The Little Book that Bores the Market

Has anyone out there read The Little Book that Beats the Market? I am reading it now. While I think of myslef as a value investor and generally agree with the principles, I don't really care for the cornpone humor. But I am mostly wondering if anyone has tried this formula and what success they have had. Any thoughts?

Whatever happened to good old-fashioned shame? And stigma, we need more of that.

I just talked to a friend of mine here at work. I knew he was buying a new house and asked him how that was going. “Fine” he said. But when I asked if he’d sold his old house, he said “it’s looking like a foreclosure”. What I thought was interesting was the third-person way he had made that remark. He didn’t say, “we are being foreclosed on”, or “we are going into foreclosure”, he merely said, “it’s looking like a foreclosure”. He said it the way you might remark on the weather by saying “it’s looking stormy out there”. Now I realize some people might think foreclosure is beyond their ability to prevent with the housing market collapsing in a broad, cross-country sort of way. But isn’t their some personal responsibility for such a financial failure? And where is the embarrassment and shame that once accompanied such an admission? I realize that sounds a little heavy handed and judgemental, but when the government is discussing using tax dollars to bail out homeowners, I guess I just wish there was a little more stigma associated with foreclosure. Then maybe folks would cowboy up and avoid foreclosure in the firsplace.

Update: June 2007

I was asked to give a lesson in church a few weeks ago. Lo and behold, the topic was Personal Finance. This has happened to me several times over the past few years and I haven't always been pleased with the results. Two ears ago I crashed and burned trying to impart my wisdom on both old and young (High Priests and Elders). My thoughts were not as well received as one might imagine. I learned that the older crowd thinks they know every thing they need to know and the younger crowd has no idea what you are even talking about.

So this time around I simplified the lesson considerably. No handouts I stayed up all night working on. No in depth discussion on the advantages of a Roth versus Traditional IRA.

To my pleasant surprise, the lesson was well received. I have now been asked to prepare a more in depth lesson for Relief Society enrichment night (husbands invited).

So now I am back to making handouts and preparing for more depth. Anyone have any suggestions? Any thought on what I might have done wrong the first time?

Please post your thoughts. I'd sure appreciate them.

My current plan is to discuss:

Our Stewardship over earthly blessings (D&C 104:13)

Financial Priorities

Calculating Net Worth and Savings needed for retirement

Savings Strategies

Financial Myths

I realize at the moment it might not seem very cohesive but given time I think it can come together. Let me know what you think I should cover.

Briefly - New 401(k) laws may impact the way you pay tithing in retirement

A law impacting 401(k)s recently signed by Pres. Bush seems to be mostly good news for Mormons...and everyone else. One change that might be important to you: for those who must make RMDs, required minimum distributions, the new law allows you to include charitable contributions (i.e. tithing) as part of the RMD. So if your RMD were, say, 50K, you would withdraw 50K from your 401k and pay your 5 in tithing and you would reduce your taxable income by 5k, saving the 5K times your marginal tax rate. Previously, you would have had to first pay the taxes on the entire amount, regardless of charitable contributions. This is possible for up to 100k in RMDs.

Anyone see something I'm missing here? Of course, consult your tax advisor before yadda, yadda, yadda. The law also includes provisions to make ROTH 401(k)s permanent and new benes for beneficiaries.

You can read all about it here: The Pension Protection Act of 2006

Easy Rider Part 1 - Don't fool yourself, that new car will cost you more than you think!

For which of you, intending to build a tower, sitteth not down first, and counteth the cost, whether he have sufficient to finish it?
Luke 14:28

Ok, so were not talking about building towers, but the principle is the same. How many of you have ever sat down and done a comprehensive analysis of the costs involved in buying a new car? More importantly, after looking at the costs to buy new, did you compare new versus used?

This may be obvious to many, but as any good finance nerd will tell you, used is the only way to go. And not only a used car but also a car that you can pay for in cash that you saved (not borrowed). This post should explain why buying a used car is an important part of good personal finances.

Short Story
Recently, a friend mentioned he wanted to buy a new car. I told him he was crazy and should consider used. Furthermore, he should save the money and pay in cash rather than borrow for a car. He said that'd be impossible. He'd never be able to save $20,000. He was right. On his salary (which isn't that much more than $20k), saving that much is impossible. Which is exactly the point. When you only buy cars you can pay for in cash, something magical happens: Your budget is naturally constrained by your income and savings habits.

What exactly is the right amount to spend? Well it does depend, but a basic guide for car budgets might look like this: If you make 18-30k per year, you should probably forego purchasing a car and use public transit, from 30-45K a $3-6,000 car might be reasonable. From 45-60K, maybe $8-12,000....and so on.

Here is the process you SHOULD be following with your personal finances -- After all essential obligations have been met (phone bill, groceries, etc.), first, pay down consumer debts, second, save something for emergencies, third, max out all tax-advantaged savings opportunities, and finally, use what remains to save for a used car.

My Experience
When my wife and I had almost finished graduate school in 2003, we bought the car I drive today, 1998 Ford Escort. We bought it because it was what we could afford from our savings. It also met the needs of 2 students with no kids. We paid a little less than 4 grand. Today the car still meets my needs of driving a short commute and a few around-town errands.

I Object!
Still not sold on buying used? You're probably raising one of a few typical objections. Let me address one of the most common.

But a Used Car Will Mean Costly Repairs and Headache!
I don't suppose my stories of many nearly problem-free used cars would convince you? How about the increasing reliability of today's cars? Most car experts will tell you that the quality of the worst car built today is better than the best car built ten years ago. If you don't believe me, there are many websites that will give you estimates of maintenance costs for any car. Do the math. If you can show me a new car that will be cheaper than a used car (for example, try computing the amount you'll shell out over a 8 year period), I'll buy it. Or eat my hat. Or go to the mall and pay retail (something only a wild finance nerd would do).

Why Does All This Matter Anyway?
Too many people are spending too much. Savings rates in this country are shameful. I believe spending on automobiles is perhaps the second most significant reason for financial problems. In the sequel to this post I'll explain further the math component I've only alluded to so far (depreciation, residual values, etc.).

Put away the pride. Learn to live on what you make. Buy used cars and invest the difference. You'll thank me come retirement.

Free advice that's worth the price!

You can probably tell from the title that my first post is a disclaimer. I'll explain my qualifications, motivations, and intentions. You already know I'm a Mormon. If you are not a member of "the tribe", you might notice that some financial information is specific to Mormons. That being said I think good financial advice applies to everyone. So while you may find references to tithing and the scriptures, be patient. I hope Mormon and non-Mormon a like find this helpful.

Qualifications: The easiest way to describe my qualifications is to say that they are limited. I am NOT a professional financial advisor and I do not have a PhD in finance. I do have an MBA from Brigham Young University and an undergraduate degree in Finance from Michigan State University. Beyond my education, I have years of experience managing my own finances and have both successes and failures to show for my efforts. Ultimately if you are coming here for advice, you probably don't need to question my qualifications. It's like Obi Wan said, "Who is more the fool, the fool or the fool who follows the fool."

Motivations: Over the years, my experiences have shown me that most people are foolish with money. I have seen friends and family make mistakes both small and monumental (and again, I've made some myself). But I think my motivation runs deeper than just wanting to help. I believe that money is a precious resource over which we each have a stewardship or a spiritual responsibility. To squander that resource is like giving up your time with family, your health, or any other precious thing that once gone is hard to retrieve. Last, my motivation comes from friends who get sick of my preaching and tell me to go put it in a Blog.

Intention: So what do I do with all this motivation and minimal qualifications? Start a blog. I have read to many finance blogs I thought were dull. My blog will likely be more provocative. That's just my style. And I hope you'll want to respond and share your thoughts. Tell me I'm wrong, tell me I'm an idiot, but please do respond. Your comments may help someone out of a jam or correct something I've said.

So there it is. My disclaimer. Now let's get started.