Intellectual Dishonesty & Investing: A Lesson from Kanye West

Almost everybody on your TV is lying to you…and they don’t even realize it.

In February of 2018, FoxNews host Laura Ingraham took exception to Lebron James and Kevin Durant criticizing Donald Trump.

Ingraham said, “It’s always unwise to seek political advice from someone who gets paid $100 million a year to bounce a ball. Lebron and Kevin, you’re great players, but no one voted for you…so keep the political commentary to yourself, or as someone once said…shut up and dribble.”

Ingraham was vilified throughout the media, castigated for being a white woman who would tell a couple of black men, “Hey, just do your job…we don’t care about your opinion on politics.”

Fast forward to just a few weeks ago when, on Saturday Night Live, Pete Davidson weighed in on the fact that Kanye West had aligned himself with Trump: “Kanye is a genius, but a musical genius. You know, like Joey Chestnut is a hot-dog eating genius. But I don’t want to hear Joey Chestnut’s opinion about things that aren’t hot dog related.”

So this is the same thing, right? A white guy telling a black guy, “Just stick to what you’re good at and keep your political opinions to yourself.”

But for some reason, there was no media outrage this time. Davidson was a cultural hero, a comedian who could so poignantly verbalize what everyone already thought.

Speaking of Kanye, his recent White House visit made a few headlines. After he regaled the gathered media with a litany of bizarre thoughts and no shortage of profanity, MSNBC’s Velshi & Ruhle wore out their fainting couch, calling his visit to the Oval Office “an assault on our White House.” This was the same Oval Office, mind you, where their hero Bill Clinton got oral sex from an intern a couple of decades ago…but sure, it was Kanye’s language that sullied the dignity of the place.

Meanwhile, let’s head over to FoxNews and see what Sean Hannity had to say about Kanye’s visit…

“What’s wrong with what he’s saying? What’s wrong with more jobs? What’s wrong with safe neighborhoods? Kanye is realizing that the Democrats had eight years and they had a failed agenda. Look at what’s happening. The Trump agenda is creating a future for the forgotten men and women in this country.”

But contrast this with what Hannity said in 2011 when he was clutching his pearls after another rapper, Common, visited the Obama White House:

“It baffles me that this is a person the White House chooses to set as an example for our kids…this is inappropriate for a President and he goes back to his radical roots again and again and again.”

You’ve gotten the point by now, but allow me one final Kanye indulgence, because it’s just too perfect. Kanye’s visit with Trump took place in the immediate aftermath of the Florida panhandle being devastated by Hurricane Michael. Which is amusing, because Trump tweeted this in 2012:

“Yesterday Obama campaigned with JayZ & Springsteen while Hurricane Sandy victims across NY and NJ are still decimated by Sandy. Wrong!”

So what’s the point of highlighting all of this hypocrisy and goalpost-moving all across the political spectrum? The point is that all of these people, more than likely, don’t even realize that they’re not being truthful with you in presenting their analysis.

You can call it whatever you want…double standards, intellectual dishonesty, confirmation bias. The bottom line is that as humans, we’re wired to continue believing what we already believe, and then look around for things that seem to support our way of thinking.

So if this is a problem in the political realm (as well as in religion, sports, and culture in general), doesn’t it stand to reason that it would be a problem in the financial world too? Here’s a few examples of cases where a financial advisor might suffer from intellectual dishonesty without even realizing it…

1) Suppose you have the option of taking a lump sum buyout on your pension or just keeping the monthly lifetime payout. Your advisor is certain that you’re better off to take the lump sum, invest it, and then create an income from those investments. He might be right. But it’s also possible that he’s been conditioned to believe that you should always take the lump sum no matter what (because his firm can’t make any money off of that money if it stays in the pension plan).

2) You have $125,000 in the bank and you owe $55,000 on your house. You’re wondering if you should just pay off the mortgage. An advisor tells you not to pay off the house, instead you should take that money and invest it because, with interest rates so low, you can make more money by investing than you’ll lose by paying interest on the mortgage. Again, he might be right. But again, it might be possible that he’s been conditioned to believe that you should never pay off your house (because, again, it doesn’t profit him for you to get rid of your mortgage payment).

3) An advisor tells you that your current _________  is inferior and he has one that’s better. You can fill in the blank with anything…mutual fund, annuity, life insurance policy, REIT, etc. He might be right, his might be better. Or it’s possible that his company has sold him on the benefits of their product for so long that he’s no longer able to see any downsides to it and believes that it trumps anything else on the market, regardless of whether or not that’s actually true.

So how do you avoid being lied to by an advisor that doesn’t even know he’s lying? You can start by looking for a few things…

Independence: Is the advisor able to make his or her own decisions, or does he work for a big brokerage firm (that likely tells him what he should or shouldn’t sell)?

Understanding gray area: Does the advisor understand that most issues aren’t black and white and that there’s some gray area to explored? Or does his sales pitch highlight only the bad things about your current situation while explaining only the good things about his approach?

Listening ability: Does the advisor ask probing questions to get to the bottom of your situation, or does he just look at your account statement and say, “Here’s what you need to do” without any deeper exploration?

Ability to articulate convictions: If an advisor feels strongly about what you should do but you have questions about it, are you able to get a direct and thorough answer, or does the answer sound more like a rehashing of the sales pitch you’ve already heard? If you present an alternate scenario, is the advisor able to entertain the thought, or does he dismiss it immediately?

The bottom line is that it’s actually really hard to operate successfully as an advisor that truly has the best interest of the client in mind. But it’s important, necessary work, and there are people who can do it effectively. Just be aware that they usually don’t work for a company with a nationally-recognized brand name.

Real Estate Investing: What's a Good Return

Guest blogger Derek Dawson is the Founder and CEO of Dawson Property Management. Derek went to Florida State University and received a Bachelor’s of Science in Finance and Real Estate and has lived in Charlotte since 1994. In 2011, Derek founded Dawson Property Management and became the Broker-in-Charge. Derek has a passion for the property management industry and strives to use his experience, knowledge, and hard work ethic to satisfy all of his clients to his best ability.

What’s a Good Return on Real Estate Investment?

Chasing after unrealistic rates of return is one of the main reasons newbies investing in real estate lose money. Very few folks understand how compounding works.

So, how exactly does compounding work? Essentially, compounding is whereby an asset’s earnings, from either interest or capital gains, are reinvested to generate additional earnings over a period of time.

Here’s an example to illustrate this better. Assume you’ve invested $10,000 at 10% for 100 years. Using the concept of compound interest, that would translate to a staggering $137.8 million.

At twice the rate of return, 20%, the same $10,000 investment would result into a whopping $828.2 billion. Now, that’s a lot of money!

Does the difference between a 10% return and a 20% return seem counter-intuitive? Well, that’s what geometric growth is all about.

This concept of compounding works equally well in real estate as it does in the sharemarket or with cash in the bank. For instance, a property worth $400,000 having a growth rate of 5% a year is worth $650,000 after ten years.

Bump up the rate of growth by two percent and it almost doubles to $787,000. In addition to boosting your property’s value, you can also benefit from charging higher rents.

How Do You Measure Return on Real Estate Investment?

The purpose of investing in real estate property is to make money. But exactly how do you make money? You can only make money if your investment is offering a good return on your investment.

So now, what is a good return on a real estate investment? Unfortunately, the answer isn’t as straightforward. To help you calculate the potential ROI, here are 3 most widely used methods.

1.    Cash on Cash Return

Cash on Cash return is a widely used metric for determining the profitability of a real estate investment. It measures the annual return on your investment based on total cash investment and net operating income (NOI).

Suppose you’ve bought a rental property through a mortgage worth $350,000:

CoC varies depending on the method of financing. It’s higher when a property is bought via mortgage and lower when the same property is bought fully in cash.

Suppose you buy a property for a total of $350,000 through a mortgage. You pay a down payment of $70,000 (or 20%) and rent the home for $1,800 per month. Then the annual property expenses add up to $4,000.

In this case, Cash on Cash return becomes 25.1%. (12 x $1,800 - $4,000)/$70,000.

When the property is paid fully in cash, then CoC becomes 5.0%. (12 x $1,800 - $4,000)/$350,000.

So, what’s a good ROI for investment properties with regards to CoC return? Experts generally agree that a good Cash on Cash return is anything above 8%.

2.    Capitalization Rate

Also called the cap rate, capitalization rate determines an income property’s return based on the net operating income (NOI). It’s another widely popular metric for calculating the ROI on a rental property.

Unlike Cash on Cash return, capitalization rate doesn’t vary with the method of financing.

Supposing you buy a rental property worth $500,000 and charge your tenants $3,200 per month. Furthermore, the annual expenses related to that property add up to $6,000.

The cap rate for that property will then become 6.5%. (12x$3,200 - $6,000)/$500,000.

Similar to the cap rate, a good CoC return is anything above eight percent and especially above ten percent.

3.    Return on Investment

Also called ROI, return on investment measures the gain or loss generated on an investment relative to the amount of money invested.

It’s usually used to compare the efficiency of different investments, to compare a company’s profitability or used for personal financial decisions.

Suppose you buy an income property for $400,000 and pay an additional $15,000 in related expenses. Then rent it out for $2,500 per month. The ROI for that rental property then becomes 7.2%. 12x$2,500/($400,000 + $15,000).

To know whether a real estate investment is profitable or not, you need to know what a good ROI is. Again, there is no straightforward answer. Experts will give you varying answers.

ROI varies on investment risks, the location, and the investment property size. Some investors would appreciate a 6% ROI, while some would be happy with anything above 40%. Generally speaking, avoid anything below 15%.

4. The One Percent Rule

This tool quickly filters and evaluates the potential of a real estate investment. According to the rule, gross monthly rent should be at least one percent of its final price.

For example, for a house worth $300,000 to be profitable, you would need to rent it out for $3,000 a month.


Numbers never lie. If you do your math right, you’ll have a pretty good idea of what your investment’s return will be.

 

The Stock Market Hurricane

If you’re not a news junkie, maybe you haven’t heard about this…but there’s a hurricane headed our way. And like most things in life, there’s an investing lesson to be learned here.

There are three conditions that have to be present for a hurricane to form.

1) Warm water

The storm can only develop over water that’s at least 80 degrees. Warmer water means increased evaporation from the ocean’s surface, which creates the necessary moisture in the atmosphere.

But the warm water also has to go deep enough; that 80 degree water needs to run at least 200 feet deep. Hurricanes don’t form in May or June because even though the surface of the water might be warm enough, the warmth doesn’t go deep enough. But throughout the summer months, the water slowly starts to heat up from the surface down, and by the end of summer, the conditions are ripe.

2) Little to no wind shear

Another important factor is the absence of wind shear, which is the difference in wind speed or direction over short distances. If the wind off the coast of Senegal is blowing west but the wind over Cape Verde is blowing south, while the wind off Sierra Leone is also blowing south, but at a different speed, that would indicate strong wind shear. Not ideal conditions for a hurricane to develop.

3) Cooler atmosphere

Finally, the air in the atmosphere has to be significantly cooler than the air at the water’s surface. The rapid cooling of water molecules as they evaporate allows for condensation and quick development of cloud formation in the storm wall.

Unless you have all three components—warm water, little to no wind shear, and cool atmosphere—you won’t find hurricanes forming.

In many ways, the birth of a stock market crash is similar.

Generally speaking, for a stock market crash to occur, we also need three factors to be present…

1) A long period of rising prices and economic optimism

Except for a very slight downturn in 2015, stock prices have done nothing but go up since March of 2009. Some analysts have classified this as the longest bull run in history. Others consider 2015 to have been a slight bear market, so they see it more as a two average-length bull markets with a small bear in the middle. Either way, the last decade has been a long upward trajectory.

As for economic optimism, there’s actually a polling group that created an index to measure this. In August, that index hit a 14-year high, meaning that people feel better about the economy right now than they have since John Edwards was getting $400 haircuts while he ran for Vice President alongside John Kerry.

2) P/E ratios much higher than long term averages

Understood simply, a high P/E ratio usually means that people are really excited about a company (so the stock price is high) even if the profits aren’t there to back up that excitement.

So when P/E ratios are high across the board, that means lots of people are excited about investing in many companies that aren’t necessarily profitable enough to justify that enthusiasm.

The combined P/E ratio of all stocks in the S&P 500 in September is almost exactly 25.

The average P/E ratio of the last 20 years? About 24.6.

3) Extensive use of debt.

According to the federal reserve, the average American household carries the following debt:

Credit card: $16,883
Auto loans: $29,539
Student loans: $50,626
Mortgages: $182,421

Meanwhile, the median household income is about $60,000. So yes, as a country, we’re heavy on the debt right now.

So where does that put us on our Stock Market Hurricane Score Card?

Two of our conditions are definitely present—a long period of rising stock prices and enthusiasm, and extensive use of debt. But we’re not in bad shape on the P/E ratio metric.

Now, the P/E ratio metric is one that can rapidly change, especially if something goes horribly wrong with some of the major players in the market—Apple, Google, Amazon, Facebook, etc.

So based on this analysis, it’s not wise to buy into any doomsday predictors who tell us that the next market crash is imminent. But it’s also wise to note that the right conditions could develop at any moment.

The water is warm and deep, and the atmosphere is cool. Right now, the wind shear is in our favor, but if that changes…look out.

Unhealthy Financial Foods

Depending on who you ask, you might get varying opinions about whether a certain food is good for you.

Are eggs good or bad?

What about butter?

Milk?

Red meat?

Red wine?

But there are certain foods that anybody with half a brain will agree aren’t good for you. And believe it or not, we can find a lot of those unhealthy foods represented in the financial world…

Empty Calories

Empty calories are the ones that add calories to your diet but no actual nutritional value. Soft drinks, candy, chips, pastries, and frozen desserts would all fit the bill here. They’re problematic because they make you feel full so you don’t have room for foods that actually give you the vitamins and minerals that you need.

Consider these two different meals:

1) McDonald’s Quarter Pounder deluxe, medium fry, and 20 oz Coke.

2) Grilled chicken breast, avocado toast on whole wheat bread, a fruity protein shake, and Pascha dark chocolate for dessert.

Both meals give you somewhere between 1100-1200 calories. The first meal provides you virtually no helpful nutrients, other than a little bit of protein in the Quarter Pounder. But the second meal is high in potassium, phosphorus, zinc, iron, magnesium, copper, protein, fiber, vitamins B and C, omega 3 acids, beta-carotene, and riboflavin—all for the same number of calories!

In the financial world, empty calories come from that 75-page financial “plan” that you get from the big brokerage house.

Most of those pages aren’t customized to you, and they don’t really provide any true advice. Once you sort through all of the pages that are just boiler plate filler and disclosures, you’re left with just a couple of pages that actually give you some analysis that’s actually related to your situation. And most of that analysis isn’t even that accurate.

So you’ve added a lot of “paper calories” to your file cabinet’s diet, without any real tangible benefit. But you feel like you’ve accomplished something because you have this 75-page document, so you don’t really push any further to get a true plan in place for yourself.

It’s no different than eating the McDonald’s meal and feeling full, so you don’t feel the need to eat anything else to give you the nutrients you need.

Added Sugar

Several months ago, a neighbor was cleaning out their pantry in preparation for a move and asked us if we wanted some of the canned goods that they needed to get rid of. Sure, why not—who turns down free food?

As it turned out, most of the cans weren’t things that we’d actually eat, and we ended up purging most of the cans from our own pantry a few weeks later. During the purge, we noticed the ingredients on a can of tomato soup. The first ingredient, to no one’s surprise, was tomato paste. But the second ingredient was high fructose corn syrup.

I’m sorry, tell me again why we’d want sugar in our tomato soup?

Well, we don’t. But most food companies are just trying to fill the can the cheapest way they know how. This often means you get a lot of sugar in foods that don’t seem like they should warrant a high sugar content.

A lot of fruit juices are bad about this too. They even go out of their way to market themselves as a healthy option, but when you really study the ingredients, you find out that most of them have an absurd amount of added sugar.

The problem with most “added sugar” foods is that you think you’re eating smart when you have them. Tomato soup, fruit juice, yogurt…at first blush, all of those sound healthy. Very often, they aren’t.

In the financial world, added sugar comes in the form of hidden fees. You might believe that you own a product with very low fees, or no fees at all. But when we take a closer look at that product (either by exploring the prospectus or by calling the company and asking a few very specific questions), we often find that your fees are much higher than you would have guessed (or in some cases, much higher than you were led to believe).

Trans Fats

Usually when you’re consuming trans fats, you’re aware that you aren’t eating healthy. Cakes, pies, cookies, and doughnuts all fall into this category.

Nobody has ever eaten cookies or doughnuts and tried to convince themselves that they were making healthy choices. You know they aren’t good for you, but they just taste so dang good that you can’t help yourself.

In your portfolio, this is the same as having too much risk exposure. You’re 58 years old and you’ve been watching your 401k grow and grow for the last several years. You know the ride can’t last forever, but it just tastes so good to see that account balance keep growing quarter after quarter. You can’t stop yourself from feasting on the risk.

“I’ll make it more conservative once I get to $500,000,” you say. Or $750,000. Or a million. “Just one more cookie and then I’ll start my diet tomorrow.”

But you never do start the diet, the market crashes, and you’re left with the financial equivalent of a diabetic coma.

The good news about all of this is that it’s actually much easier to eat healthy in your portfolio than it is to eat healthy in real life. So there’s really no need to put it off…