REALLY

The next credit card issuer to force someone to use its cards will be the first. Card issuers don’t tell you to buy things you can’t afford, live beyond your means, and then owe them money for the privilege of letting you buy what you couldn’t afford in the first place.

If anything, card users should be happy that banks like First Premier provide a means by which such people can spend recklessly in the first place. If credit cards didn’t exist, or if this were the 1960s and cards were only available to rich people, then anyone who would today use a 79.9% card would have to save money before spending that money. The horror.

Hageman claims his credit is “about average”, but doesn’t quantify it with, say, a credit score.** Hageman’s (and the journalist’s) complaint is essentially the following:
“You can’t trust me not to spend what I haven’t yet earned. First Premier is offering nickel beers, and here’s me, fresh out of my AA meeting.”

You don’t have to apply for the card. If you do, you don’t have to accept it. Nothing is usurious, deceitful or dishonest about First Premier’s offer. In fact, they’re being pretty clear: if you use their card, you have a month to pay off your purchase. That they give you 30 days makes First Premier far more accommodating than merchants you pay with cash, who often expect their money within 30 seconds. First Premier will cover you for the first month.

If you don’t pay off your purchase within a month – which is an eminently reasonable task you ought to be able to complete, assuming you know how to read price tags – then in exchange for their generosity, First Premier will charge you 79.9% interest.

That is perfectly fair. You signed an agreement, with mutual rights and responsibilities. First Premier honored the responsibility part of its side of the agreement, and now they’re entitled to their right: 79.9% interest on your money.

This story came to the attention of Control Your Cash after appearing on Consumerist. That site’s commenters show what happens when personal responsibility goes from being a fundamental precept of life to a vestige from our grandparents’ era. Here’s an example:

<The guy who owns First Premier has donated billions to one of the local hospitals for a children’s hospitals (sic) and a research facility. It is going to take much more than that to undo the bad karma he has going on.>

Engaging people in bilateral, voluntary commerce now fosters “bad karma”, as defined by the kind of person who a) believes in karma, b) thinks it has a place in an economic discussion, and c) thinks spending “billions” of dollars on “a children’s hospitals” is barely a step in the right direction.

Not that people who comment on web stories are necessarily examples of intellectual titanhood (think about that before you comment on the post you’re reading right now), but here’s another:

<Which is why we need a NATIONAL usury law. Problem is these crooks have great lobbies in state governments.>

Words mean what they mean, and “crook” has a fairly unambiguous definition. Crooks steal. They take what isn’t theirs. What they don’t do is enter into a voluntary contract, then honor it. Calling an honest business entity a “crook” is like saying “literally” when you mean “figuratively”. Or “black” in lieu of “white”.

Here’s one last commenter, blessed with a gift for both pithiness and renewing our faith in humanity:

<Don’t like the terms? DON’T USE THE CARD!!! It’s pretty damn simple people. Where did this entitlement mentality for cheap credit card interest rates with free stuff back come from?>

2) NO.

Let’s answer a question (if you forgot, it’s “Is a credit card with a 79.9% interest rate an atrocious deal?”) with a question. What’s the difference between a card with a 7.99% interest rate and a card with a 79.9% interest rate?

If you Control Your Cash, nothing. If you ring up $500 worth of charges, then transfer $500 from your bank account to First Premier within 30 days, it doesn’t matter what they charge. There is no difference between a card that charges 1% interest and one that charges 500,000% interest.

So should you accept First Premier’s offer, and happily charge purchases to your 79.9% card? After all that, no. But for completely different reasons.

The least important criterion for what credit card you should get is the interest rate. The most important is the benefits it’ll provide, for the price.

More than most cards, an American Express card can make it easy for you to reverse purchases that go awry (e.g. a brake relining that doesn’t work.) But depending on which particular American Express card you get, you might have to pay an annual fee. The standard Discover card doesn’t have an annual fee, and gives you 1% cash back on everything you buy. But it’s also useless outside the United States.

Most credit cards are free to use. If you can’t find a free one, you probably shouldn’t be using credit. And that’s what makes the First Premier card a bad deal:

The $75 annual fee.

You saw that, right? Of course you did. You read the agreement.

——————-

*Our primary passion at Control Your Cash is the responsible use of money. A close second is our hatred of journalists. In particular, television journalists. In particular, local television journalists who have neither the chops nor the ambition to progress beyond their home market(s).  That’s why we don’t mention journalists by name. You can still verify the story by clicking the link, but we won’t do the journalist the courtesy of a mention.

**Why should he? Math is hard! Numbers are intimidating! Words are better than numbers, especially because you can’t prove something with the former as convincingly as you can with the latter.

#79 in the periodic table, #1 in our hearts

Makes it hard for people to bum change off you, too

Every news story that contains a dollar figure is a product of its time, because inflation taints everything. That’s a recurring theme in the book version of Control Your Cash, soon to be released by a major publisher if certain contingencies break the right way.

Inflation, in one paragraph: with rare exceptions, the value of money always decreases. Slowly, but consistently. Right now a dollar is worth about 2% less than it was a year ago. That 2% is fairly consistent throughout the last century. It’d take a few more paragraphs to explain why. Better yet, a future post.

When the dollar amounts get big enough, and a federal government that lost its financial moorings a long time ago starts throwing out 12- and 13- and even 14-digit numbers, you can lose perspective. It’s hard to conceive of a million of anything, let alone a billion or a trillion. Especially when those numbers get bigger every year, thanks in part to inflation.

In the late 1940s, the U.S. dollar replaced the pound sterling as the world’s reserve currency – the default that international transactions are measured in when using another currency would be impractical or confusing.  Americans today still benefit from that. Just by virtue of living here, we don’t have to worry about our currency becoming gradually worthless – and our life savings evaporating.

The dollar became the reserve currency largely due to the size of the American economy and the dollar’s relative stability. (It then self-perpetuated: the more stable the dollar, the more firmly entrenched it became as the reserve currency.) But that doesn’t mean it’ll be this way forever. Just this past week, China and several Middle Eastern countries essentially proposed inventing a new currency to supplant the weakening dollar as the denomination in which oil and other commodities are traded. This new currency would be nothing formal and tradable, just an amalgamation of existing world currencies that aren’t the dollar. That people are actually taking this seriously shows the dollar is assailable.

The U.S. dollar has enjoyed a 60-year-and-counting (however tenuously) reign as a powerful medium of exchange. As impressive as that is, gold has served as a store of value for about 100 times longer.

When the government creates too much currency, that currency weakens. Inflates. Becomes less valuable. It’s easy for this to happen: the government just needs to fire up the presses. When a government owes a lot of money, like the United States’ does, this is an easy way of giving its creditors less than what they really deserve. But, by punishing its creditors, the government also punishes anyone else who does business in dollars. Which would be all Americans.

Gold can’t be injected into the market as quickly as dollars can. To increase the gold output, you need to find a particularly rich vein, start extracting, put thousands of hours of manpower on the task, refine, purify, separate the dross, and bring it to market. Which is exactly what the world’s gold manufacturers try to do anyway, every day they operate.  It’s not easy. Which is why gold, and not cobalt nor nickel, is the historical commodity people have used for money.

Gold isn’t an objective measure of wealth, but it’s as close as we can get in the practical world. Because extra gold is so hard to introduce to the market, gold’s value won’t fluctuate as much as something issued by the Federal Reserve, the Bank of England, or the EU. That’s why financial newscasts, publications and websites prominently display the price of gold. When the price of gold goes “up” (you’ll understand the quotation marks in a minute), that’s supposed to represent something noteworthy about both gold’s scarcity and the general state of the economy.

But gold is pretty scarce no matter what. Here’s a semi-rhetorical question: why do we quote gold prices in terms of dollars, a currency continuously weakened by inflation?

Right now, gold is trading at $1049/ounce, “down” $14.90 from yesterday. The Control Your Cash book recommends again and again that in order to greater appreciate how money works, you should examine every financial transaction you engage in from the other party’s perspective. Commodity prices are no exception. Instead of quoting the price of an ounce of gold in dollars, why not say that a dollar is currently trading at 29.65 milligrams of gold? (Up .41 milligrams from yesterday.)

We propose our own new unit of currency: the gold milligram, symbol Aumg (prounounced “OMG”).

Here are some current exchange rates:

euro                                   44.18 Aumg
pound sterling                  48.15
yen                                       .33
Swiss franc                        29.14
Mexican peso                      2.26
renminbi                             4.34

With no more than two digits before the decimal point, these numbers are easy to visualize. And because of inflation, the numbers will almost all decrease as time passes, reminding the people who use these currencies of their ever-weakening power.

Here are some more for you:

2005 U.S. dollar          73.32
1998 U.S. dollar        109.46
1968 U.S. dollar        883.49

Puts a modest 2% inflation rate into perspective, doesn’t it?

Why should we assume the dollar (or any other state-issued currency) is the objective and constant measure, and gold is the commodity with the wildly variable price? Shouldn’t it be the other way around?

The short answer to the first question is conditioning. Decades ago the United States switched its currency from one defined in terms of gold to one “backed by the full faith and credit of the United States government”, a remnant from the reliquary of charmingly naïve and obsolete buzzphrases.

It’s natural for Americans to phrase their economic thinking in terms of “dollars”. Natural, and convenient, but damaging and incomplete. When a dollar is only as weak or as strong as the Federal Reserve arbitrarily chooses to make it, then the Federal Reserve has the ability to dictate the terms of (and to a large extent, even the size of) the nation’s economy. It’s hard to find a better example of too much power concentrated in the hands of too few.  You know, the issue we fought the Brits over.

By one method, the United States money supply increased 6% from 2006 to 2007. That includes not only all the currency in circulation, but all the money held in checking accounts. If a 6% increase sounds modest, consider that the world gold output increased by 1.5% last year. Which triply overstates things, because 2/3 of the gold mined last year was used for industry, jewelry, etc. The 6% figure for the increase in greenbacks is conservative, too. It doesn’t include money in savings accounts, money market accounts, nor certificates of deposit.

In 2006 the Federal Reserve stopped calculating the increase in the broadest possible definition of money; the definition that includes huge institutional certificates of deposit held by banks. (These are CDs worth several hundred times more than the thousand-dollar ones you might be holding. But because they don’t trade among individuals, the government has an excuse for removing them from the equation.) The Fed argued that the costs to collect the data outweighed any benefits, which is why it would no longer estimate how much money is really circulating through the economy.

Yes, a branch of the 21^st century American government willfully stopped crunching numbers. Can you think of any scenario in which a branch of the government would do that, if it had nothing to hide? The ironic thing is that the Fed isn’t even hiding what it’s hiding: paraphrasing, they said “Citizen, this information doesn’t concern you, and you wouldn’t know what to do with it anyway. Nothing to see here.”

If the Fed released those numbers, we’d know how many trillions of dollars they’re diluting the economy with. We’d know how few Aumg it’ll take to buy a dollar next year. We’d know how badly inflation is eroding the nest eggs we’ve each spent a lifetime building.

Some estimate that the money supply is really increasing by around 16% annually. Which is more than 30 times faster than the supply of commodity gold is increasing. So which is more stable – the dollar or the Aumg?

The point of this exercise is not to argue that the next time you buy a coffee, you should offer to pay with 40 milligrams of gold. Rather, the point is to put things in perspective when, for instance, Sen. Harry Reid says health care reform will cost 59,301,000,000,000 Aumg. Or 59,301 metric tons of gold. Or 38% of all the gold ever mined.

Paper or plastic?

Yeah, but he had a GREAT introductory rate.

Would you be interested in an investment that pays 14.29%? You can get in for as little as a dollar, but the average investor puts in $6775.

You’ve had a fraction of a second to decide, but you can’t possibly still be thinking about it. 14.29%. This investment pays 7.8 times the highest available rate on money market accounts (from Flagstar Direct in Troy, Michigan), 8.4 times the highest rate on 1-year CDs (Ally Bank in Midvale, Utah) and 19 times the highest rate on checking accounts in a city chosen at random (Charles Schwab in Ocean View, Delaware.)

This investment came close to beating the Dow as a whole over the last year (which has gained 14.98%.) Unlike the Dow, this investment isn’t a gamble. It comes with a guaranteed return.

The investment is credit card debt. The numbers in the first paragraph are the average rate and balance among American cardholders.

Very funny, you soulless jerk. You’re poking fun at me while Visa and MasterCard are busy giving it to me repeatedly and hard.

Then here’s the same advice recommended to any woman who whines about being in an abusive relationship: stop being a victim.

If you have a spare dollar, there’s no excuse for having credit card debt. This post is mostly for the benefit of the people who haven’t incurred credit card debt, but if you’ve already let it get away from you, you need to wage the equivalent of total war on your debt.

Wear a sweater instead of turning the heat on. Learn to cook, and never eat out. Sell that car. You own it outright? We don’t believe you, but if you do that’s even better and will take a significant chunk out of any credit card debt you owe. Buy a bike or take the bus. Live the life of a Kosovar refugee until you eliminate that balance. A few months or even years as an ascetic beats the hell out of a lifetime as a credit card company’s sharecropper.

If you haven’t yet incurred credit card debt, the austere lifestyle above is what awaits you if you do. The only question is whether you want to compress it into as little time as possible, or spread the pain out over a lifetime.

The mantra will never get old nor obsolete: Buy assets, sell liabilities. The two aren’t purely symmetrical, however. Assets, those wonderful constructs that enrich you, are somewhat optional. Liabilities, in all their impoverishing glory, are not. You have to pay them, one way or another.

The fewer liabilities you have – e.g. a credit card balance that’s enriching the issuer while rendering you worse than broke – the less capacity you have for buying assets that will ultimately keep you out of poverty.

There appears to be no consensus on which culture the following proverb supposedly originates from – Chinese, Songhai, perhaps Aztec – but it applies here in spades:

“The best time to plant a tree is 20 years ago. The second-best time is now.”

————————–

Lung cancer is an effective means for killing 1.3 million people every year. Fun symptoms include shortness of breath, abdominal pain, and fatigue. Many lucky patients also enjoy profound weight loss, and even deformed fingernails. Pain in the bones, metastasis to the kidneys and lymph nodes, skin that turns grey…lung cancer is something you’re probably going to want to shun, unless you’re a masochist of historic order.

Control Your Cash isn’t above dispensing occasional unsolicited amateur medical advice. You want to know the best way to avoid lung cancer? A way that’ll reduce your chances by at least 90%, assuming you want to avoid spending your declining years bedridden and praying for the sweet release of death?

Never start smoking.

Hopefully you’re not looking for a more intricate answer, because that’s as complex as this one gets.

You can figure out where we’re going with this. If you want to avoid being indebted to credit card companies for the rest of your life, don’t take that first drag. Don’t buy that first pack. (Or if you do, at least pay for it with cash.)

Here’s a radical concept: buy what you can afford. Credit card companies aren’t responsible for your dismal financial situation, any more than the guy behind the 7-Eleven counter will be responsible for you coughing up blood 20 years from now.

How many possible excuses can there be for incurring credit card debt? “I didn’t know how much the stuff cost”? “It just kind of crept up on me”? “It’s the retailers’ fault for making me want it so much”? Read the freaking price tag. You can’t be so easily swayed as to look at the minimum payment listed on your monthly statement and find it palatable, if you’re carrying a $6775 balance. Or even if you’re carrying a $200 balance.

We’d reprint the relevant passages of a typical credit card agreement here, but if you didn’t read your agreement when you received your card and started incurring debt, you’re not going to read it now. Just understand that the moment you fail to pay your balance in full, you’re on the road to cheating yourself, your posterity, and your planet. Incurring debt that you can’t pay is the act of a child, not an adult; a parasite, not a worker.

Credit is a privilege, a word that’s been largely equated with “right” in recent years. Not only does nobody owe you anything, nobody even owes you the means for owing other people. (Which is a good thing. One of the best ways to avoid credit troubles is to be ineligible for them in the first place.)

When credit cards were invented in the 1960s, they were status symbols. We’re not referring to the American Express black card. We mean the now-lowly green one. And for years, the issuers enjoyed a modest business charging interest to the kind of profligate people who found it gauche to pay for restaurant meals with cash. The credit card companies didn’t bother selling to middle- and low-class people, the argument being that those people didn’t have enough money to be customers.

It took a while, but the credit card companies eventually figured out that you don’t need to be rich for them to profit off you. All you needed was the capacity for earning something, somewhere down the road, and the law of large numbers would take care of the rest. Which it has, and beautifully.

In recent months, Americans who bought too much on credit engaged en masse in our national pastime – whining about their situation. Which resulted in a compliant political establishment requiring credit card companies to lower their rates. This was a classic example of Washington bipartisanship, a noun which when applied to domestic policy means “responsible people are about to get punished.”

Like almost all laws, the one capping credit card interest rates led to unintended consequences worse than the trouble that prompted the law. With their potential profit reduced, credit card companies simply stopped offering cards to high-risk customers. Many of those high-risk customers will still find their credit, even if it’s being offered by people who understand physical violence better than they do legal procedure.

But regardless, the credit card companies still have to make up the shortfall somehow. Which can mean universal user fees, penalties for prompt payment, even cancellation for people who committed the sin of paying their accounts in full every month. To the responsible credit card carrier, this means a reduced opportunity to ride free on the backs of people who refuse to Control Their Cash. But it’s also a chance to strip away preconceptions. Imagine if credit cards didn’t exist. You’d save up to pay for stuff with cash, or at least with collateral.

And how is that worse than paying a creditor every month?

Renting is for mental patients.

America's cheapest house

3 bedrooms, 1 bath

19429 Albany Street, Detroit (like it was going to be in another city)

$20.

That is not a typo.

But it’s been on the market for 3 months, so you should come in around $16.

———————————

This country still doesn’t get it. Home prices have decreased to the point where it’s no longer a case of building equity, but of deciding how much profit you feel like eventually making.

A child can understand this, but sometimes the sophistry of years makes people stupid. Here it is in handy equation form:

“Low prices” = better for the buyer (That’s you.) Furthermore, a lower price means less risk. And a greater potential rate of return. The only thing that could make the housing market better (for buyers) would be if we could somehow figure out a way for China to build cheap houses and dump them on the American market.

That last pair of parentheses contains more than just a couple of words. It contains profound insight.

You often hear that the “______ market” (housing, jewelry, car, fine art, tourism) is “bad”. Or “good”.

There’s no such thing as a “bad market”, nor a “good market”. There are only large markets and small markets. Either there’s a large demand for and/or supply of a good or service, or there isn’t. “Good” and “bad” are loaded adjectives that don’t tell you a thing about the magnitude of a market. Somewhat obviously, to the extent to which a market is “good” for buyers, it’s “bad” for sellers, and vice versa. A “bad” housing market – according to the intellectually lazy journalists whom the gullible general populace looks to for guidance – simply means one in which prices are low.

If it’s welcome news when Best Buy or the Apple Store lowers its prices, why on Earth would it be unwelcome news when the population looking to get out of their houses does the same thing?

“Well, because houses are more important than mere consumer goods. A house is the American Dream. It’s one of the three basic necessities. It’s your refuge, your castle, your…”

Look, if you want clichés and platitudes, there are hundreds of other financial blogs that you can read, probably without even moving your lips. A house is a good, just like anything else. Would you hesitate to buy a perfectly adequate used car that’s selling for 40% below market? You know, for fear of being seen as taking advantage of the poor previous owner who meant well but just got behind on her payments?

The homeseller whose position you need to exploit will find somewhere else to live. Of course she will, there’s a housing glut. Which is why prices fell so low in the first place.

Control Your Cash’s home town is Las Vegas, a place where economic sense goes to die. (We’ll explain how this fits your city’s situation in short order.) A couple of years ago, when local unemployment was microscopically low and a nation of thrill-seekers flush with speculative cash needed their indulgences stroked, Las Vegas reached its perigee as an exciting, dynamic place to live.

Which means people wanted to move to Las Vegas, faster than the contractors could build homes. Which, not surprisingly, drove prices up. The result was about two years’ worth of endlessly recurring news stories bemoaning that local home prices were so high that working families couldn’t afford them, people were having to rent, boom times have their victims, et al.

Without attaching moral weight to the price of a house, the fact is that the market will always continue its progress and fluctuation unabated. Things cost, largely, what they cost.

The world economy weakened, and consumers focused more on necessities than luxuries. It’s tough to justify show tickets and blackjack budgets being as important as food and clothing, so tourist junkets to Vegas began to dry up, relatively speaking.  As did home prices.

Two years later, the common lament in the local news was that all the equity that people had built up their houses had now evaporated, and then some. Mortgage holders refinanced, which led to overexposure, which led to eviction, sometimes. (Only “sometimes” because intrusive government on multiple levels did what governments do best, spreading the pain around to the responsible innocents who budgeted wisely and didn’t overextend themselves. These lucky folks who Controlled Their Cash got to watch their taxes pay to keep others in their inappropriately grandiose houses.)

Yes, the unfortunates lost their equity. Many conveniently forgot that the original equity increase was built on the flimsy soil of speculation.

You can joke about Las Vegas all you want – which would be extraordinarily hypocritical if you’re one of Vegas’ 38 million annual visitors – but that only tells half the story. What really distinguishes Las Vegas is that it’s the place where differences in financial common sense are exploited the most. The typical Las Vegas moron bought at the top of the market, moved from his extended-stay apartment, and got to enjoy a brief period in an inappropriately luxurious house thanks to a less-than-diligent lender. Instead of thanking those lenders for giving them a temporary sniff of the good life, the morons rewarded them by pouring concrete down toilets and stealing fixtures.

Which makes for a good news story. But no 11:00 newscast will lead with a feature on the quiet real estate investor who took a discounted house off a lender’s hands, then held it, waiting for the certainty that prices will eventually rebound.

The housing market is having a sale. Do you understand how rare this is? Faberge lowers the prices on a dozen eggs more often than the housing market en masse breaks out the purple marker.

It’s almost counterintuitive. After all, the population is still growing. The overwhelming majority of people still have gainful employment. And the buildable area is the same – it’s not like the nation is expanding its boundaries past the traditional 3,794,066 square miles. In such a situation housing prices should continue to rise, although probably more modestly than usual. Instead, the arrow is pointing in the other direction.

It’s not like housing is a fad, the Pokemon or Rubik’s Cube of the late aughts.  People seem to enjoy shelter, and have for dozens of years.

There has never been a better time to buy a house.

If you’re still skeptical, two questions:

a) Would you agree that people can profit from real estate investing?

It’s an omnibus, incredibly general question. So much so that it might stand a little rephrasing: is it possible to create wealth by investing in real estate?

b) If you answered “yes” (which you should have, it’s the only possible answer),

Under what set of conditions would an enterprising real estate investor best be poised to strike?

Well, she’d need:

-depressed prices

We covered that.

-sellers whose motivation goes beyond price

Many of the sellers who are asking these low prices had backed themselves into a corner. They financed, say, a $200,000 house, watched its market price grow to $300,000, refinanced, got a $75,000 line of equity*, used it to buy motorcycles and ATVs, got pinstriping for the ATVs and rust protection for the bikes, couldn’t make the payments, got the line of credit revoked as the value of their home found its own level, and now are dying to get out for fear of never being able to pay off the line of credit.

So I should prey on the downtrodden?

If that’s what you’re worried about, then don’t. Instead, just let the next buyer do what we’re recommending you do. He will.

Or you can just add $20,000 or $100,000 to your offer, it that’ll make you feel better. Call it a karmic payment, if you like. And then leave a comment on this story, so we can record your IP address and report you to the Idiot Police.

The buyer wants to sell. Every day he holds onto the house brings him greater pain and uncertainty.  You’re doing him a favor by taking it off his hands and giving him the one liquid, fungible thing he needs. You can’t pay off debts with assembled stucco and drywall.

-irrationality sweeping the marketplace

Perverse incentives are everywhere. (Witness the rustic period piece at the top of this post, perfect for the enterprising young home buyer ready to test her home improvement skills.)

This isn’t a shrouded opportunity. This is a sign from the heavens. You want to make the world a better place, and build wealth in the process? Take a house off the hands of someone who needs the money. Make him happy in the short run, and yourself ecstatic in the long. When the real estate market is behaving like a pawn shop, you owe it to yourself and the economy as a whole to be the liquidity that the market is crying out for.

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*There are no stupid questions. If you’re unfamiliar with the concept, a line of equity is basically a credit card without the plastic. You know that Discover Card in your pocket with the $8000 limit? This is similar.

If you’ve shown a capacity to pay, your bank can offer you a line of equity. “Capacity to pay” can mean a salary – after all, they’re your bank and they know where your money is – or it can mean an asset, like whatever equity you’ve built up in your house, however tentative that equity might be.

And because it’s borrowed money, you don’t use it to buy toys with. You use it to buy assets with. Assets whose rate of return exceeds whatever interest you’d pay your bank on the line of credit. God, this is easy. Why isn’t everyone rich again?