10. You are not interested in money

You think that when you make enough money at work all your money related problems will take care of themselves

Actually the opposite is true – over 90% of people winning a multi million dollar lottery end up with less money just after 5 years of winning.

Getting rich takes effort and planning. If you are not interested in money then chances are that money is not interested in you.

9. You are afraid to lose your money

You are so afraid to lose your money that you keep it in an ordinary bank account with a terribly small interest rate. You are afraid to invest your money because you think that the risk of losing everything is too great.

By keeping your money on a savings account, it generates less interest than the inflation. This means that by keeping your money in a safe place you are actually losing it to inflation.

8. You invest in what you don’t know

After reading a story about a new high tech invention you decide to invest all your money into this startup company. If it’s high tech and complicated it must be a great invention, right?

Wrong!

Investing your money in what you don’t understand is the fastest way to losing everything. Something that looks like a good idea doesn’t have to be one. Stick to what you know and you will be able to keep yourself from the dumb ideas and go along with the great ones.

7. You hope that other people will take care of your money

You give professional money managers free will to take care of your money as they wish. Everyone wants to have more money so they will just end up making a lot of “necessary transactions” – of course you are the one paying the transaction fees.

Take care of your own money – always have the last say in what to invest and what to buy.

6. You want too much too fast

You want to get a lot of money fast and with little or no effort. This makes you go along with tens of get rich quick schemes that always end up losing money.  Your decisions are affected by the need to get a lot of money fast, which makes you take unnecessary and stupid risks.

You need to remember that there is no such thing as easy money.

5. You don’t have an emergency fund

You spend everything you make and don’t keep an emergency fund for unexpected things. If you are not covered by insurance an accident can set you back tens of thousands of dollars.

Without an emergency fund you would need to borrow to come up with the money. This also means that you will have to pay interest – not having an emergency fund can end up loosing you a lot of money.

4. Your goals suck

You don’t have any goals and even if you have one – its awful.

Just about every 10-year-old wants to be rich and famous but only a few will actually get there.
You need a goal that says what you want to achieve, how you are going to achieve it and by what time will it be achieved.

After coming up with a goal you will also need to make a plan on how to achieve it. You must be able to measure your progress at any point to get feedback on how you are doing.

3. You have bad habits

You smoke, drink and watch TV all day long. You spend money on the things that will never bring you anything back. In the long run you need to spend even more money on health in order to get back to your best drinking shape!

A bad and devastating habit can also be negative thinking. Research has shown that people who are more willing to keep their mind open and positive to new ideas are wealthier than pessimists.

2. You are impatient

You want to have everything now and are not willing to wait in order to buy it later. The concept of saving money for something you want to buy is not known to you – instead you use one of your many credit cards.

You probably haven’t heard that using a credit card makes other people rich (owners of credit companies) and keeps you poor.

1. You buy everything your neighbors and friends have

Trying to impress your neighbors and friends by buying all the stuff they have plus everything they would like to have? Don’t do it – spending money on things that you really have no need for is the number 1 reason why people have less money than they want to. Having a lot of things and having a lot of money are 2 things that contradict each other – you need to give money away in order to get stuff.

True wealth and money comes to those who are willing to wait – the 1000 dollars you choose not to spend on a new plasma TV with a giant screen can turn into 100 000 dollars in 20 years. Think of how much TV-s this money would get you then (as opposed to how much you would get when selling your TV after 20 years).

Timing the market is probably the most difficult thing to do – no matter how much you know about investing it always seems to work out exactly the way you didn’t want it to happen.

Here is a graph about the typical investor behaviour that always ends up losing us money. Before buying or selling stocks – take a look at this graph whether or not you are going to make one of the worst money mistakes of your life!

Click for larger image

Once a year most of the worlds influential businessmen, politicians, investors and economists meet in Davos, Switzerland to discuss the current state of world economy. This yearly gathering is known as the World Economic Forum.

To give you an idea of how high-level Davos is, you should know that in addition to presidents and prime ministers, it is visited by all of the worlds major banking institutions – starting with the banks bailed out last year and finishing with the leaders of the central banks of USA, Europe and China.
Among this years attendees were more than 70 world leaders and over a hundred of the worlds most influential companies (the likes of ExxonMobil and Coca-Cola).

Main topic in the World Economic Forum

You don’t have to be a genius to figure out what they talked about this year – the economic crisis.

It was revealed by private equity giant Blackstone that the current economic downturn has destroyed over 40% of the world’s wealth during the last 5 quarters and that things are not getting better – they are only getting worse! The world will lose even more of its wealth!

Here are some of the things said during this years summit:

“Worrying about inflation now is like worrying about the measles when you might get the plague.”

Kenneth Rogoff  – Harvard professor and former chief economist of the International Monetary Fund

“The outlook is pretty grim. Things are not good and business surveys are coming out showing they’re getting even worse.”

Sir Howard Davies – London School of Economics

“Confidence grows as slowly as a coconut tree, and falls as fast as a coconut.”

Indian economist, Montek Singh Ahluwalia

“The free enterprise system has not failed; the financial system has failed.”

Tony Blair -Former British Prime Minister

“We cannot underestimate the challenges and the dangers that we face in 2009. We are in a global recession the likes of which we have never seen. But there is no quick fix.“

Stephen S. Roach, Chairman of Morgan Stanley Asia

“The crisis is getting worse. It’s going to take drastic action to turn it around, if it can be turned around, quickly. I believe it will take a long time.”

Rupert Murdoch – Chairman of News Corp

And from a more positive side:

“In times of recession there are massive opportunities and fortunes to be made, so for new up and coming entrepreneurs, this is the time to go and start a business.”

Richard Branson – Founder of The Virgin Group

I agree that things are indeed bad and they will probably get worse before getting better but among all these quotes I especially love the last one from Richard Branson.

The positivity of this serial entrepreneur and billionaire is what keeps the world running – a true businessman always looks to the future and thinks how he can use the mistakes done in the past to build a better business for tomorrow! As long as there are people like Richard Branson – we will be just fine!

For more advice on what is going on in the financial world – sign up to our  full feed RSS or subscribe via email.

Warren Buffett has made a million dollar bet that the S&P 500 index fund will return more to investors over the next 10 years than a collection of hedge funds that are carefully selected by experts.

The bet was made between Buffett and a company called Protégé Partners LLC – a company that specializes in running funds of funds. Those in the dark – a fund of funds is just like a hedge fund but instead of owning stocks or bonds, it owns other funds.

This has some positive and negative aspects.

The Good

A fund of funds is extremely diversified. Since it consists of funds that each consist of hundreds of stocks it is relatively risk free. This is good during the bad times.

The Bad

When compared to owning stocks or index funds a fund of funds has extremely high fees. Such a fund has an annual management fee of 1% and each one of the funds that it consists of have fees of about 1,5%  a year. In contrast -  owning the Vanguards S&P 500 index fund has a yearly fee of only 0,07%.

Hedge funds also typically collect 20% of the gains they make – this leaves you 80% of which the fund of funds also takes its share – typically about 5%.

Why Buffett Decided to Take This Bet

The high management fees of funds of funds are what Buffett thinks will win him the bet.

In order for a fund or a fund of funds to equal the return of the S&P 500 index, it has to have a lot higher yield than the index. Buffett is essentially saying that even if the fund he is betting against can surpass the yield of S&P 500, the costs associated with the fund will be so high that net of all fees the yield of S&P 500 will be greater than the fund of funds Protégé Partners is running.

You can read Warren Buffett’s and the Protégé Partners views on the bet at Long Bets.

For more interesting stories sign up for our full feed RSS or sign up via email.

Here is an unbelievable true story from „The Smartest Investment Book You’ll Ever Read” by Daniel R. Solin.

One of my favorite stories was told by a man who had left work with a major brokerage firm. He told me about the training he had received a few years earlier when he started work with a major and well-respected brokerage firm. He and the other brokers in training were told to split their potential client list in half. They were told to call half and tell them to buy a particular stock. The other half were to receive calls telling them to sell the same stock.

In two weeks, these “financial advisor” trainees were told to see which way the stock had moved, up or down. Whichever way it had moved, half of the potential client list would think the trainee was pretty smart, to be able to pick a stock like that.

They were told to split the “successful” half of their group again, and do the same thing.

If they started with a call list of 120 potential clients and did this three times, they had 15 “warm leads” – people who had enough confidence in their ability to pick stocks and to become clients.

Unethical selling tactics by people who really don’t have a clue what’s going on is the reason I am taking care of my own stock portfolio – and you should too.

However I have to agree that this story gives a great example how everyone could start their own brokerage company without knowing anything about stocks!

For more tips on How to Start Your Own Brokerage Company without knowing a thing or two about stocks, please sign up for our full feed RSS or subscribe via email.

I am a big fan of behavioral economics which tries to explain why people act the way they do.

Here are 3 interesting experiments that scientists have made in order to get a better insight into how people relate to money.

The Ultimatum Game

You are given 100 dollars. You need to decide how to split this money between yourself and another person taking part of the experiment. If the other person accepts the amount that you will give him – you will both get to keep your share of the money. If the other person declines – neither of you get the money.

This experiment is set up in order to reveal whether mankind is rational (as the economic theory suggests) or not.

A rational person would accept any amount offered because he or she knows that when he doesn’t accept the amount that is offered to him – he gets nothing. In other words if the first person(A) taking part of the experiment suggests to the second person(B) that they should split the money $99 to A and $1 to B – the second person should accept. Rationally looking it is better to get 1 dollar than nothing.

What really happens?

Proposals to accept less than 30 dollars are usually rejected. The reason? According to our judgment the proposal is not fair. If you are offered a small amount of money while the other person gets a lot more (that comes from potentially your money) – you’ll have a feeling of injustice and would rather not get money than to get a small amount and feel bad afterwards.

Perceived value of money

The following is a thought experiment. Would you rather earn 100 000 dollars when everyone around you makes $50 000 or would you rather make $200 000 when everyone around you makes $400 000. The only rule you have to keep in mind is that the cost of living and goods stays the same.

Which option will most people choose? A rational person would choose the second option, where he makes more money but less than people around him. That way he will have twice as much to spend. In reality most people choose the first option – being richer than other people. Some scientist think this experiment demonstrates the irrationality of man. I disagree. This experiment clearly shows that social rank is far more important to people than the amount of money they have. If one can choose between more money than your friends vs. less money than your friends – it is a rational decision to choose the first option (even when the total amount of money is less than in the second option). In this experiment people make an irrational money decision but a rational “people decision”. The latter outweighs the first.

The Line Experiment

The first person is standing in a line. When he gets to the counter he is congratulated on being the 1 millionth customer and as a gift gets 100 dollars. A second person is standing in a line at a different place. The man in front of him is congratulated for being the 1 millionth customer and wins 1000 dollars. The second person wins $150 for being the 1 million and first person. Which would you rather be? Surprisingly most people would choose the first option – getting the $100. Money wise this is a bad decision – you lose 50 bucks. The reason most people would rather lose the $50 is because they don’t want to feel the regret of not being the millionth person themselves and winning $1000

What do these experiments show

These experiments show us, that just like in other things people can at times be irrational when it comes to their money. There are situations in life that are more important than money and economists need to understand this. When talking about economy (and the stock market), we should realize that economy consists of ordinary people who at times make financial decisions that are money wise bad for them.

Find the places and areas of life where people make these decisions, play your cards right and you will get to keep their money.

If you liked this post there is a good chance that you will find something of interest on my insights page where I post short reviews of longer articles about the rules of making money:

Insights to money and how getting rich really works

Illustrated Guide to Reading People’s Faces

To get other interesting insights into why we sometimes make bad money decisions, sign up for our full feed RSS or subscribe via email.

The rule of 72 is an easy and necessary rule for investors and ordinary people alike who wish to know how long will it take for their investment to double.

In order to get to know how long will it take for your investment to double you need to take the interest rate of your investment and divide 72 with it.

For example if the money in your bank account generates 6% interest per year you need to make the fallowing calculation:

72/6= 12 years

This means that when you invest 1000 dollars with an annual interest rate of 6%, it will take 12 years for it to grow to $2000.

The average annual return for the stockmarket in the US has been 12% per annum. Using the 72 rule we get that investing your money with this rate will take (72/12% = 6) 6 years to double.

Current inflation in the US is about 4% a year. By using the 72 rule we get that (72/4=18) it takes 18 years for your money to lose half of its value. Your $100 will buy 50 dollars worth in 18 years.

For more daily tips and advice about investing and money – sign up to my full feed RSS or subscribe via email.

Below is a great video of Jim Rogers who is widely know as one of the most successful investors in the world. Among other things he was the guy who helped George Soros start the Quantum Fund which grew 3365% (yes, three thousand) during the first ten years. That’s 42.6% per year for 10 years straight.

This video is spectacular because we have a chance to see what a man who knows more about the economy than most of the people on earth think about what’s going on. Stuff like this rarely gets aired. Enjoy!

To get access to great videos like this, sign up to my full feed RSS or subscribe via email.

Yesterday I had a chance to visit a seminar by one of Estonia’s newest asset management companies Avaron. They are only about a year old and are already managing around 77 million euros – that’s about 120 million dollars. Not bad for a year’s work!

In the seminar one of the founding partners Kristel Kivinurm-Priisalm gave an overview of how they screen and find companies they are willing to invest in. A lot of it was usual well known stuff but there was also a ton of interesting things that anyone of us can adopt and use in our own lives. Luckily for you – I took notes!

Since Avaron is a company that is focused only on Eastern-Europe they have about 1200 companies that qualify for an investment in terms of market capitalization (10 million euros). However they visit about 300 companies yearly in order to find the best of the best. These eye-to-eye meetings play an important role.

People from the States may find it difficult to believe, but here are some things that they look when visiting the companies. This is Eastern-Europe after all.

• Handshake. How does it feel? Is it all sloppy or is it strong and confident? Interestingly, there is a correlation between a strong handshakes of the CEO and how well the company does in the long run.
• Cars – What are the parked cars in front of the company alike? Is the management driving BMW-s while the production facilities are in instant need of repair? If so, they might have their priorities mixed up…
• Restroom – What does the employee’s restroom look like? If it’s old and dirty it could mean that the company is not willing to take care of it’s workforce.
• Insecure management – when the management leaves an unconfident impression they will probably do the same with their potential buyers. This means there could be problems selling their products.
• Not using computers -  If you are not willing to use technology it is certain that there will be more productive competitors who will eventually take over your business.

Since I am a big fan of behavioral finance it was interesting for me to see that companies that manage multi-million dollar funds put such a big emphasize on the things that don’t show up from the numbers.

Knowing what professionals look for gives a great opportunity to get better at the things that matter.
Going to practice that handshake now!

To get more interesting articles about what investors are looking in companies, sign up for our full feed RSS or subscribe via email.