Virtual Chinese Currency - QQ coins

There's an interesting article in today's WSJ about the growth of a virtual currency in China - the QQ coin. The official Chinese currency, the yuan, is strictly regulated and you cannot take it out of the country. This makes it impossible for ordinary Chinese citizens to move their money. My wife has two homes in China but cannot really do much with them. If she sells them she cannot get the money here legally.

It's interesting how technology has allowed people to circumvent government regulation, giving them more freedom. Virtual money creation in Second Life seems to be a similar phenomenon.

My guess is that the Chinese government will try to crack down on this, but who knows. Maybe it will lead to the yuan floating more easily and people being allowed to move their money out of China. China is teetering on the edge of real market reforms. The people there are experiencing much more freedom than Russian people did during their "reform" period. Putin has put the clamps down on that and Russia has lapsed back into Soviet times again. I'm hopeful that China keeps going forward.

Fear Keeps you from Living a Longer and Happier Life

John Stossel wrote a piece titled The Media likes Scaring us and we like it. He discusses the network of people that benefit from scaring people - environmentalists, researchers,government bureaucrats and trial lawyers, labeling them the "Fear Industrial Complex"(FIC). The FIC does a good job of scaring us. I remember the wave of fear about overhead power lines that cost lots of people equity in their homes - only later did we find out that the researcher had falsified the data and there was no evidence power lines were related to increased cancer risks. Owens-Corning lost a billion dollars over silicone breast implants lawsuits but now the implants are deemed safe and women are have the same surgery again. All created trial lawyer greed that got people afraid of a myth. Of course, we continue to read the newspaper and believe nonsense about the poor economy, unwinnable wars and global warming.

So many people adopt a pessimist point of view. The irony of this, is that a pessimistic view point becomes a self-fulfilling prophecy for a lousy, shorter life. Here's some information from an Aetna website (can't link since it is behind a secure log-in):

"Americans are living longer than ever. Over the past century, the average American lifespan has increased a whopping 27 years. What’s the secret to a long and healthy life?

Good genes help. You get them from your parents. And since you can't pick your parents, this avenue to a longer life is out of your control. Besides, the value of good genes is in question. New research from Yale University found that genes contribute only 25% to the length of your life. This seems to mean that other factors, such as health behaviors and mental health, play a role in longevity, too.

Yale study claims that a good attitude helps keep your heart pumping and your feet tapping an additional 7.6 years on average. An optimistic outlook adds more years to your life than low blood pressure (4 years or less), low cholesterol (4 years or less), a healthy weight (1 to 3 years) and regular exercise (1 to 3 years).

"These Are the Good Old Days"The Yale study suggests that people who believe negative stereotypes about growing old may face a reduced life expectancy. If you think old people are frail and sickly, you'll probably see yourself as frail and
sickly when you get old."

So all that exercising you do and healthy eating are negated by reading and believing the garbage from the media.

Healthier, Weathier and Freer

I posted before on The Greatest Economy Ever because I believe that we are in a long period of economic prosperity that is fueled by technology. It seems that technology is not only creating this economic boom, but maybe providing other benefits as well. This article discusses the Good News for Mankind - not only are we wealthier, but also healthier and freer than ever in history.

Environmentalists scream that we are poisoning the planet yet:

"life expectancy increased from 47 years to 77 years. Onset of major disease such as cancer, heart, and respiratory disease has been postponed between eight and eleven years in the past century. Heart disease and cancer rates have been in rapid decline over the last two decades, and total cancer deaths have actually declined the last two years, despite increases in population. Among the very young, infant mortality has declined from 100 deaths per 1,000 births in 1913 to just seven per 1,000 today."

The article points out that this is a worldwide phenomena - not limited to the US or the West.

Also important is the broadening of freedoms:

"Equally important, the world is more literate and better educated than ever. People are freer politically, economically, and socially to pursue their well-being as they see fit. More people choose their own rulers, and have freedom of expression. They are more likely to live under rule of law, and less likely to be arbitrarily deprived of life, limb, and property. "

I wonder if freedom precedes the economic boom or the other way around - I would guess more freedom comes first. In China, people have been given freedom to start businesses and there is a huge growing middle class, while in Russia, there is much less freedom and no economic boom.

The article also makes an interesting point lost on environmentalists that want to limit economic growth - it is countries with the best economies that can afford to have the best environments. Globalization (another thing both extreme left and right fight against) seems to be responsible for a more rapid transfer of ideas and technology that not only benefits everyone economically but is important in developing countries adopting better environmental controls sooner then we did.

Yes, we still have problems and I don't see the world through rose colored glasses, but I remain an optimist about mankind's ability to solve problems as they arise. We are creative people and Straight Line thinking is counterproductive.

What are Extreme Perspectives?

A reader had emailed me stating that my views were extreme while my blog lead was about rational perspectives in a world that screams in extremes. So what are extreme perspectives and what is rational? It seems to me that the world has changed in what is considered "normal" during my 54 years here that what was considered moderate in 1960 is now extreme.

• If you believe in God and want to preserve Christian religious beliefs, you are extreme
• If you don't accept global warming as a proven fact you are a "denier" with extremest views
• If you are Patriotic - you have extreme views
• You have normal views if you believe the US is a greater threat to world peace then Iran
• If you believe marriage is between a man and a woman you have extreme views
• If you think that "evil" exists you are an extremest
• If you think that there are differences between men and women that prevent one sex from doing everything the other does, you have extreme views
• If you think some wars are justified or you have the right to defend yourself, you are an extremest
• If you say anything politically incorrect (e.g. Islamist radicals are Fascists) you are an extremest, but if you say the President of the US is a Fascist and should be killed, you are normal

I read an interview with Michael Crichton in which he responds to the following question:

What is the most serious threat facing our civilisation?

"Loss of classical liberal values in those western societies that embraced them. England was the first modern state, the first superpower, the first nation to deal with moral issues around the world, and the first nation to install the benefits of what we might now loosely term a liberal society. I mean that in the 19th century sense of liberalism. That notion of liberalism was also present in America, but made it to the Continent only in a pale and limited form. It is a wonderful social conception that must be vigilantly guarded. It is not shared by other nations in the world. Nor is it shared by many citizens in English-speaking countries. Peculiarly, many of our most educated citizens are least sympathetic to classical liberal ideals. Indeed the term 'liberalism' in the modern day has come to imply a constellation of attitudes that John Stuart Mill would not recognize as liberal at all. Nor would, say, John F. Kennedy recognize them as liberal. Kennedy's conception of liberalism was simultaneously more tolerant and more tough minded: tolerant about varieties of behavior within the society, and tough-minded toward threats to a tolerant society from without.

That's all gone, now. Today there is far too much sensitivity within societies, and too little hard-nosed recognition of threats from without. We are inclined to be intolerant of speech by our friends and neighbors, and tolerant of beheadings, rape, and homophobia in distant lands. This makes no sense. But here we are."

Carnival of Real Estate

The Carnival of Real Estate has my post on Banks are Abandoning Houses.

Some tips for Buying with little money is an interesting post

How to Avoid Foreclosure might be useful for some of my sellers. It's amazing to me how many people just take more loans - wrong way out!

Broken rules on spending

I splurged on something this weekend - not a normal pattern for me. I bought a 42" Samsung plasma HDTV and got the HD cable package. Since I cut my YMCA membership, this is revenue neutral from a monthly cash flow and I have 2 years interest free financing. I rarely watch TV at all, so my kids will get the most use out of it. I had been living with a 20 year old 21" TV forever.

Why did I buy it? Well, the best hockey team I have ever seen in my life time is about to enter the playoffs. Hockey doesn't mean much to 99% of the country but Buffalo is hockey crazy. I have been listening to Sabres hockey games on the radio all year and yet to see a game played on TV. I got a DVR so I can record the games and watch them after I come home from rehabbing my houses. I work a day job and then work until 10 renovating homes, so I feel this is a small reward for giving up the off-time most people have after work.

I don't know how this picture compares to other TV's but it looks beautiful to me. Was I wrong to buy this? I don't spend anything on entertainment and don't eat out, so maybe I'm too much of a miser. Life can't be all about work - right?

An Inconvenient Truth - we must all sacrifice

I love hypocrisy

Carnival of Personal Finance

The Carnival of Personal Finance is up with my post on It's the Economy Stupid.

As a real estate investor, I found the post on Prosper 2.0 quite interesting.

Fighting Evil

One of the big chasms between the right and left is the question of whether evil exists or not. The right seems to be of the opinion that it does indeed exist (we are all sinners after all!), while for the left, people are simply a product of their environment and by discussion and reasoning they can all be helped to "see the light".

This past week we have been treated to the insights of several minds that reek of evil:

• Khalid Sheikh Mohammed confessed to the killing of thousands with the intent of killing even more. He recounted with glee the beheading of reporter Daniel Pearl. Rather than reacting with anger at "human rights abuse" of his victims, the left attacked our methods of questioning KSM
• Evil doers in Iraq got through a security checkpoint by carrying two small children in the back seat of the car. After passing the checkpoint, they ran, detonating explosives in the car and killing the kids and other people
• A four year old girl sang a song of honor for her mother who had blown herself up to kill Jews. The girl vowed to become a suicide bomber when she grew up.

Those on the left often quote Jesus' phrase to "turn the other check" or maybe even Gandhi's letter to urge the Jews to commit mass suicide in WWII. They fail to see that Jesus was talking about interpersonal relationships. They forget the Jesus showed plenty of anger at people misrepresenting God (e.g. the money changers - what would he say about people killing others in the name of God?). Jesus also told his followers to "fight evil".

To be able to have a dialogue with people and reason with them assumes that they have a conscience. That they can recognize good Vs bad behavior. The people that we are fighting in this war do not have either of these attributes. Sometimes war is justified to fight evil.

Update: A reader wrote me an angry email stating that this post was extreme and that I was angry. I do not feel angry about the current chasm between left and right. I do feel that the pacifist mentality is an extreme suicidal mentality. Perhaps this book explains the readers letter - A Bee in the Mouth

A New Form of Evil

Related Post:

New Age Vs Christian

Life Estate and IRS liens

I was supposed to close on a house last Tuesday, but the Title search revealed that the house was in a Life Estate agreement. A Life Estate agreement transfers ownership to someone else (called the Remainder Estate) and allows the person with the Life Estate ownership to live in the property for as long as they are alive.

The Title search also revealed that the IRS had put a $29K lien on the house (owed by the life estate tenant). The purchase price for the house is only $23k. Of course, the title company will not write insurance in this situation. This is where normal buyers would give up I think and walk away. But I already have close to $2k in this in legal fees, lender fees and the appraisal fee, so why not persist?

I read John Reeds Book on Buying Real Estate at 20% below market value and he discusses buying from people that own life estate or remainder estates as one strategy for getting below market prices. Houses with IRS liens are also a source, so this home seems to have 2 flaws that could work to my advantage.

The life estate owner in this case is an 86 year old woman who is in a nursing home and will never live in the house again. Her niece is the remainder owner and has power of attorney for her Aunt. In theory (per the actuarial tables in Reed's book) the Aunt owns only 16% of the home. Does this mean that at most the IRS could only collect 16% of the sales price? This would certainly benefit the niece. It seems to me that this would be a good negotiating tactic with the IRS.

There are a couple of options that I see:

• The niece could negotiate with the IRS to settle for something much less than the $29K (or find that the $29K is erroneous)
• The niece could give up and sell her remainder portion to me for a steep discount and leave the negotiation to me (or I could wait until the Aunt dies, which could be a long time or not - in which case the life estate interest in the house would disappear - I assume wiping out the IRS claim)

At this time I just have to wait until the seller exhausts her options to provide a clear title.

Banks are abandoning houses

I wrote last month about a bank that was walking away from $71K in loans on a house, thinking I had lucked into a great deal . Turns out that this is more widespread in Buffalo than I thought. Here's and article in todays' Buffalo News about the problems of banks starting to foreclose and then just abandoning the house.

From a banks perspective, it certainly can make sense to walk away from a liability of a vacant house that is being vandalized. The cost of one lawsuit can more than offset the mortgage owed to them. This looks like one more opportunity to make some money, but these is always risk in any business venture.

Maybe I paid too much for the property I bought? I haven't really had much interest from buyers yet (I'm trying to wholesale flip this property). I tried the FSBO route first and am now trying to use a "flat fee" listing service.

Carnival of Debt Management

The Carnival of Debt Management is up and my post on Using a Balanced Approach made the cut.

Some article of interest were the new FICO method of getting a credit score with limited credit. Since my wife is a Chinese national with very limited credit history this is of great interest to us.

I'm also quite in tune with the post on Cash Flow is King. I am experiencing exactly that problem described. I have $750k+ line of credit to buy property but need working capital to fund times between purchase and sale.

Prosper.com funding

I got a loan funded through Prosper.com yesterday. It was my third attempt and I think I have gained a little insight into the Prosper market.

• The first loan I attempted was for $20k. I had read that you will be more likely to succeed if you join a group. So I joined a real estate group. Unfortunately, the group leader wanted a 1% commission, so the interest rate that I felt I could afford was reduced. I put in a max rate of 9.5%. The group leader did not really supply much support and only bid $50, so I don't think that this was really worth much. The loan did not get funded.
• The second attempt was for $25k. I did not join a group but got dozens of emails from group leaders explaining why I needed to join their group. I also had a lively discussion in the forums section with other members on why my loan would not get funded. I had bumped up the loan interest rate to 10.5% thinking that this would be more likely to get funded than the 9.5% I had previously requested, but in the end got even fewer bidders.
• My third and successful attempt was for a loan of $6500. I wasn't sure if this would get funded either, but the bidding was similar to that on EBay - nearly all at the end. Over 240 people ended up bidding on the loan and although I started at 10% interest rate, I ended up at 8.5% as the lenders bid the rate down.

My credit rating is AA, so I don't think in the end that joining a group had anything to do with the funding of the loan. Some observations and opinions I have about Prosper:

• the lenders seem much more comfortable bidding on loans under $10k
• this is an emotional market place and it seems that most lenders will bid more based on emotions than rational data. I saw plenty of comments from bidders talking about how low credit grade people "deserved" the loan - this is not based on rational thinking. Also, the furious bidding as the loan listing came to the end also screamed of emotion.
• It didn't seem to matter the purpose of the loan as to whether it would get funded. People who had screwed up their finances were just as likely to get a loan as people looking to use a loan for business.
• this is pure anecdotal, but it seemed to me, having a picture of your wife and kids helped get funding.
• I'm not sure why people will fund loans for poor credit borrowers. Is it pure greed or "bleeding hearts"? See MyMoneyBlog's analysis of default rates. The default rates for the risky loans make them extremely poor investments from a lender perspective, yet I did not see a pattern where these loans were ignored - it seems to me a $20k loan from an AA borrower was a better bet than a $5k loan from a low credit borrower, but this is not true to prosper lenders.

It is an interesting concept and I am pleased with the results of the loan I got, but I don't think that I would ever bid on a loan as an investment.

Lawsuit against Amway Distributers

I met Randy Haugen several times and listened to him speak. I was shocked to see P&G win a $19.5M award against him for a silly rumor about P&G being a Satanic cult. I'm not sure how P&G was ever harmed by this rumor and this award appears to be excessive, like most jury awards these days.

Also, sad to see that Randy is an ex distributor. He was quite an excellent teacher and leader. Most of us have made more serious mistakes than forwarding an email or voicemail message. I wish him well in whatever he does in the future.

Scammers and Personal Responsibility

If you read the media at all you are bombarded non-stop by sob stories of people that have been ripped off by scam artists. IWillTeachYoutoBeRich has one such story about Russ Whitney. Nearly every story about the current sub prime loan crisis is biased towards the "victim" borrowers and against the evil corporations that mis-represented their products.

Implicit in all these stories is the assumption that it is someone else's responsibility (usually the Federal Government) to keep borrowers or buyers from doing something financially beyond their means and that once they do something stupid, to bail them out no questions asked.

This is pure socialism that assumes that citizens are incapable of fending for themselves in a free market and are always at the mercy of greedy (and much smarter) businessmen. Of course, we are expected to believe that the government (which runs the Post Office and IRS) are somehow more efficient or benevolent than the average businessman.

Fundamentally, the important point is that as a culture we have changed from a saving society to one that thrives on debt. This transition took place during the FDR administration when the government adopted Keynesian Economic policies and switched peoples mentality from savings to spending.

I have observed the effects of long term socialism on a society first hand in Russia and it is not a pretty sight. The hopes and dreams of the ordinary citizen have been pulled from them leaving not much to live for. Personal responsibility in this country is pretty much going the way of the vinyl record. Most people expect that the government will take care of their retirement, want the government to take care of their health care, and think the best ways to get rich are win the lottery or sue someone.

Chancellor Otto von Bismarck established the first welfare system in the 1880's. He wanted a public so dependant on the Kaiser's government that they could be herded like cattle. FDR and his political descendants have accomplished their goal.

I mentioned the other day that I gave a lecture to students and was there during study hall. 90% of the students were goofing off. Maybe if they would bother to learn, they wouldn't be as darn stupid as the current crop of adults and I wouldn't have to pay more taxes to bail them out of their stupidity.

Home Wrecks

As I visit more and more people who are facing foreclosure, the picture of these people's lives gets clearer. It seems that people who have let their finances go are not just in chaos in one portion of their lives. Except for one house, the homes I go into are a total wreck. I don't mean that the homes need a little dusting or there are a few items scattered on the floor. I'm talking about piles of stuff that fills large dumpsters.

A home I purchased in February from a woman that had "moved out" took 6 people 12 hours to clear out. The pile of trash we left for the crew we hired to haul it away was 40' long by 20' wide and 6 feet high. I was in a house last night where a man whose wife had left him was living. Supposedly she had been gone 3 months. Beside cat and dog feces surprises over much of the floor, there was was literally no room to walk without stepping on piles of trash, clothing and who knows what. Some rooms I could not even enter - doors were blocked and beds were piled high with debris. The amazing part was that the mans' daughters were coming to spend the night! I have no idea where they could sleep, much less eat. There wasn't a square inch of clear space to sit, eat or cook in the house

These peoples lives are a mess and not just financially. I don't think this man created the mess by himself, as the children's bedrooms were equally trashed. I have to wonder what kind of environment these kids were being subjected to. The odd part is the man seemed most pleasant to talk with.

Oh, the one home that I went into that was clean - but the elderly woman who gambled away her home is probably mentally incompetent. When I call her, she refuses to talk because her phone is "tapped". And did you know that "they" have discovered a cure for cancer (but won't let ordinary people know) since no President has ever died of this disease?

Carnival of Real Estate Investing

The recent edition of the Carnival of Real Estate Investing is up and my post of Sub Primes - Crisis or Opportunity is up.

I found the top article on Bad Loans intriguing. As with many people, Bad Money blames Wall Street. But, I think half the blame should go to the borrowers as they are complicit in getting these loans when they are fully aware that they are at their spending limits. Maybe the little old ladies he talks about are also complicit. Remember the old adage "if it's too good to be true". Well... the little old ladies new this as well.

I'm also interested in the Chinese real estate market and Chinalawblog outlines some problems. I still wonder how to get your money out of China once you sell. My wife still owns 2 properties there.

Finally, this post captures my approach to real estate and why I feel it can be such a good investment. I also went back and read the first article on how not to get into real estate and found it quite interesting.

Credit Agencies see no fallout from sub prime market

Last week I posted that I didn't think that the sub prime problems were a big deal because of the reaction of the interest rate market. Today more evidence from the big 3 credit rating companies didn't see this as a big deal either. Yet the headline of the article screams "The Dangers of Investing in Sub Prime Debt". More evidence of the negatively focused media misleading you.

"They Always Blame America First"

That's a quote from former UN Ambassador Jeane Kirkpatrick in 1984 describing the Democratic Party and it rings just as true today. There's an excellent article by Michael Barone describing this phenomena today.

Barone is a very astute political writer who hits the nail on the head when he says the default assumption is the we are guilty and most of the world problems - whether it is terrorism or global warming are our fault.

Now my grandparents immigrated from France in the 1920's, so I am not descendant of slaves nor an Anglo-descendant, so I don't have to defend my ancestors nor were they responsible for the good that America has done.

But I believe that nearly all the advances in freedom have come about as the result of English speaking people. As Churchill outlined them they are: the development of the common law, guarantees of freedom, representative government, and independent courts.

I grow tired of the snotty PhD's that I work with that always want to point out how Americans slaughtered the Native Americans or when my kids come home from school pointing out how evil America was to drop the atom bomb on Japan. They have little inclination or knowledge to realize the contributions to the world that America has given beyond freedom. I like the bumper sticker that reads "If you can read this, thank a teacher; if you can read it in English thank a soldier".

It's no accident that we lead the world in entrepreneurship, net worth, economic output, charitable donations, Nobel Prizes and military might. See the movie "Amazing Grace" and understand that even today slavery is practiced in many places of the world. It was the English speaking countries that lead the way to eliminate this practice.

I have travelled to many places - Russia, China, South America and Europe. What we have in America is quite unique.People worry about the Chinese catching us, but until they have the attributes outlined by Churchill, I am not worried.

It's the Economy Stupid - why we're doing OK economically

I saw 2 articles today, one highlighting why the current turmoil in the sub-prime markets won't have much of an impact on our economy, the second showing data to support how satisfied the average American is with the economy. This contrasts sharply with the 'if it bleeds, it leads" doom and gloom of media articles.

Did you know:

• Household net worth has risen to over $55 trillion - an increase of 7.4% since 2005
• Corporate profits are up 20% over last year
• US households, at $28.8 trillion, have more net financial assets than the rest of the world combined
• 9.5 million new jobs have been created since 9/11 and unemployment is likely to drop below 4.5%
• 89% of Americans feel secure in their jobs - higher than any time in the 1990's
• 52% of people are satisfied with their jobs
• 71% of people feel secure in their financial situation - higher than in the 90's
• only 9% are worried about making minimum payments on credit card debt
• 88% are not worried about losing their jobs to outsourcing

The Greatest Economy ever continues to rule. Certainly there will be ups and downs but the long term trend continues to be positive.

Installing replacement windows

I spent the weekend installing windows at one of the homes I purchased last month. I had ordered 24 windows and they are made custom for you - since I measured them, I owned them. I put the first one in place and it got stuck - could not get it in or out. I was sure I had just wasted a lot of money. Fortunately, with the help of a block of wood and I hammer I got the window in. Afterwards, I figured out that I could trim an eighth inch off the bottom and the windows fit OK.

A lesson I learned is that 1) windows frames are not square. One side was consistently shorter than the other 2) you need to remove the windows in order to measure them properly. I tried to measure the vertical dimension with window in place and I think the tape measure added extra length by bending around the window panel, so all my windows are too tall and 3) with a little bit of resourcefulness, you can solve most problems.

I installed 13 of 24 windows this weekend. I can get a window installed in about 40 minutes. It's not really too hard of a job once you figure it out.

The Inconvenience of Starting a Business

I just read a great post at IWillTeachYouToBeRich - an interview with a person who quit her job to start a wine business. There were 2 take-aways from the interview that really struck me. Her statement that starting your own business is "inconvenient". I've talked often about diversifying beyond your job or stock market portfolio. The sad truth is that starting your own business is too inconvenient for most people to bother with.

The other idea I picked up from the interview was putting a sticky note on your computer of the ONE critical thing that you should focus on that day to make your business a success. As the interviewee notes, there's a million little things that need to be done every day when you are starting a business and there is no structure. If you are a disorganized person, this is a prescription for disaster. I use Evernote to make a "To Do" list every day, but have not prioritized the "ONE thing" that I need to make my business a success. It's an interesting idea that I think I will try.

Math in the Real World

My kids' high school had a "Career Day" yesterday and the school invited business people to co-teach classes, in order bring "real world" examples of what the kids are learning into the classroom. I was assigned to co-teach Seniors taking pre-calculus. The kids had been continually wondering how they would ever use calculus in the real world.

I gave a talk on the use of math models and how nearly every profession uses math models to create understanding out of all the data they assimilate. I made the point that math can help, not just scientists and engineers, but nearly everyone make sense of data that affects all aspects of our lives. We read of studies predicting that certain foods will help us live longer or kill us sooner, problems with new medicines, economic data that influences our savings and jobs, and problems like global warming that even influence who we should vote for. I emphasized that they should develop a healthy skepticism about much of what they read since it is often based on poor math (primarily poor statistics).

One of the points I emphasized over and over was that "correlation is not causation". This point is largely lost on the public, as all correlations are deemed by the media to be the result of some cause (often the cause is based on the biases of the writer or researcher). I told this story from a Simpson's episode "Much ado about nothing". After a bear attack , the town creates a "Bear Patrol" to keep bears away:

Homer: Not a bear in sight. The "Bear Patrol" is working like a charm!
Lisa: That's specious reasoning, Dad.
Homer: [uncomprehendingly] Thanks, honey.
Lisa: By your logic, I could claim that this rock keeps tigers away.
Homer: Hmm. How does it work?
Lisa: It doesn't work. (pause) It's just a stupid rock!
Homer: Uh-huh.
Lisa: But I don't see any tigers around, do you?
Homer: (pause) Lisa, I want to buy your rock.

The world is full of Homers' who don't have the a clue about the difference between correlations and causation. And a college education doesn't prevent people from falling into this trap. Often it even does the opposite (I work with PhD's that do this all the time in areas outside their field of study).

We talked about how most of the models used calculus to some degree (or should use it). We also discussed the difficulty of developing a model for global warming. I presented this partial list of variables that might impact global warming:

Solar flux
Gravity, Pressure, Density, Humidity
Urban Heat Island Effect
Earth’s rotation and “wobble”
Currents in the ocean
Surface temperatures/ atmospheric temperatures/ water temperatures
Green house gases (CO2, H2O)
CO2 Dissolved in the ocean
Size of polar ice caps
Infrared radiation
Earths magnetic fields
Evaporation
Precipitation
Cloud formation
Reflection from clouds
Volcanic eruptions
Aerosol formation (soot, dust, sulphur)
Trace compounds
Ozone levels
Cosmic rays
Many, many others

I only had 27 minutes to get my points across, but it was obvious that the kids had not been exposed to much out of the conventional wisdom. Our education seems mainly geared to pumping information into kids, but really doesn't help them learn to think independently.

High School Education

I was invited to co-teach two high school courses yesterday as part of a "Career Day" at the school. In between the courses I observed study hall and was quite surprised. Probably less than 10% of the students were actually studying. The rest were either snoozing, listening to their IPods or playing board games with each other.

I went to a private high school and we did not have study halls. I don't know if this is normal but it seems like a real waste of time (and my tax dollars). My kids don't seem to have near the amount of homework that I did when I was in high school. I'm not sure if that is because it is not assigned or because they use the study hall breaks to do it.

The high school is rated one of the better ones in NY. If this is a good school, I would hate to see a bad one. It's disappointing to me that with the extremely high school taxes I pay here, that this is the best our school system has to offer.

Sub Prime defaults fail to affect mortgage rates

Yesterday I pondered the meaning of the sub prime lending "crisis". Now I read on CNNMoney that mortgage rates remain unchanged. Now, I may be naive about this, but it seems to me that markets speak much louder than the media about the true significance of events. And if the market were truly worried about risk in real estate, interest rates would rise.

So what are we to make of the stock market sell-off? The stock market is often driven by emotion and not facts (that's why it's riskier than real estate). If the interest rates for mortgages continue to remain unchanged, I would bet that this hoopla is not going to have any significant effect on real estate or stocks in the long term.

Pete Youngs Estimating Course

I had written about how much valuable information I had gotten from Pete Youngs CD's and DVD's that I had bought on EBay.

I recently decided to purchase his estimating course directly from his website based on my previous experience. I have to say that I do not recommend you purchase this course. It is written at an eighth grade level and quite unhelpful. I doubt that Mr Youngs even wrote it. I have returned it and asked for a refund. Hopefully, he will oblige.

So far the best information out there that I have found for estimating the cost of rehab jobs is the RS Means book. I do have to double the prices quoted in my 2 year old book (probably because I'm in NY!) but it does give me a relative cost. It still is an area I need improvement in.

Sub Primes and the future

Back in January I wondered if banks were crazy because of the loans they were making. Now with the stock markets roiling over the potential failures of sub prime lenders, I am not surprised at what I see when I talk to people in foreclosure. I saw an article at Bloomberg that discusses the potential impact this might have on housing and lending. As the author indicates, when you get to involved in the data you can create a scary scenario that all is doom and gloom.

In fact, most market corrections tend to be over corrections because people usually behave irrationally. They fall into what I have called "Straight Line Thinking" and feel that the current direction of the market will continue indefinitely. Think about how people kept assuming that the stock market would go up in the Nineties ( I did - I switched all my investments out of bonds and into stocks in late 1999), that housing prices would keep going up in the last 5 years (several of my siblings bought beach front property just at the peak of the market and are sitting on very large cash flow drains, unwilling to drop the price on their homes).

Perspective is what is often needed the most when markets are changing and it is the attribute that is usually in shortest supply. People are ruled by their emotions. The underlying fundamentals of our economy are very strong and the failure of a few sub prime lenders will not destroy the housing market or the economy. Look at the stock market graph below. It shows how the market got out of balance, and how once it corrected itself, resumed on the underlying trend of economic growth. The other thing to note is that on a day to day basis the market fluctuations are quite random. A rational investor simply can look at the underlying data, think "the fundamentals are sound" and recognize that "this too shall pass". There's no need to lose sleep over this. However, the astute investor will look for the opportunity that this presents.

Saving the Planet with your Hummer

Here's an interesting article discussing the environmental damage a Toyota Prius causes Vs a Hummer. Lots of pollution to mine the nickel for the batteries, which make an around the world journey for processing. The energy needed to make a Prius is 50% greater than a Hummer that will last 3 times longer. In addition, I have wondered what environmental damage there will be when all those batteries need to be replaced.

On the lighter side CheatNeutral allows you to offset your extramarital indulgences, much like Al Gore is offsetting his wasteful energy usage with carbon indulgences :)

JFK for today

"There is something profoundly wrong when opposition to the war in Iraq seems to inspire greater passion than opposition to Islamist extremism. There is something profoundly wrong when there is so much distrust of our intelligence
community that some Americans doubt the plain and ominous facts about the threat to us posed by Iran. And there is something profoundly wrong when, in the face of attacks by radical Islam, we think we can find safety and stability by
pulling back, by talking to and accommodating our enemies, and abandoning our friends and allies. Some of this wrong-headed thinking about the world is happening because we're in a political climate where, for many people, when
George Bush says 'yes,' their reflex reaction is to say 'no.' That is unacceptable. "

Joe Lieberman

Housing Slump - Crisis or Opportunity?

A CNNMoney article today point out how terrible the current housing market is due to the failure of sub prime lenders. Certainly if you are a distressed seller, this could be true. But for everyone else this is a great buying opportunity. The article points out how foreclosures will drive prices of housing down. Just like the stock market, sometimes housing must have a "correction" as well. The current problems in the housing market are an opportunity for those of you who have been priced out of the market to seek out a distressed seller and get yourself a "steal". Those who buy homes going into foreclosure (like myself) see a gold mine out there.

Success comes when opportunity and preparation meet. Most of the time we see opportunities passing us by because we have not prepared (I know I have). If you are not prepared for this opportunity, get your finances in order so you will be the next time. Opportunities are never "once in life time". They constantly come into our lives. When your eyes are open and you are ready, you will find the gold at the end of the rainbow

Jobs and Stock Market Corrections

We had months of steady Stock Market increases without any corrections. When this goes on too long (as it did in the 90's) people tend to exude "irrational exuberance" and make foolish decisions about buying. (This applied to the 90's stock market as well at the 00's housing market - everyone was buying on the "greater fool" theory and did not make an assessment of underlying value).

But is this market correction a real indication that we should panic? The underlying economy still looks strong. GDP may slow down from the 3.5% - 4.0% growth rates it has experienced the last 5 years, but a recession does not look likely. Companies are still hiring. Overall unemployment is near a record low of 4.5%. And look at these unemployment rates by education:
Less than High School education - 7.1%
High School diploma - 4.3%
some college education 3.9%
College Bachelors - 1.9%

So when there is a market correction, and the economy looks good (or not) what should you do?

• not panic - in fact, if you are using dollar cost averaging to invest just keep putting the same amount into savings
• stay in an index fund - if the economy is going to tank, individual stocks are the most risky. Stay in a index fund that represents the market.
• diversify out of stocks. Yes, I know that stocks market investing is passive and you don't have to do much. But starting a small business is the best way to diversify. And this is where most of the job creation is coming from - not Fortune 500 companies.

Carnival of Investing

The Carnival of Investing is up at the Skilled Investor, featuring my post on Stock Market Investment Newsletters.

I also enjoyed Real Estate is a Business, by Al Young who has gone full time as a RE investor.

Falsifying Historic Stock Recommendations?

Instapundit has pointed out what looks like a re-writing of history. Playing the stock market is risky enough. Could it be true that analysts recommendations are being revised to appear better?

Carnival of Personal Finance

Check out the latest edition of the Carnival of Personal Finance and my post on Emergency Funds.

Other posts I liked are:
A New Look at Good Debt Vs Bad Debt
My Money Blogs look at Prosper - I am trying to get a loan funded on this site for a second time and will have more to write about it
I've written before about investing in index funds and Surfer Sam talks about why
Free Money Finance talks about how to create that emergency fund

Last, but not least, the Stubborn Capitalist supports my thoughts on working hard to get rich

Greed and Responsibility

I wrote yesterday about the sub prime real estate lending market. There were a lot of comments on the post by My Money Blog regarding who was at fault. On one hand some people called the lenders greedy because they were preying on "innocent" people - enticing them to accept the introductory "teaser" rates knowing that they could not afford them if the prime rate increased dramatically. Then there were those people that were milking the system for every dime, constantly refinancing their property every time their home value went up. Were not these people also greedy? They thought that they had a cash machine that could provide them with an unlimited source of money that they could use to indulge in their personal desires. I doubt many used the money to improve the property or to invest. Certainly none of the clients in foreclosure that I have encountered did any home improvements with their "windfall" profits. (I thought only oil companies could have "windfall" profits?!?!)

We live in a society today where we automatically blame "big business" for many of the social ills we encounter. But both "big business" and "big government" only reflect what we are individually and individuals tend to act the same way at work as they do in their personal lives. So, personally, I put 90% of the blame for the rise in foreclosures on the individual. But, unfortunately, society would reverse this ratio. Heck, why not sue these lenders for "forcing" you to over finance your home? I'm sure someone, somewhere has already thought of this.

The question is - is greed wrong? Capitalism itself depends to a certain degree on the greed of individuals to work in their self-interest. By working in your self-interest a person generally must provide good service to his fellow humans. The better service you provide, the more money you can make.

I think the problem with greed comes into play when you no longer provide a service to make money but are trying to "get something for nothing". The concept of gambling fits into this as does this whole "re-financing" pyramid that has occurred during the last 5 years. The government and or banking system has facilitated the ability of people to stoop to their basest level and get something for nothing. And a lot of them did with no thought to the consequences. And when the pyramid collapses, fail to take personal responsibility.

I am old I guess - I feel that success comes from hard work. When something is "too good to be true" - it's probably the wrong thing to do. And when you screw up you take responsibility and correct your errors.

Sub-Prime Lending market in Distress presents opportunities

My Money Blog has a post about sub prime money lenders getting hammered. I also saw that CountryWide will stop doing 100% financing. This doesn't surprise me. About half of the foreclosures that I am getting called on for my direct mail campaign come from CountryWide. I guess that it is not my direct mail campaign that is so successful, its the market for defaulted loans that is skyrocketing. I could probably buy about three times the houses I am buying now if I had more access to cash. Even though most don't fit my criteria for making $20k in profit, most could make me $10k quickly. But the cash access I have doesn't permit me to buy "subject to" existing financing and that is what makes the pre-foreclosure buying really work well.

I've often read that in bad times lots of money can be made. If this is a bad time for homeowners going in to foreclosure, than I can really see this to be true. We will make some good money this year since we are already at 75% of our goal, but I could double or triple that had I been in better financial position.

Life Estate Agreements

I have encountered something new in my real estate "real life" education course. The most recent property I signed a sales contract on is not really owned by the seller, but by her Aunt who has a "Life Estate" agreement on the property. This gives the Aunt the right to live in the property rent free for as long as she lives. Currently the Aunt lives in a nursing home so there should be no problem - right? Well, no... You see the Aunt owes the IRS $29K and the IRS has attached a lien to the property. So now, having invested $1500 in Title search, loan application fee, appraisal and legal fees, I'm not sure if I can buy the property.

A life estate looks like a nice way to avoid probate but it seems foolish to get a piece of property with a lien on it worth more than the property. Looks like I will spend some more legal dollars to see if this is salvageable.

Why Keep an Emergency Fund?

I have not (until recently) had an emergency fund. I always depended on the stability of my job and excellent credit (to borrow funds in an emergency) as my backup. As I have been working my real estate business, most of the houses I am buying come from people in foreclosure. Why do these people lose their homes? Here are some of the reasons I have come across just in the last 2 months:

• medical problems cause them to lose their income and they incur heavy debt
• an elderly, retired women with her house completely paid off decided to go to the new Casino in Niagara Falls and developed a gambling addiction. She spent all her life savings and then mortgaged her house to the hilt and lost it all
• couples that split (both married and unmarried)
• people that buy a house based on two incomes and one of them loses their job
• people that borrow against their homes to start a business that fails
• a person whose daughter died suddenly and she moved in with her son-in-law to raise small grandchildren
• loss of a job
• people that just don't want to deal with their previous home after milking the bank for all that they could (one bought a brand new SUV with the HELOC and didn't improve their home at all)
• people that bought based on "teaser" ARM's and couldn't handle the increased payments when their rate went up.
• people that bought houses that were assessed very low and the assessor raised their assessment to the new purchase price doubling their PITI payment (NY property taxes are outrageous)

One common denominator in all these cases was that the homeowner borrowed way more than the house was worth and the banks were complicit in letting them borrow the money. I think the blame is not solely with one party - both parties were stretching the truth of the situation and both lost in the end.

So some lessons to be learned:

1. Don't borrow excessive amounts against your home
2. Don't buy a house that is at the limits of what you can afford
3. Keep an emergency fund
4. Don't buy a house using an ARM with a low teaser rate
5. Be prepared to live on one income and try to add a second source of income (like a small business)

Keep Your Pet Farts From Ruining the planet

An Australian firm now lets you buy carbon credits to offset flatulence from your dogs and cats. That's about the seriousness this discussion deserves.

Al Gore missed an opportunity on this one.

Identity Theft

JLP made a comment about an article regarding identity theft. He was surprised that "not signing your legal name" can cause problems with your credit score. I would have never thought of this myself.

But, I recently came across a real life example of this. One of the properties that I purchased had over a dozen liens attached to it. The problem in this case was that the owner did not have a middle initial. So lots of creditors decided to attach a lien to her home. These people had many different middle initials although their first and last name was the same as the home owner. You can imagine that if you only sign your first and last name to important documents that you will be more easily confused with someone with a similar name - especially if your name is common. My name is quite rare but I can find half a dozen people with the same name in the US and Canada.

Besides lowering your credit score, imagine putting your house at risk by not putting it in your full legal name! That article was right!

Overcoming Real Estate Weaknesses

We did the property inspection for the most recent house that we have signed a contract on last night. As usual, we found lots of stuff that we had overlooked. I'm sure once the owner gets all the junk out of the house (the house is packed full of stuff making it impossible to examine most of the rooms) we will find more problems. This remains one of my basic weaknesses. When I was buying property through Realtors, the homeowner was not present and it was fairly easy to go through a house in detail and note problems. Now, I am looking through a house with the homeowner looking over my shoulder and am self conscious about being critical of their home. In one house, I was sitting at the table trying to negotiate with the homeowner and my wife was roaming the house looking at the details. The homeowner was extremely concerned with where my wife was and distracted from concentrating on what I wanted her to look at. Later I scolded my wife. On the other hand my wife is very detail oriented (she has an accounting background) and is great at finding error in documents and problems with the houses.

A second area I need improvement in is estimating costs when using contractors. It is easy to get a price on something and know how much it will cost when you do the work yourself. As our business gets bigger, I am forced to use contractors (and in fact, the hard money lender I will be using for this purchase requires it). I am sure that contractors pad the prices of their services in several ways. First, they increase the prices of materials, second they put in fudge factors to account for mistakes or oversights, and finally they add 20% of more just as profit.

The last area I need more confidence in is market value. I subscribe to RealQuest and can get sales prices of homes surrounding the prospective property. however, without being able to actually go inside these properties, it is difficult to determine how they compare to my subject property. For example, for this property I can find sales in the last 12 months within 1 mile varying in price between $10k and $150K. I eliminate houses that were built in different time periods and are of different styles but still have a large difference between the worst and best.

Education is certainly one area to work on. I just bought PeteYoungs estimating course, so I hope that can help me. Pete also gave some tips on dealing with contractors but they seem like a stretch (getting 3 bids, picking the lowest and then asking 3 more contractors to beat the lowest bid). Lastly, I will have to be bolder when inspecting houses and not be worried about what the homeowner is concerned about. This may in fact work to my advantage when the homeowner knows that I know about all the problems.

Science and Medicine

If you have read this blog, you've probably noticed that I have posted a lot on global warming. The point of my posts is not that I don't believe global warming is occurring (I don't have enough data to determine whether it is or is not). My main argument has been that there is a lot of poor science being used to push a political agenda bordering on religious fanaticism.

Poor science is not only being used to promote global warming, but in many other facets of our daily lives. Take this article on the use of "science" to influence our medical knowledge. As the author states, most studies are pure "rot". No one seems to have a clue as to how to use statistics properly. Sample sizes are too small compared to the population size (researchers often draw conclusions from a sample of 20 people!!!). Drug companies typically use samples sizes many times higher than those used in these studies and still do not find all the harmful interactions that may occur. So one day coffee is bad for you, and a year later we find that it can be good for you.

Both for global warming and medical studies such as noted in this article, you need to understand that this is another case of "follow the money". Researchers at educational institutions are under pressure to apply for "grant money". So they find areas of study that are slightly off the beaten track. Due to personal biases they "conclude" that their original hypothesis was correct. This all makes for shady ethics.

Remember the scare many years ago that living near electrical transmission lines caused cancer? The data was completely fabricated. Whenever I hear the latest information on scientific topics in the media, I assume that the data is bad. Money or ego are probably behind the research and statistics are being used improperly or not at all.

The only good science being done is that on the health benefits of chocolate ;)

More risk from stock advice newletters

In other posts I have talked about the risk of investing in stocks and urged diversifying into real estate or a side business. In that post on risk I showed a Table from AllFinancialMatters which proved the inherent risk of trying to pick a fund in any given year.

Now MyMoneyBlog points out the success rate of taking advice from financial newsletters. The short of it is that if you try to use the most successful newsletter from the previous year to pick stocks, your return will be negative.

This all proves that stocks are truly a Random Walk and investing in stocks for short term is akin to gambling. If you want to invest in the stock market (and I do), you must be patient and have a long time frame of at least 20 years. Don't bother to try to pick stocks - just buy an index fund that mimics the broad market and add money to it every month. Look at corrections as just an opportunity to buy at lower prices. But don't waste time obsessing about the market.

And diversify. Not just from your stock portfolio -but your job as well. Too many Americans put all their eggs in the job and stock market basket. But, that always gives reporters a sob story to wrote about when something changes - and it will.

Wallpaper woes

We spent the weekend buying several thousand dollars of materials for one of our recent property acquisitions and removing wallpaper. I used some techniques recommended by Pete Youngs to open a contractor account at a wholesale window supplier and saved $1500 on the purchase of replacement windows over the Home Depot quote. So I quickly recovered the cost of the $250 I spent on EBay buying Pete's course. I also found that Lowe's has special project card accounts that you can open that provide no interest for 6 months. So we opened an account and bought other supplies.

The rest of the weekend we spent scrapping wall paper. We bought some wallpaper remover from Lowe's, but warm water worked better. Sherwin Williams had some wallpaper remover that seemed to work pretty well on most of the papers in the house. We got through several rooms with ease and then came to the entry. The paper was different than that in the rest of the house and did not seem to wet well. The previous owners seemed to have removed a large section of this same paper cleanly, but we could not. After several hours of scrapping we had succeeded in damaging the underlying drywall without removing most of the paper. So now I am contemplating putting new paper on or skim coating the wall with drywall mud. We also managed to stain the popcorn ceiling in the entryway as well with the wallpaper remover.

The wallpaper fiasco left us on a down note after what had been a productive weekend. Tomorrows another day and we have to inspect a house we signed a contract on last week. Also have a prospective buyer for the other house we are trying to wholesale. The next few months will be very busy as we try to rehab one house ourselves, use contractors to rehab a second house and market a third. I want to continue to use direct mail to find more houses and have 3 prospective houses we are working on.

My full time job is getting in the way of my part time business already.

Update: Textured paint comes to the rescue!

Failing to Succeed

Here's an inspiring article from Forbes on Looking Failure in the Face. I always admire people that have been at the very bottom and fought their way back to success. We usually remember people for their success and overlook the role failure played in them reaching success.

"The idea that a single "F" will keep you out of college and ruin your life
is something they use to scare students into doing their homework. The reality
is that we all have a string of "F"s on our records, whether we acknowledge them
or not, and those failures, just like our successes, add up to form our lives
and who we are."

I was terrified of failing in school, but my career, both at my job and in my side businesses has been a string of one failure after another. I've had many hundreds of experiments fail during my career. My successes have been few and far between, yet I am still employed after 29 years of failing. Why is this? Well, I've had enough successes to save or make $10's of millions of dollars for my company.

In my side businesses I've had a mix of success and failures as well. My first venture into real estate was a disaster and I had to take an embarrassing step backwards to recover. I told hundreds of people I would get rich in Amway, but in the end I only had moderate success.

Never the less, I survived and am working on another real estate business. Will I succeed this time? I don't know. But I do know I will survive no matter what happens and keep trying until I reach my goals. One aspect of my personality that I find I have in common with other successful people is perseverance and a willingness to work hard.

What will the focus of your life be - your failures or your goals?

Use a Balanced Approach to Get out of Debt

Here's a really sensible article on how to get out of debt - Grow Your Income - Not Your Lifestyle. It's not often you see this type of balance in the media. Most article focus on cutting your spending as do most blogs. In business, we say "you can't cut your way to growth". At some point you have to focus on revenue. Starting your own business is the most overlooked strategy (probably because it requires effort and forces you out of your comfort zone).

And when you make more money, you must be cautious about just using your extra income to increase your lifestyle. Most people when they get a raise, just increase their spending rather than pay down debt or increase savings.

Projection of Force

I had written about JFK and wondered where the Democratic Party went. Here's an article from the Boston Globe discussing how to negotiate with those who wish to harm us.

It's all the rage to talk about negotiating to avoid war. I think that what few Democrats understand today is that negotiations do not work when we are seen as weak. And the Arab world is looking at Congress's plans to undermine Bush at every step and sees nothing but weakness.

An American proverb, often attributed to Teddy Roosevelt, "Speak softly and carry and big stick" would go a long way to helping negotiations, as they did with Libya. But right now the administration is being undermined for political purposes that make war much more likely and negotiations nearly impossible.

We are seen as the "weak horse" and that will only prolong our struggles with radical Islam.

Stock markets and the economy

I had written elsewhere that we are experiencing the Greatest Economy Ever. Larry Kudlow discusses the current stock market correction and reasons not to panic.

One of the keys to staying positive when the news media writes one negative story after the other about how terrible the economy is to to take a larger perspective. The current economic boom is not some unstable house of cards that could tumble any moment. Instead, it is built on a large macroeconomic trend that is driven by technology just as the Industrial Revolution was.

We may experience some minor ups and downs (due to Creative Destruction), but right now we are in a very long term economic growth period that will lift all boats. The new Congress or hiccups in China could effect us short term but long term keep positive.

Real Estate Funding Update

One of my goals was to find $500k in funds for real estate purchases this year. Here's an update on where we stand Vs the goals:

• We have a $150k LOC from a hard money lender
• We just got approved for a $500k "revolver" account from Community Preservation. This entity provides funds for purchase and rehab.
• We got a $40k HELOC from the first house we purchased last April
• We have transferred my Roth IRA to a self-directed IRA which will allow us to purchase real estate
• We purchased one of our recent houses using a "subject to" strategy which allowed us to take over a $144k mortgage
• Last night we held a Private Money lending seminar during which I illustrated how investors could loan us money secured by real estate using their IRA's and earn 10%. We had 3 people interested but don't have any firm commitments yet

So, we have exceeded our goal by about $350k so far. It still would be nice to have some more free cash, since none of these strategies involve 100% financing (except the private money lending option). I tried to use Prosper to get funds but did not get funded. But Prosper limits you to one $25K loan at a time. I had enrolled in a group but for my AA credit rating, I think that was a mistake since the group leader was adding 1% to the interest rate.

The coming Ice Age

Here's a look back at the 1970's Ice Age scaremongers from PowerLine