Archive for the ‘Reviews’ Category
Super Freakonomics Review
Posted by: Todd Metheny in Reviews on November 13th, 2009
I finished my copy of the sequel to Freakonomics on a plane on the way back from visiting my wife’s family in Long Island, NY. I like traveling, in that I like going places and seeing and experiencing new things. I don’t like the actual act of traveling. I don’t like all the waiting involved with flying. I’ve never been able to sleep on planes for some reason – not even on the extremely long flights to Europe. A couple days after flying, it’s not uncommon for me to wake up with a cold.
One thing that makes flying bearable is the opportunity to read without many distractions. My wife usually goes to sleep soon after take off (sometimes before – the woman has a gift for sleep). Such was my situation with a half read copy of Super Freakonomics.
This is exactly the type of book I like to read. It’s the kind of book that challenges all the things you’ve come to accept as cannon. It’s sort of a new genre of bestseller – the book of sociological studies that isn’t really about anything, but has lots of loosely connected and interesting stuff.
The first book was surrounded by controversy. Controversy is almost a necessary marketing tool for a book like this. You need a little controversy to get people talking about whether or not your right at dinner parties, coffee shops, and wherever else people get together to gab. One chapter of the first book, in particular, created a tremendous amount of buzz. That chapter is what I would now refer to as the “abortion chapter.”
If you haven’t read the book (and you should) the hypothesis offered is that the dramatic fall in crime in the 1990s was due to the fact that it was found to be unconstitutional to outlaw abortion. That is, women could legally decide to have an abortion. I’m not going to make Levitt’s case here. I will say that it’s an interesting one. The data is very compelling, and he makes a dispassionate, economic and believable argument.
Like the first book, this book has been generating a healthy amount of buzz. Once again, one particular chapter has been at the forefront of the controversy. Not the chapter about prostitution, which I found fascinating. Not the chapter that proclaims that the high condom fail rate in India is due to the small genitalia of Indian men. It’s the chapter about global warming.
I’ll let you read the book, but just so you understand a little about the context, the book doesn’t dispute that global warming is a very real thing. In fact, it proclaims that there are basically people with any credibility in the scientific community that don’t accept that global warming is a very real threat. What they challenge, is whether the facts commonly associated with global warming are truly, well, facts.
The question is not whether they spoke with leading experts. The controversy is about whether they cherry picked quotes in an effort to manipulate what the leading experts were trying to say. I can’t say. Only the experts know whether the quotes attributed to them accurately reflect their beliefs. I don’t know that they’ve come forward publicly and said otherwise.
In any case, it’s a fascinating book. I enjoyed the first book, and I enjoyed this one as much if not more. I have two criticisms, and perhaps they are minor ones:
1. The titles of chapters – The titles, have very little connection to what the chapter is actually about. For example, one of the chapters is called “How Is a Street Prostitute Like a Department Store Santa?” Sounds fascinating, doesn’t it? Actually, it was. But the chapter was completely about street prostitutes. A single sentence explains how they’re alike. This is just a matter of marketing. It doesn’t hurt anything, but after seeing it repeatedly throughout the book, it annoyed me a smidgen.
2. Studies – The most annoying thing that ever (maybe not ever) happens to me in arguments is if I bring up a study (I do this sometimes in a feeble attempt to bolster my credibility) and someone tells me, “you can make a study say anything.” The problem is, this is at least partially true. You can create a confirmation bias that’s difficult to overcome. It’s difficult to mirror real world results in a lab environment, because it’s difficult to consider every variable. None of those things are my problem with this book. My problem with all books like this is, in my experience, if you go back and read the papers the book is based upon, the conclusion of the paper usually isn’t represented in the book. I’m not saying that’s the case with this book. I haven’t read all the underlying papers. But it’s something to keep in mind. If something really seems difficult to believe, I would suggest going back and reading the underlying paper that’s been referenced. As with anything else, be a filter, not a sponge (to quote one of Stephen Chbosky’s characters). In conclusion, read this book. I’d love to hear what you thought about it. Thanks for reading.
3 Random Things You May Have Missed
Posted by: Todd Metheny in Frugal Living, Green Living, Managing Finances, Reviews on October 21st, 2009
In case you missed it...
I’ve been working on a pretty interesting appellate brief at work. It’s interesting, challenging, and mentally stimulating. It’s the kind of work we always say we want. It’s also hard. Seth Godin refers to the time when things get hard as “The Dip” (and wrote a book by the same name). It’s a phrase I’ve liked since I first heard it, and I find myself trying to push through things sometimes by telling myself, “you’re just in the dip right now, Todd, push through this.” So I’m pushing through it.
The three things I decided to pimp in this post are all things that should make your life easier, in some small regard, either by organizing data for you (see number 3), saving you a couple bucks (see number 2), or by making it easier for you to make sure your stuff is put to good use when you’re done with it (see number 1). I’m calling it the 3 things you may have missed, because if you’re the kind of person that reads a lot of blogs (and maybe even if you aren’t), you’ve probably either used or heard of these tools. Or maybe I’m just suffering from the curse of knowledge, and assuming, as people subject to the curse do, that anything I’ve heard about you’ve heard about. Obviously that’s not always the case. Without further ado:
1. Freecylce.org – I’m including Freecycle because I just think it’s a pretty cool idea. That’s why I wrote about Pimp this Bum. The concept is simple, people form local groups in their area. When you have something you don’t want anymore, you post the group and let them know what you have to offer. If you see something posted that you’re interested in, you can let them know that you’d like to have it. ”It’s the whole, one man’s trash…” philosophy. It’s green, too. They don’t want you to throw your old stuff away, because someone else might still be able to get some use out of it. Of course, you could give your stuff away (or sell it) on Craigslist or a like site as well, but Freecycle seems to be more of a community thing. If you’ve ever used it, I’d love to hear about your experience with it. My community here in St. Louis has over 6000 members. I’m thinking about checking it out. I’ll have a better read on how much value it adds after I do.
2. Restaurant.com – I’ve written about this little number before, and I tell people about it every chance I get. So does my wife. Between the two of us, I think Restaurant.com owes us for all the word of mouth promotion we’ve offered to help tip their site. If you’re not familiar with it, Restaurant.com typically offers you the opportunity to buy a $25 gift card for just $10. There’s a caveat and a bonus. The caveat is, you’ve got to spend $35 at the restaurant. Some other restrictions may apply. I’ve seen some that can only be used during the week. Some restaurants won’t allow you to use the certificates on alcohol. For the most part, though, you can use them as you please. The other thing to keep in mind is that these are usually newer restaurants or places trying to get noticed. Your favorite place probably won’t be on there (but hey, try something new). Those are the caveats.
The bonus is, if you sign up for email updates from Restaurant.com, you never have to pay $10 for the $25 gift card. Every week, you’ll get a coupon code by email that gives you at least 50% off. About once every two months, the discount code will give you 80% off (just $2 for a $25 gift card!). The week of 9/9/09 it was 90% off, but that’s the only time I’ve seen that after using Restaurant.com for about 2 years. For what it’s worth, this week’s discount is 70% and the password this week is “pumpkin.”
3. Mint.com – The other day I was talking to a mother of four, and she said something to me to the effect of, “I don’t know where all the money goes. We live frugally. We drive old cars. My kids wear second hand clothes. We don’t do anything extravagant. And yet the money is never where we need it to be.”
Keeping and maintaining a budget is hard to do. I admire people that can do it. Mint.com isn’t necessarily a budget substitute, but it sure can help. It can definitely help you answer the question – “where does the money go?” Mint tracks your purchases and spending, and categorizes it for you and attempts to develop a budget. It will also send you alerts when your bills are due, and has several other handy tools.
The annoying thing about Mint is that at first you spend a lot of time re-categorizing expenses that were they haven’t categorized properly. Mint does get smarter if you stick with it. It ends up being something that requires almost no effort on your part. The best thing about Mint is that it’s free. So if you don’t like it, nothing has been lost.
Hopefully one, some or all of these things offered value to some of you. Thanks for reading.
Capitalism, A Love Story – Response
Posted by: Todd Metheny in Reviews on October 12th, 2009
I almost hate to post this, because I want to avoid making this blog political. Political issues are polarizing, and my site is about personal finance, investing and careers. It’s not about how you should think or vote. Economics, unfortunately, leaks over considerably into the political realm (though it’s ignored by politicians more than it should be). Anyway, I saw the movie and here are some of my thoughts. Take it for what it’s worth.
I saw Michael Moore’s new “documentary” this weekend. I put documentary in quotation marks because it’s not what I think of when I think documentary. It’s not even handed. It doesn’t purport to be or attempt to be. It’s the equivalent of an op-ed piece from a man whose views most people are already pretty familiar with.
I personally disagreed with most of the movie. After watching the film, I wasn’t convinced that Moore has even a basic understanding of economics. I think this is frustrating. Anyone considering making a movie about capitalism should, in my opinion, become well versed in Friedman, Keynes, Smith and Ricardo. Todd Buchholz’s book, New Ideas from Dead Economists would have been an excellent place to start.
I think documentary film making is a pretty interesting form of education. The opportunity to interview experts in the subject matter, on camera, gives the viewer a unique insight into the subject matter, pulled together by the film maker. Unfortunately, very few experts were utilized to make the movie.
To prove capitalism was evil, he asked 2 priests and a bishop. They told us that capitalism was, in fact, evil, and that Jesus would reject capitalism. To further prove that it was evil, he showed factory workers that had lost their jobs. He showed people that had been evicted from their homes. He showed a wide variety of pain and suffering. And it was sad. It really was. Moore just chose the wrong enemy.
It’s not the first time he’s chosen the wrong enemy. I agree with Moore that healthcare is possibly the biggest problem in this country. I agree with him about several things, I suppose. I actually enjoyed Bowling for Columbine, but I think he chose the wrong enemy there, too. He went to Target and asked for a refund on the bullets used in the shooting. He framed Target as being partially at fault for the shooting. It was another demonstration of how he feels about capitalism. There’s only one reason that Target sells bullets in its stores – people want to buy them. (See another basic tenet: supply and demand).
Moore went so far as to argue the merits of socialism. I have no doubt in my mind that Michael Moore honestly believes that this would be better. Once again, he fails to show even a rudimentary understanding of economic systems. He’s a passionate guy. He’s a bold filmmaker. I’m not convinced he’s a very educated guy.
In one portion of the film, he shows a factory. In the factory, he explains, every worker is an owner of the company. Not because of stock options – each worker owns an equal portion of the business. He seems to be making the same argument that Karl Marx did, long before him – that profits are made based on the exploitation of the worker. He fails to account for one of the most basic tenets of economics – taking on larger amounts of risk allows you the potential for a larger return (or loss). Business owners do this. Entrepreneurs do this. Michael Moore sees the situation as very black and white. Those that succeed under a capitalistic system, in Moore’s eyes, are evil. Those who do not excel are good. Unions are good. Others are bad. People who wear suits to work are bad people.
Moore also frames foreclosures as the fault of capitalism. Neither Moore or any of the people being foreclosed acknowledge that they didn’t pay their bills, or that they borrowed more than they could afford to repay. When people lost their jobs, Moore contends that the company owed them jobs. Clearly, that’s not how capitalism works.
Milton Friedman would say that economic freedom is a pre-requisite to political freedom. Moore doesn’t see it this way. He thinks that socialism is freedom. I disagree.
The movie wasn’t without it’s interesting parts. I enjoyed Moore’s conspiracy theories about Goldman Sachs and the roles in government of Goldman Sachs alumni. I think this was one of the best parts of the movie.
There were parts of the movie agreed with, as well. Not everything can be properly handled in the private sector. For one, we probably shouldn’t privatize juvenile incarceration. Doing so ignored another basic tenet of economics, people respond to incentives. Juvenile incarceration were sure to go up when someone stood to profit from it. This is the same tenet that Moore ignores when he argues the evils of capitalism and apologizes for socialism.
Overall, most of the people that see the movie will probably agree with it, because most of the people agree with Michael Moore. I don’t think anyone who studied economics will agree with it. Maybe I’m wrong. Moore has the courage to ask people tough questions. I admire that. I think I would have enjoyed the movie more if Moore had asked some questions of some people that didn’t agree with him. I think he’s become what Rush Limbaugh (or Glenn Beck) is to the right. For me, they’ve both become caricatures that I can’t take seriously. They’re two uneducated, extreme personalities that are good at gathering sheep to follow them. Whatever your politics are, think for yourself. If you end up seeing this movie, I’d love to hear what you think in the comments. If you both see this movie and studied economics, I’d really love to hear what you think. Thanks for reading.
The Tipping Point
Posted by: Todd Metheny in Reviews on September 22nd, 2009
I just finished reading The Tipping Point by Malcolm Gladwell. It’s a good book. I recommend it. It’s sort of in that genre of books that are both informative, entertaining and easy to read, sort of along the same lines as Steven Levitt’s Freakonomics.
The title presents us with the books stickiest idea – that small things can cause an epidemic. When enough little things add up, they build and build until at some point, they reach the “tipping point.” Gladwell does a phenomenal job of making his point with lots of interesting examples. His examples are the strength of his writing.
If you find time to read the book, you’ll learn about the culture behind Goretex, crime fighting theories, what made Hush Puppies and Airwalk so popular, why people smoke, whether Sesame Street and Blue’s Clues serve a purpose (and why they work). You’ll learn about suicide, Paul Revere’s midnight ride, and how to promote your restaurant. More than anything, The Tipping Point is about people. It’s about how people think. How they work together to accomplish their goals, and how different types of people create a synergy that makes some things tip instead of others.
After reading the book, I was convinced of Gladwell’s thesis – little things matter. People matter. He does a good job of making a compelling case. He builds his story around lots of vibrant and fascinating examples. That being said, I do have a few criticisms.
1. I didn’t read this book in a day. I didn’t even read it in a week. I don’t know exactly how long it took me to read this book, but I sort of read it over the course of time. In telling his story, Gladwell attempts to present the reader with very sticky concepts (and he does this well). One of his approaches was branding (naming) different things. For example, people are Connectors, Mavens, Salespeople, etc. He also names a slew of other things. There’s the Rule of a Few, The Power of Context, The Stickiness Factor, The Rule of 150, etc.
All those names were difficult for me to keep track of, and I have a pretty decent memory. Perhaps I’m splitting hairs with that complaint. I don’t have a suggestion as to how to make it better. He would throw the rules in much later, saying something like – remember, it all comes back to the Rule of a Few – and I would scratch my head and start flipping back to see what the Rule of a Few was. Maybe you’re smarter than I am, and this won’t be a problem;)
2. My main criticism is that I think Gladwell manipulated the data in some places in order to align them with his goals. There are several example of this in the book. One that stood out to me, in particular, is his use of the Broken Windows theory to explain why the crime rate fell in the 90s. The Broken Windows theory basically is the theory that keeping things in order leads to less crime. If I’m a criminal and I see that a neighborhood is very run down, I might assume that no one is in charge, and that it’s alright to commit crimes because no one cares about this particular neighborhood. The theory is compelling because we like it. It makes sense to us. We think about how clean places feel safer and often are safer. The problem is, by most in depth accounts on the subject, the theory has a minimal impact.
If you’ve read Freakonomics (or Levitt’s paper the chapter on crime was based on), you’re familiar with not only the Broken Windows Theory, but with a slew of other theories that he puts forth. Any or all of them likely contributed to the fall in crime. To me, Levitt puts forth more data and presents it in a more compelling and believable way. The Broken Windows theory, of course, goes straight to the theme Gladwell is attempting to perpetuate – that small things matter. I don’t think the presentation is wrong. He tells you what the theory is, what they did, and then how much the crime rate dropped. His book isn’t about crime. I think it’s wrong not to at least mention the other theories. This isn’t the only place this happens in the book. I’m not going to spend a lot of time picking apart a book I enjoyed, though. I’m simply saying that you should be on guard. Be a filter.
The main idea remains excellent. It’s an interesting topic, isn’t it. How things spread by word of mouth and how it affects what we buy, wear, eat and do. Like Outliers and Freakonomics, reading this book will make you feel like you’re one of the people that gets it. (Interestingly enough, bloggers help things tip all the time nowadays – if this book weren’t already a bestseller, I’d be giving it a little help) Thanks for reading.
Lessons from the Service Industry
Posted by: Todd Metheny in Reviews on September 8th, 2009
My wife, Rachel, and I went out to dinner on Labor Day. We went to a little place in Clayton, Missouri, called Oceano’s during happy hour. We knew it was happy hour because we observed a sign telling us so on our way in. The sign let us know what happy hour entailed. Among the things discounted during the designated time period were appetizers (half price). The hostess sat us at a nice little booth, and a waiter came by to take our order. We asked about the happy hour, which was still in effect, and our waiter informed us that we couldn’t have half price appetizer’s where we were sitting. I asked why. The waiter informed us that happy hour specials were only for people sitting in the bar area. I asked where that area was, and the waiter pointed to a table that was about 15-20 feet away. I looked around at a mostly empty restaurant (5 of approximately 25 indoor tables were occupied).
I smiled and asked the waiter, “So, you mean to tell me that if we sit at this table, appetizer’s cost $12, but if we sit at that table, appetizers cost $6?”
“Yes, sir, that is correct.”
“But that’s ridiculous.”
“Yes, sir.” I asked the server to go ask his manager if he would make an exception and allow us to remain at our table, just a few tables from the magic section.
“I’ll see what I can do, sir.” He left and was gone for several minutes. He returned and informed me that the manager had said no. I couldn’t believe it, but I shrugged and asked to move to one of the tables at which appetizers were $6. We were moved. We enjoyed the appetizers;)
I don’t know about you, but if I were running that restaurant, I wouldn’t have made a patron move tables to get a deal in my empty restaurant. I don’t care enough to follow up on this, but I don’t think it would be hard to get in touch with the owner of this restaurant and inform him that his restaurant is being run this way.
I got my first restaurant job while I was in college, waiting tables at a local restaurant. It was the best run restaurant I ever worked in, though I didn’t appreciate that until working in several others while I was in college. The owner personally trained the wait staff back then (she doesn’t anymore), and on my first day she told me this:
“Whatever people ask for, you want to say yes if you can. Try to get them whatever they want. If they want to order something that isn’t on the menu, and we can do it, we’ll do it. If they want scramble eggs, and we have eggs, we’ll make scrambled eggs.”
Unsurprisingly, this restaurant has had a lot of success. They now own two restaurants, and business is still going strong as far as I can tell. I think about the above quote every time something utterly ridiculous happens at a restaurant.
What’s the competitive advantage in the restaurant business? Is it good food? Maybe. But it had better be so good that it blows your mind if that’s going to be your competitive advantage. I would say that there isn’t a competitive advantage in the restaurant industry. Restaurants, even good ones, are a dime a dozen. I’ll probably never go back to Oceano’s in Clayton. The food wasn’t bad. It wasn’t incredible, either. I really didn’t have a legitimate reason to go back. The bartender that served us was a very nice person. The fact of the matter is, I have so many options to try in life that I’ll never be able to try them all – and this particular restaurant gave me no reason to come back. Plus, irrational situations (playing musical tables) bother me. Thanks for reading.
The Millionaire Next Door
Posted by: Todd Metheny in Reviews on August 18th, 2009
Until recently, I had never read The Millionaire Next Door by Thomas J. Stanley and William D. Danko. Why? A couple or reasons. For one, I don’t think you need to read a slew of introductory personal finance books. One or two will do it. Once you have those basic core principles down pat, you don’t need to keep up with reading the introductory stuff. If you want to improve yourself from a personal finance perspective, you should read more advanced books in specific areas that interest you. I’ve read my share of introductory level personal finance books. The Millionaire Next Door may be the best one. Now that I’ve read it, I think it puts a unique spin on the same topic. It has a competitive advantage over others in that they compiled their own data (and its good data) then drew conclusions in ways that fit their methodology. So even if you’ve read all the big ones, I think this one is worth reading as well. The other reason might be that I usually shy away from anything with “Get Rich, It’s Easy!” or “Millionaire” in the title. I only read it when I did because my wife was kind enough to pick me up a $4 copy (1997 hardback version) as a gift from a used bookstore (thanks honey!).
I’m going to tell you from the outset, that The Millionaire Next Door is excellent, and I’m not going to “review” it. Instead, I’m just going to hit on some of the key points that the book makes. The book was written by two Professors, and is full of excellent research. The Profs combed through gobs of data and surveys in order to try to determine who the wealthy in America are. Their research ultimately culminated in this book, and that research gives us some of the most basic tenets of personal finance. If you read this site and/or others like it, you’re not going to find anything earth shattering in this book, but you’re going to find it in a logical, straight forward way that’s supported by data. Here are 10 things that struck me:
1. Predictably, the data shows that most people who you believe to be very rich are not. They might have high incomes, but high incomes often does not correlate with a high net worth. The people with the highest net worths, statistically, aren’t the people you know with a $5000 watch or a Porshe. Millionaires tend to be entrepreneurs who live frugally and save their money, rather than spending it on expensive consumer goods. Does that surprise you? Many high net worth individuals have never actually earned a high income – many of the millionaires in the book have never made $100,000 in a year.
2. High net worth individuals, statistically, tend to be people that live within their means. They don’t spend a lot of money. They don’t waste money. They tend to be pretty frugal people. Obviously, the higher percentage of your income you save and invest, the higher net worth you’re going to have.
3. The book divides people into two basic categories, (1) Under Accumulator’s of Wealth (UAW) and (2) Prodigious Accumulator’s of Wealth (PAW). Doctor’s, for instance, tend to be UAWs. Surprised? In the book, one case study revealed that a doctor that had been making $500k per year had a net worth of less than $2 million (not counting his residence). Doctors are a group that is singled out again and again. My wife is a doc, and I can say from experience that she knows infinitely more about money than her peers. Most of the people she went to med school with can’t tell you the difference between a Roth IRA and a 401(k). To be honest, none of them think they need to know. For the most part, they’re taking the approach of the doctors in the book – I’m going to make a lot of money so I don’t need to know anything about it or consciously save it.
4. A decent amount of time is spent on how and what kind of cars that PAWs buy. The authors point out that most of the riches people you know aren’t driving expensive luxury automobiles. That’s what the people who want everyone to think they’re rich drive. Statistically the people who drive luxury cars are PAWs.
On this note, I can’t tell you how many times people tell me someone is SO rich and that they bought this and this and this (it’s a lot). Every time this happens, I think to myself – I bet that person isn’t as rich as you think he or she is. Statistically, people with a lot of wealth live beneath their means. Based on the data in the book, most of the people that have high net worths don’t look like it. They’re more likely to be wearing a Timex than a Rolex. Remember that the next time you’re tempted by the allure of a brand. Financial independence tends to be more important to PAWs than status symbols.
5. This is the most unsurprising thing I can think of, but statistically PAWs spend more time planning their financial future than UAWs.
6. A part of the book I found very interesting was the part about “Economic Outpatient Care.” Their research shows that parents tend to help the children that are the worst at making and managing their money – the authors refer to this (brilliantly), as weakening the weak. In most of the cases examined, often the parents are encouraging the children to live a lifestyle above their means. If you help your son or daughter with a down payment – they’re probably buying a house they couldn’t afford. This makes them weaker. Not only that, by putting them in that neighborhood they couldn’t afford – they’re setting them up for an unsustainable lifestyle. They’ll want to send their children to expensive private schools they can’t afford, drive cars they can’t afford, etc. This causes the parents to give them even more gifts. Many of these children are doctors, lawyers, engineers and other well respected professions.
According to the authors, if you are going to pay for something for your children in adulthood, the most prudent thing to pay for is education. I had an uncle that helped me with my education. He didn’t pay for it all, but he helped a lot. He subscribed to the “teach a man to fish” philosophy. My wife’s father paid for her school. We were very lucky in that respect. We haven’t had to take money from anyone otherwise. Our families taught us to fish, and put us in a position to be PAWs.
7. Statistically, many more PAWs went to public schools and public universities than private schools and private universities (this one is my favorite).
8. PAWs tend to have children that are economically self-sufficient.
9. Here’s an interesting note. An incredibly high percentage of PAWs tend to be self-employed or entrepreneurs. Many of these business owners own less than glamorous businesses. Let’s say, for example, that a pair of parents made their money by owning and operating a dry cleaning company. They were frugal, saved their money, and now they’re worth almost $4 million. What do they encourage their children to do? They encourage them to be doctors, lawyers, and accountants. Entrepreneurs often have money, but are insecure about status – so they encourage their children to pursue high status jobs. I found this interesting. They don’t encourage their children to become entrepreneurs and follow the path that they themselves have followed. I didn’t comb through the data like the authors did, but in my experience, they’re spot on in this regard.
10. There’s an entire chapter about what they think the jobs in demand will be. The premise they start from is that there will be more wealth in the future, and they try to pinpoint services that they think will be in higher demand because of that. I’m not going to reprint the job list here (read the book if you’re interested). I disagree with some of their picks (and it’s my blog;)). Overall, excellent book. It’s my new recommendation for someone that’s never read a personal finance book before, because, well, I love that they use so much data and that they compiled a lot of it (or funded the compilation) themselves. Have you read the book? Thoughts? Good luck on your road to becoming a PAW and thanks for reading.
Lending Club Preview
Posted by: Todd Metheny in Reviews on July 5th, 2009
Editors Note: No Tuesday post this week. I’m hosting the Money Hacks Carnival on Wednesday, so I had to do some preliminary type stuff for that and ran out of time. My Thursday post is going to be on Master Limited Partnerships, so please stop by for that, and of course, come by to check out the posts in the carnival.
I’m calling this a preview because I haven’t actually made a loan through lending club yet. I’ve opened an account, read pretty much every page of information on their site, and now I’m waiting until a debit shows up in my account before I can start funding my account and making loans. I’m also counting this as Mondays post even though I’m going to publish it on Sunday night.
In case you haven’t heard of Lending Club, it’s an internet peer to peer lending company. You could use it to either invest in promissory notes, that is, the paper that says you have the right to receive payment on a particular loan. Or, you could use it as a borrower to fund a purchase of personal property or your expenses. My interest in Lending Club is as an investor, but I think it would be a reasonable resource for taking out a loan as a borrower, too, but only if it’s the lowest rate you can get for a particular purchase. For instance, I have a friend who recently made a purchase of several thousand dollars on a 0% interest rate credit card. If he doesn’t have that card paid off by the time the 0% is over, he can expect to pay 15-30% on that card (that’s one of the ways they get you). In that case, if he can borrow money from Lending Club (or any other Peer to Peer lending company – Lending Club just happens to be the one I’m familiar with) at 10% that might be a prudent course of action. He would want to check with his local bank or credit union as well, and go after the lowest rate available, of course.
As an investor, peer to peer lending allows you to act as a lender. Each loan requires you to invest a minimum of $25. So someone borrowing $1000 might have gotten the money from 40 different lenders. Lending club takes the money, charges the borrower a fee, and gives the bundle to the borrower. Lending Club services the loan, meaning that payments are made to them, and they make contact if there is a delinquent payment or default. This is good for all parties. The borrower doesn’t have to worry about making 40 small payments to all of his creditors, and you don’t have to try to hound the borrower for payment if he’s late.
What’s cool about this as an investor, besides the fact that it allows you to invest in a different medium, is that your returns tend to be significantly higher than if you were investing in fixed income investments like cds, treasury bills, or even most corporate notes. This makes sense, because there is increased risk. I think it makes sense to look at how severe that risk tends to be, and whether it offers enough upside to outweigh that risk.
The risk, put simply, is that the borrower won’t repay you on the loan. There are two types of debt, secured and unsecured. Secured debt is tied to a particular asset. That asset stands as collateral for your debt. For instance, if you buy a car on credit, they secure the loan with a provision in your agreement that says that if you fail to pay on the debt, the lender can take the car from you and sell it in an attempt to recoup what you owe. Unsecured debt isn’t tied to an asset. Of course, if you don’t pay, someone could sue you for what you owe and a judgment could be recorded against you. That judgment could be a lien against assets you own in the jurisdiction where the judgment was recorded.
I’m still getting the hang of the info on Lending Club, but looking through some of the notes you can see the reason the person wants the loan, a summarized view of their credit history, their credit score, etc. You act as the underwriter and decide whether a person is credit worthy. This creates a risk, because you aren’t an underwriter. Of course, the people with better credit can borrow money at lower rates than the people with lesser credit ratings and histories.
Lending Club puts borrowers into 7 categories: A, B, C, D, E, F and G, with A being the most credit worthy borrowers and G being the least. They also offer stats on default. These only go back to June of 2007. It’s a small sample size, but since that time, 0% of borrowers with an A rating have defaulted, 3.7% of B loans have defaulted, 4.2% of C loans have defaulted, 7.5% of D loans have defaulted, 9.6% of E loans have defaulted, and about 23% of F and G loans have defaulted.
I’m planning on only investing in A and B loans. Of course, you get paid for taking on a larger amount of risk if you’re willing to step into the riskier loans (the average G loan pays 19.47% vs an average of 8.4% for A or 11.58% for B). Let’s take a look at a hypothetical. Let’s say I want to invest $1,000 in loans, spread out over 40 loans ($25 each) for diversity. Let’s say my average return is 10%, for the sake of simplicity. Let’s say that exactly 5%, and only 5% default without making a single payment. Let’s also assume that rather than the 5% being spread out over multiple loans after some payments have been made, exactly 5% of the loans will default after making no payments. 5% of 40 loans would be 2 loans ($50) plus the interest that would have been earned that year ($5). That means you would have had $950 working for you at 10% for a $95 return. Your $1000 under these circumstances would have grown to $1045, or a 4.5% return. 4.5% is nothing to write home about, but it’s still pretty good, and we assumed a higher default rate than the historical average of C loans (4.2%), which tend to return, on average 13.16%. So we over estimated our default rate (hopefully) and under estimated our return based on that default rate, and still came out making 4.5%, which is much higher than the current 1.9% rate a CD will pay you.
Like I said, I’m planning on focusing mostly on a portfolio of A and B loans, and I’m going to spread my money out over as many loans as I can. Hopefully this will be a worthwhile investment. I’ll keep everyone updated on late payments and defaults and we’ll try to figure out our actual return at the end of the year. I’m probably going to fund my account this week with either 1 or 2 thousand to get started, then make the minimum loans in $25 increments. You can get $25 free to invest by joining using this link. I get a referral if you use it as well. Once you’ve joined, you’ll be able to refer people and give them the free $25, too. Assuming it works (I didn’t get referred), the site says you can immediately lend it without funding your account any further. So that’s pretty cool. If you decide to try it, let me know how it goes, what you’re returns are like, defaults are like, etc. Good luck and thanks for reading.
Review of The Dip by Seth Godin
Posted by: Todd Metheny in Careers, Reviews on June 17th, 2009
My wife and I have been going to bookstores about once a weekend and sitting and reading the books together. It’s a cheap date, and it’s fun. Sometimes we go to the library instead, or, if we already have control of something we want to read, we go to a coffee shop or a park and read there. A lot of the time, we end up putting the books aside at the coffee shop and just talk. I think it’s one of the times we really connect. We’re out, and not burdened by the business of being home, and in a lot of ways that allows us to just relax and talk about things. I really enjoy it.
Trips to the bookstore to read leads me to try to pick books that I can read in one or two sittings without buying the book. This is how I read The 5 Dysfunctions of a Team (read my review here). This is, in part, why I chose to read The Dip by Seth Godin. I love Godin’s blog, so picking up one of his books seemed to be a logical step.
The Dip is a very short book. I would estimate that I read it in about an hour. It’s concept is simple – quit the things that you can’t be exceptional at and pursue the things you think you can be exceptional at, even when the pursuit becomes tiresome and difficult. He refers to that time when things seem too hard as “the dip.” This is undeniably good marketing, as I’ve already started to think of that point where things start to get hard as the dip, and I tell myself to push through.
According to Godin, anytime you start something new, like a job or a business, you are filled with enthusiasm and energy to further your success. At some point, however, some of the duties of running your business or doing your job will become something of a grind. They’ll become difficult. You won’t feel inspired every second of every day. You won’t feel invigorated. You might feel like quitting. This is the dip. He offers marathons as an example. No one quits at mile 25, when you can see the finish line and hear everyone urging you on. Most people, in fact, quit at mile 20, when you’ve run a long way and feel like you physically can’t push through.
Of course, Godin says that sometimes you should quit. He says you should quit if you can’t be the best in the world at whatever it is you’re trying to do. Of course, both “best” and “world” are subjective terms in this context. If you’re looking to go to the best barber, you’re world is limited to someone in your town or immediate area. Best is limited to whatever criteria you assign it. Best might mean the quickest, or friendliest, or the person most highly recommended to you by friends and family. If you can’t see yourself being the best in your field, then you should quit immediately.
Godin gives us a couple more clever phrases to refer to where were at in what we’re trying to do: the cul-de-sac and the cliff. The cul-de-sac refers to where you’re at when you realize that you can’t be the best in the world in your field. It’s basically when you can’t go any higher – a dead end job. The cliff occurs when you can’t quit something until you fall off a cliff. Godin doesn’t really go into this with very much detail. The only example he gives are cigarettes. Cigarettes are addictive, he says, and the more you smoke, the more addicted you get. This addiction rises continually until eventually, you get sick from emphysema and die. That’s his example for the cliff. I personally don’t see how that example translates into many other situations – and Godin admits that it’s rare.
The key, then, is to be able to distinguish what situation you’re in. Are you in the dip, in which case you should keep working diligently, or are you in the cul-de-sac, in which case you should abandon your current plight and search for greener pastures. That’s the question. It’s something you’ll have to figure out on your own.
The book is light on hard data. It doesn’t prove anything, but it does offer lots of good examples. One is General Electric (GE). When Jack Welch took over GE, he demanded that they abandon any business division in which they couldn’t be one or two in, even if they were profitable divisions. Why? Because the value in being number one is enormous. Almost 30% of all the ice cream sold in the United States was vanilla. The runner up was chocolate, with less than 8%. To the victor go the spoils. Things tend to go this way. Number 1s tend to win big. Top movies on an opening weekend tend to gross far more than the second place ones.
So how can we deal with the dip? According to Godin, the key is to decide under what circumstances it makes sense to quit. Don’t decide during the dip, because that’s often exactly when you’ll want to quit the most but need to work the hardest. Overall, I think it was an excellent book. Unfortunately, I read it directly after reading Malcolm Gladwell, and I missed having so many assertions being backed up with data, but that doesn’t change the fact that I enjoyed the book. It’s definitely worth the minimal time investment (for many people 1 hour or less) that it would require to read it. If you’ve read it, or any of Godin’s other books, please let me know what you thought by email or in the comments. Thanks for reading.
Much Ado About Twitter
Posted by: Todd Metheny in Reviews on June 15th, 2009
When I was in my first year of law school, I was in an informal study group with several of the people in my class. One of the girls in my study group was the first person I knew on the then-new Facebook. She was sitting their checking the profiles of some people that she went to undergrad with. While we were waiting on the other people, she started telling me about how I should jump on the facebook bandwagon, how it was going to be really big – bigger than MySpace. At the time it was only for students. I remember thinking it was a tremendous waste of time. But I ended up signing up. I don’t check my account very frequently anymore – just occasionally, but I can’t discount it’s ability to keep people connected. I know more about what’s going on with my closest friends than I would without it. On the other hand, I also know a lot more about what’s going on with lots of people that I’m really not that close to.
The most recent thing to go viral, it seems, is twitter. I see multiple news stories a day about twitter. Hundreds of celebrities and journalists are on twitter. Because the buzz around twitter was overwhelming, I decided to sign up today. If you’d like to follow me on twitter, you can click here. Please do.
If you’re anything like me, the idea of twitter sounds pretty useless. They offer an opportunity for you to answer the question: What are you doing now? It’s essentially broad based instant messaging. In fact, you can do the exact same thing on facebook, which offers a box that says, what are you doing now? So what’s the difference? For one, lots of top journalists, authors and celebrities are on twitter. Lots of stories are scooped on twitter first. It’s an incredible news source for almost anything you’re interested in.
For instance, I’m a baseball fan. In particular, I’m a big fan of the St. Louis Cardinals. On twitter, I can follow a variety of different bloggers and journalist to essentially give me up to the minute news about the Cardinals. It’s ability to link to news that interests you in particular is one of the strengths of twitter. It’s something of a news feed – about the things and people you’ve stated you’re interested in by following them. You can follow ex-GE CEO Jack Welch, athletes like Shaquille O’Neal, movie stars, journalists, bloggers, and just about anything else you can think of.
The neat thing about twitter is that it’s an interactive conversation. It’s crowdsourcing at it’s finest. You can ask your followers questions and get hundreds of answers and rationales (assuming you have that many followers). It’s easy to see why so many people are so into something that’s seemingly useless. I drug my feet, and I’m late to the party, but after one day on twitter, I could see myself becoming one of them. Thanks for reading.
Outliers by Malcolm Gladwell – Review
Posted by: Todd Metheny in Reviews on June 10th, 2009
I just finished reading the most recent Malcolm Gladwell book, Outliers : The Story of Success. It’s his third book, and like the first two, The Tipping Point and Blink, this book became a #1 New York Times Bestseller. I haven’t read the other two books, but based on this book, it’s easy to see why.
This book actually reminds me in some ways of another book I loved, Freakonomics by Steven Levitt, in that Gladwell (like Levitt) combs through data in an attempt to challenge conventional wisdom. He’s chosen a different subject matter than Levitt, but it’s the same basic underlying premise, that we can learn more about how people work through social science. What Levitt calls economics, Gladwell calls sociology, but there are extreme intersections between any manner of social science, whether you’re calling it economics, psychology, sociology, anthropology or political science.
Like the title says, Outliers is a book about success. It’s about the circumstances that create success and successful people. Gladwell looked at groups of successful people and asked himself what makes them successful, such as, what do tech entrepreneurs and business giants like Bill Gates, Steve Jobs and Eric Schmidt all have in common (hint: their birthday, and it has nothing to do with astrology)?
In general, he challenges the idea that success is one big Horatio Alger-esque meritocracy. The smartest, strongest, hardest workers don’t necessarily have the most success. One example he brings up is Chris Langan, the highest IQ on record, at allegedly 195. Gladwell examines the data and poses a hypothesis about why Mr. Langan, for all his brilliance, hasn’t accomplished more that has impacted the world in a positive way. The reason posed by Gladwell isn’t one that will be popular, but as with any of his theories, he offers lots of data and poses it in a way that’s difficult to dispute.
Gladwell tackles why some geniuses become successful and others aren’t. He tackles why Jewish lawyers have been so successful in the United States, why Asian kids are better at Math than White kids from the United States (it’s directly correlated with wet rice farming), and why Korean pilots crash so many planes. Like Levitt, he makes assertions that might offend some people, but he backs them up with a tremendous amount of research, and explains it simply.
He ends the book with his take on the US school system, and how he believes it can be improved and made more equitable. He argues that it’s possible to create a meritocracy with the right incentives and opportunities. Clearly, he believes that it’s difficult to give everyone a chance at success, the book repeatedly demonstrates just how difficult that is. This is where he sort of deviates from Levitt (besides being more focused in his subject matter). While Levitt is discussing why the crime rate has fallen so dramatically and why crack dealers still live with their mothers, Gladwell is using his last couple chapters in order to argue for change – how he thinks the world can be better. I admire that.
I’m sure there are lots of things I could find to criticize in this book. Gladwell clearly has an agenda and you can use the data to make arguments other than the ones that he made. I don’t care to criticize it, though, because frankly, I enjoyed it too much to worry about criticizing it. It’s a great book. It’s entertaining, informative and above all, it forces you to think about issues in a way you probably haven’t framed them in your mind before. I hope you’ll check it out. Feel free to let me know what you think if you do. Thanks for reading.
