Archives for April 2008

Help A 6th Grade Teacher With Financial Education?

Posted on April 17, 2008 // 49 Comments

I received this intriguing e-mail yesterday from reader Ryan:

I am a 6th grade teacher who wants to do a month long lesson on financial education. I was wondering if you have any thoughts and/or ideas as to what you think should be stressed at such a young age? I have broken my lesson down into income, savings, and investing. I hear a lot of people say it is important to teach financial education but I find hardly anyone doing anything about it. Do you have any tips or could you ask your readers to send in their thoughts? Anything would be appreciated.

It’s very true. I am one of those people that think it’s crazy that our kids have to leave school knowing the date the Pilgrims landed but not understanding compound interest. But at the same time, how do you cleverly teach a six-grader something lasting about money?

Your thoughts? I have an elaborate idea for a money game that is either stupid or brilliant (I’ll share tomorrow), but I’d like to hear what you have to say first. Help him out!

Filed Under: Giving Back //

ThankYou Points: Double Your Redemption Rate With The Fixed Flight Option

Posted on April 17, 2008 // 30 Comments

If you have a Citibank credit card and are collecting ThankYou points, you are probably familiar with the various gift cards available at approximately a 1 point to 1 cent ratio, or 10,000 points = $100 gift card. You may even be familiar with the Fixed Point redemption option for travel. This not-so-publicized option allows you to redeem 20,000 ThankYou points for any domestic coach flight up to $400 in value (per Expedia.com). That’s nearly twice the value, with no blackout dates, no seat availability issues, no 14-day advance booking requirement. You do have to pay the taxes and fees, however, which can be up to $50 if there are multiple stops. (For details see the FAQ, click on Travel Rewards.)

It’s actually quite nice, and I have booked a ticket before this way before. The problem is, they have been gradually restricting which credit cards are eligible to redeem this options. The list went from virtually all Citi cards to only a select few.

This only left me with either gift cards or the variable point flight option, which is not horrible but much worse in comparison. Essentially one point = 1 cent, so 20,000 ThankYou points would only cover a $200 ticket on Expedia.com. Double-checking, I see that one way to qualify for the fixed point redemption is to have or open up a bank account at Citibank, specifically the “Citibank Account” which has a minimum balance of $6,000 across your accounts.

However, there is another easier way. I missed the Expedia Account part! What did that mean? Surely this was some sort of special account, and not just that simple free account that tracks my itineraries at Expedia? Well, it was. But merging your Expedia account to your existing ThankYou account was very tricky, until I stumbled across this post at the FlyerTalk forums. Here is my simplified version, which worked great for me:

1. Create a new Expedia account. Unless you really use your Expedia account, this makes it easy. When you are signing up, do not enter your existing ThankYou account number. Have them generate a new one, and write it down.

2. Now log into your ThankYou Network account that you wish to redeem points from. From the menu bars at the top, click on My Account » My Sponsor Accounts » Add a Sponsor Account. Type in your new ThankYou account number from above, and confirm. You should now have merged the two accounts together, with this result:

altext

Voila… now you have an Expedia Account as a sponsor account, and the fixed point redemption option is available to you. I just hope this window stays open long enough for me to use it again.

(Update: This option is set to go away at the end of February.)

Filed Under: Credit Cards, Deals & Offers //

Series I Savings Bonds: Inflation Numbers Released, Time To Buy?

Posted on April 16, 2008 // 29 Comments

Well, the CPI-U that I recently questioned went up 0.9% in March alone. I guess you can’t hide everything. 😉 So, is it time to buy some Series I bonds? First, refer back to this earlier post for a primer as well as some background information. You can ignore the predictions since we have the actual data now.

Calculating the Rates For Next 12 Months
If you buy by the end of April, the fixed rate portion of I-Bonds will be 1.2%. You will be guaranteed an variable interest rate of 3.08% for the next 6 months, for a total interest rate of 4.28%.

After that, the rate will adjust every 6 months based on the previous 6 month’s worth of inflation data. The next adjustment will be in May, based on September-March 2008 data. We can effectively predict this now using the prediction method explained here:

Sept 2007 CPI-U was 208.490. March 2008 CPI-U was 213.528. 213.528/208.490 = 1.02416, or a semi-annual increase of 2.416%.

Total rate = Unknown fixed rate + 2 x Semiannual inflation rate + (Semiannual inflation rate X Fixed rate)

If we assume a fixed rate of the current 1.2%, we get
Total rate = 0.012 + (2 x .02416) + (.012 x .02416)
Total rate = 1.2% + 4.86%
Total rate = 6.06%

Possibly Good Short-Term Investment?
A known “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month as if you bought it in the beginning of the month. Let’s say we buy at the end of April, hold for the minimum of one year, and pay the 3-month interest penalty for redeeming within 5 years. You’ll be able to sell on April 1, 2009 for an actual holding period of 11 months.

We will get 4.38% for 6 months, and ~6.06% for 3 months taking in account the penalty. Over 11 months, that’s equivalent to an annual rate of ~4.04%. Now, if you live in a state with 9% state income tax, your equivalent yield gets bumped up to ~4.44% depending on if you fully itemize your state income taxes.

This is a pretty competitive yield for an 11-month term on guaranteed cash, as long as you are okay with the lack of liquidity. In addition, you can always decide to hold it longer than 11 months if inflation continues to climb and the Fed is unwilling to raise interest rates due to economic recession. This could make your Series I bonds yield significantly more than similar bank CDs. If you hold for 5 years, then you don’t have to pay the 3-month interest penalty either.

Update: Also, if you hold it for 15 months (14 with buying early), you would get 4.28% for 6 months, 6.06% for 6 months, and then 0% (penalty) for 2 months. This would average out to about ~4.43% APY over that slightly longer period.

Very little downside with a good potential upside… just how I like it! I’m definitely buying some, I just have to figure out how much cash I am willing to lock up for 11 months.

The Catch
First of all, I just tried and unfortunately the TreasuryDirect website no longer allows purchases over $5,000. The official (and now enforced) purchase limit is $5,000 of paper I-bonds and $5,000 of online I-bonds per Social Security Number, per year. For a couple, that’s $20,000 total per year.

Second, you need to be quick and buy before the end of April to lock in these rates. I have a feeling in May the fixed rate will drop significantly. So if you haven’t already, open your account at TreasuryDirect soon. Their security has increased, I couldn’t even link up a new bank account online without mailing in paperwork. For paper bonds you should be able to buy these at any bank (not sure about credit unions).

Filed Under: Banking, Savings Bonds //

Considerations in Do-It-Yourself Hardwood Flooring

Posted on April 16, 2008 // 33 Comments

I am now the proud owner of over $7,000 in hardwood flooring. It cost as much as my car! We charged it to our Citi Cash Returns card in order to grab the extra cashback at the time, which saved us another $350 on top of the $400 we got back last month for paying our taxes owed with it.

Types of Flooring Available
If you’ve ever thought about installing your own flooring, here is a quick review of our thought process. There are three major choices these days:

  1. Laminate Flooring. Also called “Pergo”, after a popular manufacturer. This is essentially a picture of what hardwood looks like, glued on top of wood chip composite. Think Ikea furniture. It the cheapest type, you can easily install it yourself, but it can’t be refinished.
  2. Traditional Hardwood Flooring. This is a entire piece of solid hardwood. More expensive, hard to install yourself, can be refinished multiple times, will probably outlive you.
  3. Engineering Hardwood Flooring. This is 1/16″ to 3/16″ of real hardwood glued on top of a plywood base (see picture). It costs about as much as traditional hardwood (or even more if comparing to unfinished hardwood), but you can install it yourself which can result in a net savings. With a quality floor, you can still refinish 1-2 times if desired.

Our Decision
Unless you’re really experienced and have lots of time, most DIY people either choose laminate flooring or engineered hardwoods. We first looked at laminate, aka “Pergo”. Laminate flooring is really affordable, starting at about $1.50 per square foot (sf). It can also be more scratch-resistant. However, if a scratch or a moisture bubble does occur, you can’t really do much about it. I think laminate is a perfectly fine flooring choice, but we personally did not like the look of it. I’ve been to nearly 100 open houses, and I can spot laminate flooring instantly; it simply does not look like real hardwood.

I’m probably biased though, because our last two houses both had some beat-up hardwood floors that were over 50 years old, and we loved the the look. Scratches, dents, and age simply added character to us. With a good engineered hardwood, you can get a wear layer that is nearly as thick as solid hardwood, and can also last indefinitely. In the long run, we felt that paying more for the look and durability of real hardwood was worth it to us. After installation, you can’t tell the difference between solid hardwood floors. A high quality engineering hardwood can cost $5/sf or more, but they start at around $3/sf.

altext

Resale value wasn’t really a huge concern for us, but is something to consider. I’m sure real hardwood flooring adds more value to a house, but I don’t know if all of the cost differential between hardwood vs. laminate is recovered.

Installation
The easiest type of installation for a weekend warrior is the floating floor setup. First, you need a flat subfloor. This could be an old floor like vinyl, ceramic, or even an old hardwood floor. Second, you place a thin foam underlayment on that subfloor, which smooths out minor imperfections and also serves as a noise and moisture barrier. Third, you either click or glue together the hardwood pieces so that you have one huge piece of flooring that “floats” on top. Nothing is nailed or glued directly to the house.

Easier said than done, of course, but that’s the basic idea. Here are some tips by a professional installer, as well as some pictures from a DIY amateur. Wish me luck!

Filed Under: Frugal Living, Real Estate //

Does The Government Underestimate Inflation Through The Consumer Price Index (CPI)?

Posted on April 15, 2008 // 30 Comments

Many people, including myself, are worried about inflation. Is it just because of the current housing and stock market conditions, or are our bills really a lot higher than before? The inflation numbers that we usually hear about are based on the Consumer Price Index (CPI). Variations of the CPI are published monthly by the government’s Bureau of Labor Statistics, and they supposedly track the prices consumer pay for a basket of goods and services. For example, a greatly simplified basket may include a month’s rent, 10 pounds of steak, a tank of gas, and a laptop. As the price of this basket goes up, that’s inflation.

Why Does CPI Matter?

  1. Payouts on inflation-protected investments like TIPS and Series I bonds are indexed directly to the CPI.
  2. Social security payments, pensions, and inflation-indexed annuities all rely on CPI data to determine their annual adjustments.
  3. The size of individual income tax brackets, personal exemptions, and the standard deduction are tied to movements in the CPI.
  4. Low inflation numbers (especially when they are much less than GDP growth) make the economy seem healthy.

However, there is some controversy over whether the CPI is an accurate measure of inflation. As you can see above, there are many reasons why the government and large pension groups would like to see a lower inflation number. Lower inflation numbers mean lower payouts, a smaller budget deficit, and a happy stock market.

In 1995, the Boskin Commission study suggested that the CPI overestimated inflation by around 1.1% every year, and in 1996 changes were made to counteract these alleged errors. But critics say these changes were completely unnecessary, and now the CPI underestimates inflation by around 1.1% per year. Here are some of the arguments:

Substitution Adjustments
It was suggested that if steak becomes too expensive and people buy hamburger instead, then the CPI should just start using hamburger prices instead. After all, that is what people are buying right? Not only does this reduce inflation, critics wonder where this is headed. Hamburger gets too expensive, so then we eat hot dogs. Hot dogs turn into… dog food?

In addition, let’s say we go from using steak to hamburger due to price, and then back to steak again once it gets cheaper. Roundtrip, this substitution system would say that there was zero or even negative inflation during this time. But obviously prices actually rose. Just doesn’t sound right.

Quality, or Hedonic, Adjustments
A second major factor is that the CPI tries to adjust for increases in quality as well as increases in price. If a car costs 10% more, but it is 10% higher in quality, then there was no inflation. Okay, I can see this in certain examples. But critics point out that many times the consumer has no choice but to pay the higher price, so why aren’t we taking this into account?!

Example: If the government mandates an additive to your gasoline that costs an extra 20 cents per gallon, there is no affect on the CPI because this 20 cents was an improvement in “quality”. But we still get stuck with higher bills!

I wonder… if we follow all these quality adjustment ideas, isn’t shifting from steak to hamburger losing quality and shouldn’t that be adjusted for as well?

What If We Remove These Adjustments?
Here are two estimates of what the CPI number would look like without these adjustments. From Shadows Stats2 (Clinton era means 1996, when the changes were made):

altext

From Bill Gross and PIMCO3:

altext

Personally, I think the government has a vested interest in getting the inflation numbers at least somewhat correct (considering the scrutiny they are under), but at the same time they want to err on the low side rather than the high side. Some of the methods they use definitely seem to support this goal, and I wouldn’t be shocked if the CPI-based inflation numbers lagged what consumers actually experience by up to 1% per year at times. This may be something to consider when buying anything indexed to the CPI.

Sources and More Information

  1. The great inflation cover-up by Elizabeht Speirs, for Fortune Magazine.
  2. Consumer Price Index by ShadowStats / John Williams – Slightly more aggressive and controversial.
  3. Haute Con Job by Bill Gross – He runs PIMCO and the largest bond mutual fund in the world, so not quite a kook. Also see Con Job Redux.
  4. US CPI Inflation Statistics Manipulation and Deception? by Ronald Cooke.
Filed Under: Investing, Taxes //

SmartyPig Review: With Less Fees, Are Piggy Banks Back?

Posted on April 14, 2008 // 24 Comments

When I first heard of SmartyPig, it sounded like a pretty cool idea. Give us back the piggy banks we had as kids, but make it virtual and public so that others can help directly with our goal. But a bunch of fees made it expensive and my enthusiasm disappeared. However, the folks at SmartyPig seem to have really listened to feedback, made some changes, and now I think it is deserving of another look. I opened an account to check things out. So, how is service different from a traditional bank?

Multiple Accounts For Specific Goals
With SmartyPig, you can create as many separate accounts as you want for different goals. Tuition for your kid, a Wii, engagement ring, whatever. Why not, they are all free. Yes, you could simply use one big savings account and a notepad for all of this, but if this convenience helps you visualize your goal better then what’s wrong with that? I use mental accounting like this all the time.

You Must Setup Automatic Contributions
No broken resolutions here. You must set up regular contributions of at least $25 per month from an external bank account. You also must add a $25 contribution to start, and your goal must be at least $250. Here is a screenshot of setting up a goal:

altext

Friends and family can help contribute to your goal. You have the option of making your goal public. Grandma can then send over some money for little Jane’s tuition via credit card, but will be charged a 2.9% processing fee. SmartyPig accountholders can send each other money for free using their bank accounts. (It used to be a $5 fee for each external contribution, but that was dropped.) Now the question is, will Ms. Manners think it’s polite to hint at some Smartypig cash gifts?

Upon goal achievement, you can redeem for gift cards with “up to” a 5% bonus. So if your goal was $500 for electronics, you might get up to a $525 gift card to Best Buy (see update below). You could also settle for a pre-loaded Mastercard for $500. However, these “boost” percentages are not revealed ahead of time. I even called customer service, and they still wouldn’t tell me as they said they can change in the future. I would prefer more transparency, but for now I’ll just assume I’ll be withdrawing cash. If there is appropriate gift card upon my goal completion, then it’ll be gravy.

Update: Reader Tom shares the current gift card boost percentages. Best Buy is actually only 0.75%… but 2% for Amazon.com doesn’t look bad.

Doesn’t it cost money to take out cash?
Up until recently, they did charge $25 to withdraw via a check, which was a big bummer. It basically promoted “spending” on consumer goods and eliminated potential goals like an emergency fund or tuition at many universities. But as of now the check-request fee is gone, and you will soon be able to simply withdraw your money directly back into your funding account for free. I’m glad to see this.

Summary
With the elimination of these fees, SmartyPig might finally rival my current piggy bank setup with Capital One 360. They are paying 0.75% APY right now. Unless your goal is huge, it probably won’t make much difference, but it’s something. Anyone want to contribute to my “Used Jeep Wrangler” fund? 🙂

Filed Under: Banking //

Links: Wisdom, Hope, Knowledge Edition

Posted on April 14, 2008 // 6 Comments

More posts from other bloggers that also hopefully made me wiser and smarter:

Millionaire Mommy Next Door reminds us that there is more than one right answer on how to get rich. Lots of wisdom here. While I’m reading all these financial books, I think many people who do get rich think their way is the best way, and the fact that they are rich somehow proves that. It doesn’t!

Mrs. Micah shares what busts her budget. I never though of my hopefulness as costly, but my forgetfulness is definitely up there.

JLP of AllFinancialMatters teams up with his wife to present the five things they want their kids to know about money. Highly sensible knowledge to impart!

SVB’s Digerati Life drops some tips on making 10 ordinary things last longer. It made me feel slightly better about trying not to waste the last of my shampoo by watering it down…

Ginger of GirlsJustWannaHaveFunds discusses mothers deciding whether or not to work after a baby. It’s funny how things change. For a while I was the one who wanted to stay at home with the kids, but now our goals seem to be switched. Hopefully our double-half-time idea pans out. Our financial life test-drive is working out pretty well so far.

Filed Under: General //

Sweat Equity: Removing Old Carpet Yourself

Posted on April 12, 2008 // 24 Comments

We bought a house with some flaws, and one of them was this shag carpet complete with old pet stains. Before we can install our desired hardwood flooring, we had to remove the dirt magnet. After asking around, the price for professional carpet removal is about $0.35 per square foot. For the 1,500 sf of carpet we had, that’s a potential cost of over $500. Armed with the knowledge and help of our father-in-law, we set forth to do it ourselves.

There are a plenty of online tutorials on how to remove your old carpet (one, two, three), but in general it’s pretty straightforward:

  1. Remove all furniture.
  2. Pull up carpet, cut into strips, roll up, remove.
  3. Repeat #2 with the carpet pad underneath.
  4. Pry up tackstrips, and tons of nails
  5. Scrape glue off of subfloor.
  6. Sweep up remaining crap.

In our house, the pad underneath the carpet was glued down to the concrete subfloor. The original installers were generous (or just lazy) with the glue and squirted it everywhere, so scraping the petrified stuff up took forever. The only new tool we bought was a special scraper blade, for about $10. Otherwise you just need a utility knife, some rope/tape, pliers, and a crowbar.

Was it worth saving $500? My aching back says no, but at least now I know how to remove carpet. Also, occasionally it’s nice to perform some manual labor and feel like you accomplished something tangible. Occasionally.

Filed Under: Home Improvement //

TrueEarnings Card from Costco and American Express – Rewards Card Review

Posted on April 11, 2008 // 42 Comments

True Earnings Card from Costco and American ExpressHere’s another solid all-around rewards credit card that is much better than all those generic 1% back cards out there. The TrueEarnings® Card from Costco and American Express offers the following:

  • 3% cash back at U.S. gas stations and on gasoline at Costco  (up to $4,000)
  • 2% cash back at U.S. restaurants
  • 2% cash back on eligible travel purchases (airline, lodging, car rental, cruise line, travel agency and tour operators)
  • 1% cash back on other purchases, including Costco

I’m pretty sure this is also better than their previous offer, I don’t remember there being a gas rebate before (I might be wrong). If eating out and gas are your biggest expenses after housing (like us on many months), then this looks pretty good. There is also no limit on the cash back you can earn. Might go nicely with the 2% cash back from Executive memberships. Terms and restrictions apply.

There is no annual fee, but you must have a Costco membership to apply. (The TrueEarnings card can also replace your Costco Membership Card. ) Regarding getting the cash back:

“Rebate is awarded annually in the form of an in-store coupon redeemable for cash or merchandise at any U.S. Costco Warehouse.”

Why not cash in the coupon, and then charge your Costco purchase to get another 1% back? 😉

Filed Under: Credit Cards, Deals & Offers //

Why Buy and Hold Investing Is Simple, But Not Easy

Posted on April 10, 2008 // 25 Comments

The strategy of Buy & Hold Investing has a lot of followers (including me), and one of it’s touted benefits is that it is a simple way to invest. In the case of passive investors, it primarily involves picking and maintaining an asset allocation plan for the next 10-50 years of your life. No need to monitor stock prices or decipher financial statements. However, “simple” and “easy to execute” aren’t the same thing. For example, “spend less than you earn” is simple. “Always save for a rainy day” is simple. But how many people actually do this?

altext

So why don’t I think it will be easy?
The picture above is the cover of the August 1979 issue of BusinessWeek magazine. In case you can’t make it out, the picture is of a stock certificate folded into a paper airplane that has crashed, surrounded by many other crumpled airplanes. (No Photoshop back then…)

The title of the cover story is “The death of equities: How inflation is destroying the stock market.” I haven’t been able to find the full text of the article noted, but I did find some snippets at TheFiendBear. He notes that the article “was published at a time when the Dow was languishing at 875 and had been trading in a see-saw fashion ever since topping out 6 1/2 years earlier in January of 1973. Inflation was a persistent nag on the economy and the Federal Reserve and US fiscal policies were held in low regard.”

Sound familiar? Now here are excerpts from the actual 1979 BusinessWeek article. Here is the summary:

The masses long ago switched from stocks to investments having higher yields and more protection from inflation. Now the pension funds–the market’s last hope–have won permission to quit stocks and bonds for real estate, futures, gold, and even diamonds. The death of equities looks like an almost permanent condition–reversable someday, but not soon.

Pension funds invested in diamonds? Wow. But stocks always beat bonds over long periods, right?

Until now, the flight of institutional money from the financial markets has been merely a trickle. But it could turn into a torrent if this year’s 60% increase in oil prices touches off a deep recession while pushing inflation sky-high. As it is, the nation’s financial markets and its capital flows have been grossly distorted by 13 years of inflation. Before inflation took hold in the late 1960s, the total return on stocks had averaged 9% a year for more than 40 years, while AAA bonds–infinitely safer–rarely paid more than 4%. Today the situation has reversed, with bonds yielding up to 11% and stocks averaging a return of less than 3% throughout the decade.

Still, I thought stocks were a great inflation hedge?

The one rule whose demise did the stock market in could be summed up thus: By buying stocks, investors could beat inflation. Stocks were a reasonable hedge when inflation was low. But they proved helpless against this awesome inflation of the past decade. “People no longer think of stocks as an inflation hedge, and based on experience, that’s a reasonable conclusion for them to have reached,” says Richard Cohn,an associate professor of finance at the University of Illinois. Indeed, since 1968, according to a study by Salomon of Salomon Bros., stocks have appreciated by a disappointing compound annual rate of 3.1%, while the consumer price index has surged by 6.5%. By contrast, gold grew by an incredible 19.4%, diamonds by 11.8%, and single-family housing by 9.6%.

This isn’t to bash BusinessWeek, they were certainly not alone. Of course, since 1979 the U.S. stock market has had an awesome run, and now we are back to many people putting 100% of their portfolios into equities. But I am pretty sure that some time within the next 20-40 years there will be a similar fearful atmosphere. Imagine bonds outperforming stocks by 8% per year, for 10 years. Imagine very smart people, pension funds, moving their money as well.

Imagine this article being written 40 years later (replace 1979 with 2019, late 1960s with late 2000s), after all these crazy Fed cuts, money injections, and high oil prices spike inflation. Just something to consider. Will you still be able to buy and hold? I’d like to envision myself being a pillar of steadiness in that storm. 😀

Filed Under: Investing //

Why Sports Betting and Stock Picking Are Similar

Posted on April 9, 2008 // 30 Comments

So how did everyone do in their March Madness pool? In the book Wise Investing Made Simple by Larry Swedroe, there is a great explanation of why stock-picking is very difficult which incorporates sports betting. I’ll try to briefly paraphrase the idea here.

Sports Betting Basics
Let’s stick with college basketball. Earlier this season, Duke played Cornell. If you were simply betting on who was to win beforehand, most people familiar with basketball would pick Duke. Duke has won national championships, has a top-ranked recruiting class, has a famous coach, has better record against stronger opponents.

But, nobody in Vegas or any sports book will take that bet. Instead, you have an adjustment called the point spread. In this case, the spread was 30 points. Now you have to either bet that Duke will beat Cornell by more or less than 30 points. This is much harder.

How was this 30 point spread determined? By the collective opinion of the other gamblers! It is a common misconception that you are betting against the casino. Nope, the point spread constantly moves so that half of all bettors are on either side of the spread. By the time the game is over, the casino doesn’t care who wins. The casinos simply take the bets, pay off the winners, and walk away with their commission. (You have to bet $11 to win $10.) Great deal, huh?

Because of this point spread and commissions, it is very difficult to make consistent money betting on sports. How many professional sports bettors do you know of? A historical study of NBA games showed that the average difference between point spreads and the actual differences in score was less than 1/4 of one point! The collective opinion of gamblers turns out to be very good.

In other words, with the handicap of the point spread, you could bet on Cornell every year and still come out the same as betting on Duke each year. (This year, Duke only won by 13.) When this is true, it is called an efficient market.

Picking Stocks
When people say “buy a company with a strong brand, a wide moat, and good growth prospects”, it is like saying one should just bet on Duke to win. It’s simply not that easy. There is a handicap, but instead of a point spread it is the price of the stock.

A good company will be priced at a premium. For example, people may love eBay, Apple, or Google and think it’s the best business company ever. But at the price you have to pay (the market price), you’re not betting that eBay will be successful, you’re betting if eBay will be more successful than the collective market participants think it will be based on all the information currently available. Again, the data shows that beating this collective prediction is very unlikely.

The argument over whether you can get better risk-adjusted returns from picking individual stocks will probably go on forever. Is it skill? Is it luck? Either way, it is important to know that very few people pull it off over the long term, and I think this analogy illustrates one major reason why. Next time you feel like stock picking, try beating the spread on 10 different sports events first. 🙂

Filed Under: Investing //

Zillow Mortgage Marketplace: New Place To Shop For Home Loans?

Posted on April 8, 2008 // 16 Comments

If you’re shopping for a new mortgage, there is now another option out there. The Zillow Mortgage Marketplace attempts to make connecting borrowers and lenders as effortless as typing a search on Google. Will it work?

Application: Less Nosy, But More Responsibility
While shopping for loans, I had two big worries. One, I didn’t want to give out my Social Security number to everyone. Two, I didn’t want 100 desperate brokers calling me all day long “fighting” for my business. No problem with Zillow, you only need to fill out a application with your property details, your credit score, your income, and your assets. This is all the information that a loan officer needs to provide you a quote.

To see your loan offers, all you need to do is sign up with an e-mail address. No SSN, no name, no address, no telephone.

But you really want to avoid painting a rosier picture than reality, which is what most people tend to do. If your info is wrong, then the lender’s quote is null and void, and everyone’s time was wasted. Check your credit score beforehand, ideally at all three credit bureaus. It’s one thing to say you make $X per year, it is another thing to prove it. For a full-documentation loan, you need to have two years of W-2 forms, your last tax return, and your most recent bank statements. They will want everything! I’d even say it’s a good idea to pull these up before filling out this form.

Comparing Bids and Feedback Ratings
Participating lenders are supposedly verified to make sure they are licensed brokers without excessive complaints filed against them. Bids are also required to be specifically tailored to your loan, not just generic rate instantly created by a computer. In addition, Zillow is adding a feedback system (like eBay) where you can help determine the reputation of lenders (service, extra fees, if they bait-and-switch, etc.). The system is probably too new for this to matter right now, but hopefully it’ll help in the future.

I submitted an application today for a home equity loan, but I haven’t gotten any bids yet. However, I do like that all the loan quotes will be organized in the same format, so you can compare loan offers side-by-side easily. Sometimes it’s a puzzle to figure out all the lender’s fees in Good Faith Estimates.

Finally, lenders will be able to see what other lenders have been offering you. This gives them a chance to see their competition, and even lower their initial bids. I don’t see anything wrong with that. 🙂 Once you pick out a lender to contact, then they will see your e-mail and you can move forward with the loan.

I couldn’t find any information about how Zillow is making their profit from this. I’m assuming they will charge a fee per lead or per closed mortgage.

More info: Zillow Press Release

Filed Under: Real Estate //
« Previous Page
Next Page »