Greedy Goblin

Friday, August 28, 2015

The dumbest way to "get rich"

Again and again I see "financial advisors" telling the biggest nonsense ever: get a loan (typically mortgage your home) and put it into some investment to get passive income and then you'll get the investment income minus loan interest as pure income for nothing.

Anyone who does it is a drooling moron and deserves to lose his home.

It's trivially easy to disprove all these financial perpetuum mobiles: giving you loan is someone's investment. Someone, typically an investor or large bank had money and figured that the best way to use his money is to give you loan. He had the option to buy the house you'd buy for rent or buy Chinese stocks that never stop growing or investment gold (steady growing between 8500$/kg in 2001 to 54000$/kg in 2012, but fell to 36000$/kg by now) or state bonds of Ukraine (on September 1 there will really-really be cease fire) or even that wonderful penny stock that increased 200% in the last 3 months. Yet he chooses to pass on these wonderful opportunities and loan it out to you for paltry interest rates. Or he gave it to Germany for negative interest rate. This means that either the billionaire investor (with hundreds of highly qualified analysts working for him) is an idiot, or you are. If you think it's him, I have a wonderful tip for you, for free: the 2 years maturity Greek state bonds pay 12.5%! Mortgage your home and buy some now!

Only the advisors who sell their stupid books and the brokers who get a cut from all the transactions get rich from these. For you, I have a much better idea that will make you more money than all the "get rich fast without skills or work" books: Never, ever invest money while you have outstanding loans! If you have money to invest, repay your own damn loan!


PS: a business tip in EVE: never invest into faction modules for your ratting boat, it likely won't live long enough to repay the added DPS. Especially if you are a minion of Evil. Same for pods. Also, don't fit Vindicators like they were Ishtars.

There is also a video up about the TNT capitals.

PS2: I started to write the 5000 words essay this nice reader requested, but got distracted by the titan that Goons managed to lose with a supercarrier on the undock of their own capital station to Out of Sight, Mordus Angels and Harry Forever (that part will never get old) who immortalized the event with a video. My favorite part: 202 people on local while the battle report has only 140 pilots. So another 60 Goonies were hiding in the station and refusing to undock something to save their "bro".

In the meantime Imperium fleets keep Pure Blind locked down

27 comments:

Anonymous said...

Aren't you usually supposed to do this with state funded mortgages, with like 3-4% interest rate? I don't see how you could earn more than the interest you pay for the loan anyway.

Anonymous said...

The other reason why people take mortgages is tax brakes.
also, not everyone can just put the cash down for a home. paying the interest + loan can come cheaper over a few yeares, compared to rent.

Marek Zaborowski said...

I am a great fan of Chinesse, You know why?

Average Polish person saves up 2% from his income. Thats right, 2%.

Now, how much does average Chinesse was saving? 48% (!!!). When running survey, why, they responded "For Child education, crisis situation and retirment.", which are basicly 3 great investment for a lone person. I mean, if kid get college degree he got bigger chances of achieving higher payment, having instant medical help and necessery sugery instead of waiting, could literally save our life and money for retirment is also important, since if we are doing physical labour we may not could do it in old age.

Its funny kind of sad really. Cause by today, there is over 300 million Chinnese people that earn on average 1600 EURO, while Polish average is 800... Then Chinnese suggest building new Silk road to Europe and Polish politics talking about "reviving industry" (instead of investing into RnD) and all I can imagine is us becoming manufacturers for Chinesse, lol.

But really, its basics of economy -> To invest money, You need to save money first. You can loan money and invest it into high-risk option, but You could as well go to the casino.

Gevlon said...

Getting a loan to get a home is different from mortgaging your home to get money for some crazy investment plan. In the first case you are willingly taking financial losses to enjoy a home earlier. In the second case you are just dumb.

Urziel99 said...

"
Anonymous Anonymous said...

The other reason why people take mortgages is tax brakes.
also, not everyone can just put the cash down for a home. paying the interest + loan can come cheaper over a few yeares, compared to rent."

If you take a mortgage for the "tax break", you suck at math. In the US the home mortgage interest deduction allows you to deduct from taxable income mortgage interest paid to a bank that year. It isn't a 100% deduction though (IE. I pay $10,000 in interest, I get to take $10k off my income) It's deducted at your tax rate. So you'd only deduct $2.5k if you were in the 25% tax bracket. So in essence you are paying a bank $10k to save from paying the IRS $2.5k.

Not very bright.

Anonymous said...

Overly simplistic view of the world. There are very good incentives to purchase investment properties, using the equity in your own bricks and mortar to secure such a loan.. many governments offer massive tax incentives so that those who have money (or the ability to put their hands on the money) can purchase or build housing which is ultimately rented to lower income families.

And if the arrangement is positively geared (that is the income you enjoy from the investment property entirely pays the loan and provides you a profit) you are by any measure better off for the exercise.

What should be avoided is dangerous and risky leveraging of assets. That is to say if the total value of your debt is very close to or exceeds the value of the investment, if something goes tits up and you have to sell you wont have enough to cover the loss. That's a bad situation to be in. That's an irresponsible situation to be in (and it doesn't matter if you have a mortgage or 100 investment properties, if your loan/value ratio is too high you are making an idiotic decision).

However, if you have plenty of equity, and the value of your investments comfortably exceeds the debt against those investments then you can hardly be considered foolish for leveraging your bricks and mortar to grow your portfolio.

Anonymous said...

"Getting a loan to get a home is different from mortgaging your home to get money for some crazy investment plan. In the first case you are willingly taking financial losses to enjoy a home earlier. In the second case you are just dumb."
Not entirely true. Different investments are available to different people. Like in EVE, a rich guy might be happy to loan to people for 2% interest as they have so much capital they want easy, safe investments. The borrower however can make significantly more than 2% by borrowing the cash and reinvesting.

In the real world, many people who fully own a home can remortgage, buy a 2nd home and rent the second home out for considerably more than they are paying in interest. As long as they are insured, their risk of loss is minimal. Also, think about someone who borrows money from a bank to start a shop. Most individually owned shops start out on borrowed capital.

You're right about one thing though, the online get rich schemes are simply people telling you to invest for their gain, not yours.

Gerd L. Plüü said...

I agree with "Anyone who does it is a drooling moron". I do not agree with "Anyone who does it deserves to lose his home."

It does give a good insight on the type of person you are.

Anonymous said...

about that Titan - actually this was more of an OOS op than MOA.

here's a vid from OOS side: https://www.youtube.com/watch?v=DhUXAZeKTxw

Anonymous said...

No comment on the CFC invasion of Provi and how well that seems to be working out for them??
No iskies for the Provi coffers either?

Gevlon said...

@Anon: there is no reason for a poor acting more risky than a rich. Actually there is a reason for the opposite, as a loss for them is bigger part of their assets. The rich writes off 500K loss, a poor goes homeless, that's why it's advised to them to insure their property, despite insurance is a sure loss on average.

@Urziel: tax deductions are still beneficial and could be a legit reason why the same investment is good for one person and not for the other. I mean if the alternative investment pays 1K more, a bank should take that, but an individual should pick the home that gives him 2.5K in tax. The problem isn't there, it's in risk.

@Next anon: the problem is that for common people (who are targets of these books and internet advices) investable money is in short supply, so practically all their money comes from loans. Therefore they must not invest in anything, even if the same investment is a good call for someone with money.

@Gerd: if we agree that they are morons, we agree that loss will happen. It seems you disagree with them bearing this loss. Would you tell me who should bear it? Should YOUR taxes be increased to bail out people who wanted to get rich without working?

@Next Anon: I never claimed otherwise, the dreads that killed the titan were OOS. MoA just brought support fleet.

@Last Anon: Provi is a punching bag for literally everyone. Imperium beating them up is actually a sign of weakness: they can't really beat anyone else anymore, it's no different than ganking in highsec. Oh wait, they failed in Amarr. Why should I help Provi? To allow them to feed more kills to Goons? The faster they die off, the sooner Goons "win", just to see they gained nothing and go home empty handed.

Esteban said...

There's a Buffett quote that, of course, all the penny stock and risk-peddlers love to use in their spiel, about the structural advantage of low capital. There is some truth to it, though: a big bank manages risk in a more complex way than a dude with $50,000 from a refinanced mortgage. Sometimes, it does make sense for that indebted dude to engage in higher-risk activities and profit accordingly.

You can't deny that buy-to-let landlords have made a killing in European cities for many years now - the ones who have kept up with their homework on yields and rules, anyway.

Urziel99 said...

" I mean if the alternative investment pays 1K more, a bank should take that, but an individual should pick the home that gives him 2.5K in tax. The problem isn't there, it's in risk."

Oh I agree that people make bad financial decisions and don't measure the risks. But they can burn themselves even more by falling for traps like the one I mentioned instead of focusing on getting rid of debt. Debt = risk.

Anonymous said...

"there is no reason for a poor acting more risky than a rich."
It's not all about risk. The richer person may simply not be able to micromanage his investments enough to turn as big a percentage profit on them. Someone with a lot more money can got with low return investments because they are investing a lot of capital. A poorer person can then reinvest that money in a higher return investment to earn himself profit. It's how the vast majority of businesses are started, and it's how people that are poor have a legitimate chance of raising themselves from poverty. The morons are the ones who could do better for themselves but stay in a low paying, high effort job for their whole lives because they don't want to take risks.

Gevlon said...

@Anon: it's obvious that little people have comparative advantage in micromanaging things and they can use it by starting a small business. However when you buy investment gold or more homes to rent or Greek bonds or Chinese Stocks or whatnot, you aren't micromanaging anything.

Anonymous said...

Of course not, but that's why I've made that distinction. Yes, if you just mindlessly invest in some internet scheme, you're a moron, but borrowing to invest itself isn't inherently bad. You seem to be making no distinction, like any option besides paying back debt is automatically stupid.

posix compliant said...

Interest on loans is a negative return with 0% risk. No matter what happens, that negative return is guaranteed. In the world of positive returns, anything better than inflation generally has risk associated with it.

If anyone with a few thousand dollars wants to invest right now, their best bet is stock indexes. It avoids paying someone to guess badly which stocks will go up, and exposes you to a generally positive growth (assuming you buy it and hold it until you retire).

The way you invest in an index is you purchase shares of an ETF that tracks the value of the index you're interested in. There's one for the NYSE, for example: https://www.google.ca/finance?cid=700235. The way you purchase things like that is you open

Anonymous said...

My stock portfolio averages 7-8% growth over the long term. My home mortgage is 4%. My car loan is 3%. It would be silly of me to invest in paying off my mortgage and loan early verses continuing to invest in my stock portfolio. So I disagree with the concept of not investing while you have outstanding loans.

That said, I would not take out a new mortgage just to invest, even though it appears to be the better investment. One must find a balance between outstanding debt, income, and investing.

Gevlon said...

Any option besides paying back debt is automatically stupid for someone: you or the guy who gave you the loan. There IS a possibility that it's him being stupid. But I wouldn't bet my home on it, like you.

Anonymous said...

"Any option besides paying back debt is automatically stupid for someone: you or the guy who gave you the loan. There IS a possibility that it's him being stupid. But I wouldn't bet my home on it, like you."
Except it's not. He's being smart by investing his cash in low interest stable investments for large amounts of capital. You are being smart by investing in the higher paying investment which require more individual care.

Take for example the following:
Person X owns 90% of his very nice house which he has insured. Person X goes to a bank and remortgages his house, buying a 2nd smaller property outright. He's now paying low interest on his loan against his nice house. He insures and rents out the second property to person Y. The rental amount covers the insurance + monthly repayments of mortgage + interest and leaves profit.

In that situation, neither the bank nor person X are stupid, they are both making money from their investment. The only person not making cash from it is person Y, however he too is not stupid as he simply can't get a mortgage so he has to rent. Since renting a house is better than being homeless, he's also made a good choice.

Sure, the bank could buy all the houses and rent them out themselves, but then they have to deal with all of the aspects of that and would simply be turning into an estate agents, which they are not, they are a bank. Saying that there's always a moron in these situations is ignorant.

VOLT pilot said...

And your assumption around Provi 'feeding' kills to Goons is based on what data exactly??

From my experience in fleet last night they were feeding us kills not the other way around.

Also I would think you would recognise the strategic value of splitting a force i.e. whilst their more active PVP base is attacking Provi they aren't back home defending their space from MOA and co.

Marek Zaborowski said...

Obviously, there is 2 variation of what Gevlon said:
1) Someone run the numbers, figured out that he can make money and after carefull calculating he decided to take a risk and invest his money from a mortage loan. He may succed, yes, but if something goes really, really, bad, who is to blame other than him? Obviously, if he was aware of the risk, he cant just bail out from it after it happens.
2) Someone trusted kind banker or investor, that this deal is GREAT. Ofc. it wasnt great in any rational and objective way, but oh boy, what was promised was totally worth losening a house.


To be honest I think, that there is very easy way to fix that kind of issues (cause someone may want to put guilt on evil bankers, that exploits people lack of common sense). Made mandatory, state math/economy testes for people that wants to loan large sums of money (larger than their income or assests). That way, the whole demagogy of "its the banker fault, cause the loan-taker didnt know how percentages works!" would be in vain. Cause the person that taken risk knew the risk in mathematical sense or was to lazy to understand it, besides capacity to do so. In both way, they basicly putted themselves in that situation.

Also, I am aware that few pure capitalists would go full "let him become homeless and rot in hell for his failed bussiness atempt" but no. That is not my standpoint. Simply, educated (hey, he can read/use computer/sign a contract/etc.), adult human is valuable assests. In ancient times, he would simply become slave. In more civilized societes, a slave until he repaid his debts (Rome). In modern societies, giving him new loan in form of paying up his debts (he basicly lose all his assets anyway) and then sending him to social house with BASIC commodities, will repaid in futher taxes and his consumption. Much like SRP works for newbies. Even if they are morons that losed blinged ship to some trolltrons and now are broke, giving him free Maulus or Vexor and taking him to strat-op so he can be F1-monkey is from alliance level a great investment.

Gevlon said...

@Anon: there are already real estate agencies. They could do rental business more profitable than random Joe. The reason why they don't is that it's not as profitable as random Joe believes when he gets a large loan.

However the main point is what Marek said: while it's theoretically possible that you are a market genius who just made his first killing from that loan, 99% of the guys are not geniuses at all and will pick a stupid investment losing their homes. So my advice "don't ever do it" is right in the same sense as "don't ever do jump off a building". Sure there is a tiny basejumping community who know what they are doing, but then he don't need my advice anyway.

@VOLT pilot: you are damn right, I just made an assumption from the fact that structures fall left and right. It is indeed possible that CFC lost more than Provi. I will make a proper analysis.

Jim L said...

Where do you get the idea that 99% of the people will just lose their homes?

Reality does not support your premise. In reality, people borrow against their houses to make investments and profit from doing so much of the time.

Gevlon said...

I didn't say that 99% lose their homes, I said 99% are idiots. Lehman Brothers was profitable for 150 years. If you blindly invested in them for 1 year, you made profit 99.4% of the time. And lost everything in 0.6%.

I'm saying that 99% of the little investors have no idea what they are doing and just follow the lemming train. Most of the times the lemming train just gets somewhere around the market average, so the idiot gets money. But sometimes they jump off the cliff. If you invested from your savings, that's not a big problem, you might even profited on the long run. If you invested from mortgage, you are now homeless.

Jim L said...

Actually you did say that 99% would lose their homes in your comment 19:58.

Sure I will accept your made up number that 99% of little investors do not know what they are doing, but most little investors do not borrow against their house to invest. Those that do are generally knowledgeable investors or are entrepreneurs who start a business.

Marek Zaborowski said...

For me its all goes to first line of the Gevlon post here:
"Again and again I see "financial advisors" telling the biggest nonsense ever: get a loan (typically mortgage your home) and put it into some investment to get passive income and then you'll get the investment income minus loan interest as pure income for nothing."

And for me, this is true simply because described situation breaks few economical laws, that I tend to -believe in-. (So yes, there are rare expections, but no, people that do them wouldnt follow my theory anyway. They are lv 3 or even lv 4, so they are found of breaking said rules anyway)

1. To get rich You need reinvest Your INCOME. To simply put it, if You want to become richer You lower Your current consumption, so each month You get extra cash and then after many months of savings You got enough money to start a small business, invest it on trading, etc.

2. If someone offers You a loan, that would be 100% of Your capital, why did they not invest said money themselves? They obviously have capacity to buy certain stocks or houses or -gold/copper etc.- that they offer to You. Its simply easier than finding a moron that is willing to take such a loan.

3. Passive income is another lie, that morons/socials believes often in. In EVE is in the mythos of Planetary Interaction as being passive, when irl You need to tend planets, haul stuff, monitor PI market etc. I think lots of people would hestitate from taking an "investment loan" if only they were advertised as more intelectual, demanding work (Sure, You dont have to shuffle the shovel all day, but in the same time You need mental focus and capacity to do rational decisions.)

4. If You want to invest into something based upon a loan as a lone, middle-class person there is one word FRANCHISE. Seriously, with well placed McDonald You gonna make more money that any stock out there. Why does people are not aware of that? Because it demands hard work (Franchise-giver demands from You following strict rules) and dedication. But from rational standpoint it is simply much better. Save some capital (For small-franchises it can be as small as 2,5k Euro) then make a deal with a Franchise-giver. He will give You a loan and needed equipment, workers etc. for a share in Your income. Its far better investment for people, simply because:
a) Its their field of expertise. Few average people from Europe are interested in stocks, estate trade or global economy. Yet, every average Joe knows, why hiring college-grad to flipping burgers and selling them is money-positive.
b) Risks are divided. Franchise-giver is also willing to take a risk and wish for You to succed. After all, he would earn more money if You achieve success. Thus he is aware, that some of his investments into franchise-taker gonna fail, but he will back-up that with those franchise-taker that would turn into profit. Pure statistic.


So... Yeah. Anyone saying "loan to invest" rather than "loan to support Your current investment" is to simply put... a scammer in my book. Does there would be expections? Of course! Mostly because of stupid laws, but then again, people that are abusing them are not -stupid- and are totally aware why they are breaking rules and laws I stated above.

Good example is old bank-scam. You create new company, loan money from a Bank to start, then You fraud it and after year or two, You declare bankrupcy. In charge of Your investment You put some slacker, who agreed to be -slaughter sheep-. Basicly he is going to jail for few years at max and after he goes out of it, he gets share in Your income. So he was sitting in prision for taxers money for nicly double the average annual income. And there is more... But it always close ups to one side want to scam another, is basicly a more complicated double ISK game.