Back in July of 2010, I wrote a post entitled, “Am I Living In A Parallel Universe?” discussing the disconnect between the robustness on the ground in San Francisco and the incredibly negative mood by the mass media.  Even my online friends were making fun of my bullishness.  You guys know who you are!

Hopefully you guys not only increased your asset allocation towards equities, you also took advantage of the amazingly bubbliscious bond market and refinanced your debt.

At the end of 2010, Twitter was valued at some $3 billion bucks.  Prince Alwaleed’s 3% stake for $300 million in December of 2011 now values the company at some $9-10 billion!  The same thing has happened for Facebook, now valued at some $100 billion.  There is so much liquidity out there it’s absolutely ridiculous how much new wealth is being created.  Look at more representative companies of the economy, such as McDonald’s and IBM.  Both stocks are near record highs.

Let’s discuss some reasons why people continuously are slow to recognize change.  We’ll also discuss how you can improve your sense of reality by being more honest with yourself.

WHAT’S WRONG WITH PEOPLE

* We are delusional. Delusion is the root of many problems.  You are a C-student but you think you deserve an “A” lifestyle so you spend more than you have and get yourself in trouble.  The perfect metaphor is that you believe you can fly, so you jump off a building and die.  Back in the summer of 2010, you didn’t believe the economy was recovering because your mind selectively chose to highlight all the suffering in the world, even though you yourself were fine!  People love to point out that everyone else is suffering but themselves.  You know that’s just stupid because if you’re fine, and you represent everybody else, then of course everyone is fine.

* We are dumb. Let’s face it, we all think we are smarter than we really are, but the fact of the matter is, many of us are just dumb.  There are actually people out there that think that grades don’t matter.  Seriously, that’s just stupid if you think grades aren’t one of many indicators people look at to select the best people possible to partner up with.  When traffic is horrendous, you can’t get a reservation at your favorite restaurant until 10pm, your friends are all getting jobs, and the stock markets are marching higher due to better earnings and a re-rating, and you still think the economy isn’t doing well, then you are dumb.

* It’s hard to let go. Change is stressful and we hold on for longer than we should.  Money losing stocks are a great example.  The stock is down 10%, and we believe it’ll recover.  The stock is now down 30%, and we continue to hold on until the stock is down 50%.  We finally sell, and the stock goes up.  We are so stubborn and so slow when it comes to change, that we end up missing out on opportunities.  When we feel hurt, we want other people to hurt too, so we can feel better about ourselves.

* We are as blind as dingbats. There are certain people or organizations out there that are just no-brainers to latch onto.  In “Riding Rocketships For Greater Success“, I talk about how everyone should identify who is the rocket ship in their midst and hop aboard.  If you are not constantly surveying your community to identify who is the one with great potential, you are just missing out.  You need to build those relationships with those rocket ships, leverage off what they are doing, and create your own success as well.

HOW TO IMPROVE

* Be honest with yourself. The first thing to do is to conduct a thorough self-assessment of ones attributes to reduce the amount of disillusionment.  I can’t surf, which means I will never be a cool surfer dude with nice deltoids and back muscles that can pick up beach babes.  I can’t control myself around cheeseburgers and butter cookies, which means I will never have washboard abs or be a male model.  I have trouble hitting a top spin backhand, which means I will never be a truly elite tennis player.  Damn, I’m depressed now!  But, that’s OK, it’s better to be realistic than delusional.

* Recognize that many people are smarter, more attractive, and harder working than you. She will also get the better assignments and get more attention because she’s not only speaks three languages fluently, she’s just that much hotter than you.  He will always have more money than you because he started his business years earlier.  Once you recognize that you aren’t hot sh*t, you are better able to recognize reality.

* Once you recognize reality, systematically work on improving those things you care about.  You can’t be everything to everyone, but you can be great at a focused list of things.  The goal is to figure out what’s important to you and focus like a mad person to get there.

CONCLUSION

2012 is going to be a better year than 2011.  You just have to open your eyes to see that things are improving.  Credit card use is on fire again.  Car sales are at a record high.  Unemployment rate has dipped to 8.6%.  Interest rates are at record lows.  Consumers are cashed up and spending.  Meanwhile, every single bad thing is known, barring another terrorist attack.

With political false promises as a final buttressing point, how can the economy not be back?

Readers, do you feel the economy is alive and kicking again?  Why do you think people in the summer of 2010 refuse to acknowledge the economy was improving?  Share with us some of your positive and negative anecdotes.

Photo: Future 28 year old Facebook engineer’s Pacific Heights Mansion, 2011, SD.

Regards,

Sam

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The 401K is one of the most woefully light retirement instruments ever invented.  The worst is the pathetic IRA which limits you to only $5,000 if you make under $58,000 a year for a traditional IRA to completely participate.  Meanwhile, you have to make less than $110,000 a year for the privilege of contributing after tax dollars in a a Roth IRA.

Give me a pension that pays 80% of my last year’s salary for the rest of my life over a 401K any time!  With the government only allowing individuals to contribute $17,000 a year in pre-tax income into their 401Ks in 2012, once again, our politicians fail us with their regulations.

You know from a previous post that the average 401K balance is around $70,000-$80,000, which is incredibly low given the median age of an American is 36.5.

As an educated reader who is logical and believes saving for retirement is a must, I’ve proposed a table that shows how much each person should have saved in their 401Ks at age 25, 30, 35, 40, 45, 50, 55, 60, and 65.  We stop at 65 because you are allowed to start withdrawing penalty free from your 401K at age 59 1/2.  Meanwhile, I pray to goodness you don’t have to work much past 65 because you’ve had 40 years to save and investment already!

HOW MUCH YOU SHOULD HAVE IN YOUR 401K AT DIFFERENT AGES

The assumptions for the below chart are as follows:

* For the first fully year out of school, you only contribute $8,000 to your 401K.

* After the first year, one maximizes their contribution every year to their 401K plan without failure.  We already agree that $17,000 a year in contribution is much too little, therefore contributing less is illogical.

* Average starting working age is 22.  But you can follow the number of years working as a different guideline if you graduate later or earlier.

* $17,000 is used as the conservative base case maximum contribution amount for one’s entire working life.  Hopefully the government will increase the max contribution amount over time.

* No after tax income contribution, although more power to you if you have the disposable income to do so.

* The low end column assumes $17,000 X the number of years worked.

* The higher end column will assume $17,000 X the number of years worked X a 5% constant rate of return which is aggressive in this environment.

* Excludes any company match or profit sharing completely.  The idea is that by excluding company match and profit sharing, that will more or less make up for the years in which one loses money in the stock or bond market.  Furthermore, each company’s 401k match program is different.

* The Lower and Higher Amounts encapsulate at least 60% of all 401K levels for those who contribute the maximum amounts.  There will be those with less, and those which much, MUCH greater balances thanks to higher returns.

* You are logical and not a knucklehead.  Just by searching this topic, you are taking ownership of your retirement and are thinking ahead with an action plan.

FINANCIAL SAMURAI 401K RETIREMENT SAVINGS GUIDELINE

From the results, we can conclude that even after 43 years of consistent saving, you only have around $723,000 to $2,618000 in your 401K.  Let’s say you live for 20 years after retirement, you only get to live on $36,000 – $131,000.  If goodness forbid you live to age 95, then you can only live off of $24,000 – $87,000 a year!

We know from simple economics that thanks to inflation, a dollar today will not go as far as a dollar 40 years from now.  Private school tuition will probably cost over $100,000 a year in 20 years, so who knows what medical, food, shelter and energy costs will cost then.  One thing is for sure, prices will be much higher.

To play around with various compound growth and contribution assumptions, you can use this compound interest calculator.

TRUST NOBODY BUT YOURSELF

Contribute the maximum pre-tax income you can to your 401K for as long as you work.  This is the absolute MINIMUM you can do to help ensure a comfortable retirement.  After you have contributed a maximum to your 401K every year, contribute at least 20% of your after tax income after 401K contribution to your savings or retirement portfolio accounts.  That way, you will have potentially DOUBLE the amount in total retirement saving if your household income is $100,000 or more.  If your household income is closer to $50,000, you should still see a nice 30% boost to your retirement savings if you consistently save 20% of your after tax income.

Treat your 401K just like Social Security and write it off completely from your mind.  Do not expect either accounts to be there for you when you retire, just like how you should never expect the government to ever help you when you’re in need.  Just imagine 30 years from now, the government deciding to raise penalty free 401K withdrawal to age 80 from 59.5?  Unfortunately, you need the money at age 60, and because you withdraw, the government imposes a 30% penalty on top of the taxes you have to pay.  Don’t think it can’t happen.  Expect it to happen!

The only thing you can count on is after tax money you’ve invested or saved.  Consider raising your real savings percent after 401K contribution to 50% as soon as comfortably possible.  The easiest thing to do is make 401K maximum contribution automatic, and save every other paycheck for the rest of your working life.  Once you maximize your 401K and save over 50% of your after-tax income for at least 10 years in a row, you will be financially free to do whatever you want!

Readers, care to share your thoughts on your age and how much you have in your 401K?  If not, do you agree with the estimates above based on age or years of experience?  What are some of the things you notice from the chart?

If you want to blast holes at the Ideal 401K Chart, ask yourself why you are blasting holes.  Could it be that you are actually just making excuses for your own lack of saving discipline?

How much of your after-tax, after 401K/IRA contribution are you saving?

Note: For those who think this type of savings is hard, Grace Goldoni saved $300,000 by 18.  And for those of you who think I believe in just hoarding cash, I don’t.  There’s no point making money if you don’t spend your money!

Follow Up: For those asking “How Do I Save So Much For Retirement, If I Don’t Make Much?“, I’ve written a 1,500+ word post on how to get there, with a chart guideline as well.

Photo: Occupy SF Tent, by Sam.  Might be your home if you don’t max out your 401K and save more.

Regards,

Sam

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After the biggest surge in the stock markets since 2009 this late November 2011, I’m left wondering whether we’re back to bull markets or whether now is a ripe time to sell.  Although it shouldn’t matter, the answer depends on how well your portfolio has done.  If you’ve been 100% invested in equities since the beginning of the year, you are likely only flat even after the 490 point Dow rally to 12,045.  That’s pretty pathetic since you could have left your money in a savings account and earned 0.3% doing nothing with zero stress.  If you’ve got a 50/50 mix of equities and bonds, you’re likely up in the mid single digits.

It’s always a good time to reassess one’s portfolio once a quarter, especially towards the end of the year.  One should take a view on the markets in 2012 and rebalance accordingly.  If you’ve been following my site for a while, you know that I have a very optimistic outlook on many things.  Perhaps it’s because things are so robust in San Francisco thanks to so many great companies like Apple, Facebook, Google, YouTube, Twitter, and eBay all thriving.  Then again, I’ve always been very upbeat.

Below are some positives and negatives I can think about that will help in the thinking process.

The positives: November Chicago PMI at 60+ indicates an expansion.  Record high Black Friday and Cyber Monday retail sales demonstrate consumers are cashed up and positive about their jobs.  Low interest rates increase cashflow for property owners and anybody with revolving debt.  Pending home sales in November are up 10% MoM vs. +2% MoM expectations.  Private sector hiring continues to trend up with unemployment levels falling to a 2.5 year low of 8.6% as of November, 2011.  WTI oil is back over $100, signifying higher demand.  Corporations have the largest amount of cash on their balance sheets on record, signifying a potential unleashing of buybacks, increased dividend payouts, and M&A.  Markets have historically rallied during an election year on false promises.  Valuations are reasonable and the S&P500 dividend yield is more than the 10-year risk free yield of 2%.

The negatives: EuroZone debt crisis, US state budget woes, political gridlock, and unemployment rate still above 8%.

Positive anecdotes: Raised rent by 10% in one of my rentals this fall.  Vacation rental pre-bookings to Lake Tahoe have been the strongest I’ve seen in years.  Buses are so jam packed they skip stops, necessitating I walk three stops away to get on.  I have to call at least a week in advance to get reservations at a restaurant that averages $75 a person.  Zynga is looking to go public with a US$10 billion valuation in December.  Facebook is looking to raise $10 billion with a $100 billion dollar valuation in 2012.  Google had blowout 3Q results, even at its large size.  Online advertising income has been consistently on a stable to upward trajectory all year.  A friend went from an average $3,500/month two bedroom rental and bought a $3 million house out of the blue due to a liquidity event.  A couple friends are finding jobs and leads again when they couldn’t this summer.

Negative anecdotes: Compensation firms think bonuses will be down 20-40% in the financial industry on average.  Mass layoffs at companies such as American Express and the US Postal service seem inevitable.  The vacation property market is still quite weak.

OBSERVATIONS ABOUT OBSERVATIONS

It’s interesting to note the list of negatives is so short.   The markets tanked when the S&P rating agency first downgraded the US credit rating one notch.  Since every rating agency is downgrading every country now, the markets are no longer reacting negatively since it doesn’t matter!  We’re about the same!

We all know about the problems over in Europe as well as how screwed up our political system is.  Therefore, we expect our Congress to do nothing and Europe to fall into the abyss.  Since our expectations are so low, any progress will be taken as a positive.

The underlying fundamentals of the economy are definitely improving.  Things just seem to be taking way longer than expected.  Whatever the case, so long as the direction is correct, we’ll get there.

REBALANCING HISTORY AND NOW

My major rebalances this year was going from 100% equities on Jan 1 down to 30% equities and 70% cash on April 29.  The portfolio was up 11% and I wrote an article on Yakezie.com entitled, “Sell In May And Go Away: Stock Rebalancing Time“.  I then went 97% cash at the end of October after the markets tanked and came back a little, and on November 25 rebalanced the portfolio to 50% equities, 50% cash.

The reasoning for buying stocks was that the S&P500 was down 7.8% at the time and my portfolio was up 10.5% for a 18.3% outperformance.  If the markets rallied, I would significantly lose outperformance.  With a 50% allocation in stocks, the markets would have to go down 21% for me to start losing money in the portfolio.  On the flip side, the markets would have to rally over 36.6% for me to start underperforming the markets with a 50/50 allocation.  But if that’s the case, I don’t mind at all.

A 50% allocation in cash (not bonds) with the rest in equities is pretty conservative.  It basically says, “There’s a lot of uncertainty out there and I don’t have much conviction and want to play it safe.“  I’m usually 70-85% equities on average and the rest bonds/stocks.  I realize I will never get super rich being up just 10-15% a year, but with the 10-year yield at only 2%, I’ve decided that 10% is my hurdle rate of return for practically all asset classes.

When your mother fund starts getting chunky, capital preservation and decreased volatility is what you start to seek.  Let’s say you max out your 401K or whatever retirement vehicle you have every year for 20 years.  You’ll probably have $500,000-$1,000,000 after performance and company match.  The $17,000 a year contribution doesn’t make a big difference anymore because a 10% return on $500,000 is $50,000.  If you end up losing 20% one year, that’s $100,000 gone!  At a $17,000 a year 401K max contribution, that will take 6 years to make that money back!  The more you have, the more careful you need to be with your money.

I believe in stocks for the long term, especially as the world’s largest central banks continue to print money.  The real question is whether we can use our ever devaluing cash to buy stocks and real assets quick enough!  My gut says that the bull market is not back, and that if we can return 10% in 2012, that will be another homerun!

What are you guys doing with your portfolios now?  Are you bullish or bearish about 2012?  How have you done in your mother fund in 2011 (as opposed to your punt fund)?

Punt Fund: A portfolio that’s much smaller than your mother fund that’s used to speculate in the markets for fun and with money you can afford to lose (perhaps $5,000-$50,000).  The Punt Fund makes you pay attention to economic and political events.  It sharpens your mind and keeps you thinking.

Regards,

Sam

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Imagine a tennis court.

Now, imagine a cube with sides that are slightly shorter than the length of a tennis court. No, this isn’t some sort of New Age meditation. This is, in fact, a way to visualize all the gold that has ever been mined since the beginning of time.

Most people are shocked to discover the relatively small amount of gold that exists above ground. Indeed, if all that gold was evenly divided between each person on Earth, each individual would only be entitled to a mere 23 grams.

Let’s examine some of the best reasons to purchase this rare chemical element that has captivated humans for thousands of years.

The Economy Hedge

You don’t need to be a financial expert to know that we are currently at the brink of a recession that is bringing the world to its knees. The U.S. debt-ceiling debacle led to the country’s first-ever credit downgrade, while smaller countries like Greece have found their debt so unmanageable that their economy is about to enter the Death Star.

Gold is known for being relatively dependable in the darkest of times, with the price of gold still up over 30% in 2011 despite the recent pullback.  The S&P 500 meanwhile, is down about 10% and the US dollar continues to be weak.

Reduce Volatility & Protect From Inflation

Financial pundits advise strengthening and stabilizing your portfolio with gold due to its ability to withstand inflation and times of uncertainty. Indeed, in the years since World War II (when inflation has affected the U.S. most severely), the price of gold has risen. Thus, the decision to buy gold can be viewed as something of a shield to protect oneself against the ever-weakening dollar, as well as unforeseen economic crises. 

Flexibility

There are a plethora of avenues available for those looking to buy gold, so tailor your purchase to suit your specific needs and comfort level. Purchasing physical gold is of course a time-honored option, while others prefer to invest in gold ETFs such as GLD, gold mining companies or gold mutual funds to avoid the logistics of storing, moving, insuring, etc. There are possibilities for all budgets and levels of financial expertise.

Personally, I find that simply buying GLD and some bling bling rare gold watches are the easiest methods, and the most fun.

Buffering Your Future

You could even consider an IRA backed by gold. Gold IRAs are relatively new, as they only became possible after the Taxpayer Relief Act was passed in 1997. The Act provided a superb option for those looking to reduce the volatility of their portfolio.  Indeed, an investment of $12,500 in gold coins 30 years ago would have resulted in a current net worth of approximately $250,000!

Slow Production + High Demand = Higher Gold Price

Production growth is slow and can’t keep up with demand. Gold production increased at the rate of 1.9 percent for the first 90 years of the 20th century, while in the past 20 years, it has grown at a mere 0.7 percent per year. Meanwhile, demand continues to grow worldwide, especially in China and India.  Did you know that in Vietnam, gold is their asset class of choice?

With gold’s history of counter-cyclicality coupled with strength during uncertain times, the choice to buy gold has become extremely compelling.  The price of gold has come off 12% from its $1,800/oz high, and perhaps you could start owning a tiny piece of that golden, tennis court-sized cube.

2011 Performance Of Gold ETF: GLD

Readers, with the markets tanking, the EuroZone in disarray, a dismal employment market, and the US Fed basically giving up, what are your thoughts about buying gold here?

What do you think about gold’s recent pullback with discussions that people are selling gold to cover margin calls for other commodities?

Regards,

Sam

We have a culture of blaming others for our problems and Main Street is now on a tear with this “Occupy Wall Street” movement that’s gathering steam.  The thesis is that financial institutions and anybody who has anything to deal with financial institutions are bad.  The government and the media help fuel the fire against Wall Street and make them scapegoats for the economic decline.  That way, they’ll hopefully deflect the blame away from themselves.

One man from one Wall Street firm stood up and had enough.  In 2010, he penned this letter below which started slowly circulating the web until it finally caught my eye.  The letter is just as appropriate today as it was last year.  He probably had nothing specifically to do with credit default swaps and other exotic instruments that helped cause our decline.  “Wall Street” is a catch-all phrase that leads to a lot of unwarranted stereotypes.

Just because you work at Bank of America as a teller doesn’t mean that you are to blame for Ken Lewis’ empire building when he bought Countrywide Financial and Merrill Lynch for prices nobody in their right mind would pay, which is now leading to massive layoffs.  Just because someone is a Latin America investment banker at Goldman Sachs doesn’t mean they are responsible for you buying 3 condos with minimal money down in Florida to try and get rich.  No, the guy buying the 3 condos is responsible………… or is he?

Just because you have massive student loans and can’t find a job, that doesn’t mean the US economist working at JP Morgan had anything to do with your situation.  Maybe it’s because you borrowed more than you could afford?  Or maybe it’s because you didn’t do well enough in school or go to a better school for that matter.  Why protest an irrelevant economist when you could protest right at your very own school!

If you are a raging populist, who is easily offended, and complains a lot, perhaps you shouldn’t have a read.  But, if you’re a normal rational person who likes to see both viewpoints, take a look and let’s discuss!  Remember, this letter is a retort against the media and the protesters who’ve attacked him, his family and his industry for months.

“WE ARE WALL STREET” EMAIL

“We are Wall Street. It’s our job to make money. Whether it’s a commodity, stock, bond, or some hypothetical piece of fake paper, it doesn’t matter. We would trade baseball cards if it were profitable. I didn’t hear America complaining when the market was roaring to 14,000 and everyone’s 401k doubled every 3 years. Just like gambling, its not a problem until you lose. I’ve never heard of anyone going to “Gamblers Anonymous” because they won too much in Vegas.

Well now the market crapped out, & even though it has come back somewhat, the government and the average Joe’s are still looking for a scapegoat. God knows there has to be one for everything. Well, here we are.

Go ahead and continue to take us down, but you’re only going to hurt yourselves. What’s going to happen when we can’t find jobs on the Street anymore? Guess what: We’re going to take yours. We get up at 5am & work till 10pm or later. We’re used to not getting up to pee when we have a position. We don’t take an hour or more for a lunch break. We don’t demand a union. We don’t retire at 50 with a pension. We eat what we kill, and when the only thing left to eat is on your dinner plates, we’ll eat that.

For years teachers and other unionized labor have had us fooled. We were too busy working to notice. Do you really think that we are incapable of teaching 3rd graders and doing landscaping? We’re going to take your cushy jobs with tenure and 4 months off a year and whine just like you that we are so-o-o-o underpaid for building the youth of America. Say goodbye to your overtime and double time and a half. I’ll be hitting grounders to the high school baseball team for $5k extra a summer, thank you very much.

So now that we’re going to be making $85k a year without upside, Joe Main Street is going to have his revenge, right? Wrong! Guess what: we’re going to stop buying the new 80k car, we aren’t going to leave the 35 percent tip at our business dinners anymore. No more free rides on our backs. We’re going to landscape our own back yards, wash our cars with a garden hose in our driveways. Our money was your money. You spent it. When our money dries up, so does yours.

The difference is, you lived off of it, we rejoiced in it. The Obama administration and the Democratic National Committee might get their way and knock us off the top of the pyramid, but it’s really going to hurt like hell for them when our fat a**es land directly on the middle class of America and knock them to the bottom.

We aren’t dinosaurs. We are smarter and more vicious than that, and we are going to survive. The question is, now that Obama & his administration are making Joe Main Street our food supply…will he live and will Joe Main Street survive?”

Is there any truth to this letter?  Should we blame financial institutions and people who work in financial institutions for our nation’s economic woes?  Or, should we blame people who borrowed more than they could afford and didn’t uphold their promises to pay off their debts?

If we bring down Wall St., will the rest of society get better or worse?  The one key point I disagree with in the letter is the author’s jab against teachers.  Teachers are woefully underpaid in my opinion, and have taken plenty of hits during this downturn as the government cuts back on educational funding.

Sometimes we just have to take a look in the mirror and accept responsibility for our own decisions.  But sometimes, it’s so fun to list out a bunch of random people and organizations to lay blame on!

“I blame you Mr. Barber for losing me money in the stock market!”

“I blame you Dr. Phil for me still being out of shape!” 

“I blame you Lindsay Lohan for why I can’t stop smoking these joints!

“I blame you Albert Einstein for not allowing me to get straight A’s in school!”

“I blame you Market Zuckerberg for not being rich by age 25!”

“I blame you Tiger Woods for cheating on my wife 30 times and getting a divorce!”

“I blame you Pace University for forcing me to go into so much student debt!”

“I blame you President Obama for why I can’t get a job!”

“I blame you Wall Street for everything that is wrong in my life!”

“I blame you readers for not making me a rich and famous personal finance blogger!”

Share your thoughts and more examples of blame, baby!

Kevin from Thousandaire has an entertaining write-up called “If You’re Going Occupy Something, At Least Pick The Right Place.“  Have a read!

Regards,

Sam

Confession. I’ve been a bad boy for a long time.  It all started when my parents gave me 5 bucks to exchange for quarters at the arcade when I was 8 years old.  This was the most amount of money I ever held in my entire life.  My parents figured it was enough money to hold me over for a couple hours as they went to lunch.

I was with my buddy and we took turns playing various games such as Pacman, Galaga, DigDug, Zaxxon, BurgerTime, and Frogger.  About 45 minutes in, I had spent $4 of my $5 dollars and was worried my remaining $1 wouldn’t be enough to last me until my parents came back.

At this moment, my buddy bragged a lot about how good he was at my all-time favorite game 1942; the one where you fly a 1942 war plane and do 360 flips to avoid gun-fire.  I let him keep talking about how great he was until I challenged him to a bet to see who could last longer for my last 4 quarters.  He obliged, and I not only won $1, but won another $2 as he doubled down.

Little did he know that I had just finished the entire game last week and had been practicing for months on end before.  Ever since that day, I’ve developed a system to increase my betting odds and make plenty of side money.  This is an unusual post for me, since my tag-line is “Honorable Personal Finance.”  As you read on, you’ll realize that perhaps winning money off willing participants who have big heads is not so bad, especially if the proceeds go to charity.

HOW TO DRASTICALLY INCREASE YOUR BETTING ODDS AND MAKE LOTS OF MONEY

You’ve read books like Bringing Down The House where they teach you to count cards and increase your odds by 1 or 2%.  Frankly, that’s useless unless you have a massive bank roll and a large amount of time on your hands.  Oh yeah, having a gang of 4 or 5 folks working with you who are smart and hot doesn’t hurt either!

What I’m going to tell you helps increase your chances of winning by well over 30% in my opinion.  What used to be a 50/50 chance of winning, now becomes a 80/20 or better chance of winning.  That is significant!  In fact, using my method, you can basically lock in a 100% probability of winning.  If you are poor, need money and know how to critically assess people, you are well on your way to make a lot of extra money.

1) Identify big egos.  This is the #1 way to increase your betting odds.  You have to find the loudest, most arrogant person around and figure out what he or she cares about.  Ken Lewis from Bank of America had a huge empire building ego.  John Thain smartly identified this and sold Merrill Lynch to him for $50 billion BEFORE the market open, even though it seemed apparent with futures pointing down more than 7% that Merrill might not even exist by the day’s close! Other examples could be fanatic east coast sports fans who believe West Coast schools are too soft.  It could be some loudmouth Republican who thinks Ron Paul is going to win.  Or, it could be some IT engineer who has no financial investing experience, but consistently touts how great he is at investing.

2) Make them even more overconfident.  You’ve got to really play them up by asking them questions on why they think their pick is going to win.  Let them tell you about all their previous victories and how smart they are.  You’ve got to butter them up and make them feel like geniuses.  The more confident you get them, the easier it is for them to lose site of what the market odds are.  This is when you patiently wait and innocently suggest a bet that is well in your favor.  You must make yourself look as stupid as believably possible.

3) Check official Vegas betting odds.  You can go on various online sites to see what the official odds are between a sporting event, or a Presidential race.  If you are only getting 50 cents to win a dollar because your selection is the favorite, and you can get someone to agree pay you one dollar, you suddenly increased your returns by 100%.  It’s important to always know what the official betting lines are because the chances are, the person you are betting with doesn’t know.

5) Lock in your gains.  For example, President Obama at one point was odds in favor to win the 2012 Presidential election with 1.5:1 (50% more likely to win, bet $1 to win $1.5, or bet $1.5 to win $1, “odds on”).  If you can get someone to pay you $2 to win $1 by playing up how horrible the economy is, and saying the President has no chance of winning, but schucks, lets bet but give me better odds, you are an instant winner.  Why?  because you can simply lock in your gains by making a bet with someone else based on the official line. this case, if Republicans win, you earn $1.5 (win) – $1 (loss) = 50 cents and if Democrats win, you earn $2-$1 = $1.

Note: It’s important to NOT throw around terms such as odds on, money line, point spread and so forth.  Using betting terms will give away to your opponent that you are a seasoned better.  Instead, spell everything out i.e. “So, if Obama wins I get $2, but if the field wins, I give you $1, right?”  Use a clueless, slow accent.  Even throw out wrong nomenclature to confuse them!

6) Consider pressing.  Remember, the bigger the talker, the more you can extract out of them.  During the betting process, when you see your chance of winning increasing, press!  Let’s say you bet on the 49ers getting 10 points against the Eagles, but the 49ers are winning by 7, your opponent must score 17 points just to break even.  Now is the time to press.  Egomaniacs are super stubborn and will be willing to bet more, even when they are losing out.

WHERE DO WE FIND THESE SUCKERS?

Suckers are everywhere.  Hundreds of people make thousands of dollars online with their info-products when they have absolutely no credibility.  It’s beautiful and a bullish reason why I believe the economy will be OK, since you too, can do the same if you wanted to.  Just be careful when you’re sitting at a poker table, if you don’t know who the sucker is, it’s you!

* The Internet.  Over the past couple years, Twitter has been an incredible resource to pick people off.  College bowl games and playoffs are especially lucrative.  When Virginia Tech and Stanford played in the 2011 Orange Bowl, all I did was follow the hashtag #Hokies and #VaTech on Twitter.  I patiently followed the stream and identified who was the loudest, most brash person out there bashing Stanford.

Incredibly, the Hokies were 3.5 point favorites!  This was because #1, there is an east coast bias where for some reason, broadcasters and fans believe the West Coast is weak, and #2 they were playing on the east coast.  I’ve watched both teams, and it was clear to me Stanford was the superior team, even if they had to travel.  If I were making the line, I would have objectively made Stanford a 10 point favorite, so right then and there, I had a 13.5 point advantage with the Hokies being 3.5 favorites.  I was able to ping two guys for $600 total, and collect via Paypal after Stanford blew VaTech away 40-12.

* Rallies & Bars.  If you go to a Sarah Palin fund raiser rally, you will obviously encounter huge Sarah Palin supporters.  All you have to do is cozy up to her loudest supporters, listen to them talk about how great she is to the point where they cannot help but accept your bet that she will not win the presidency, or the Republican ticket for that matter.  Go to a sports bar that supports a particular team, it’s the same thing.  You can better your odds due to their fanaticism and lock your gains by betting with someone else with the real odds.

* Opposing team stadiums.  This one is a no-brainer.  Fans who go to NFL games have a ton invested: time, transportation, parking, and ticket costs.  They are truly fans who have a ton of pride.  These fans are easy to bet with given a win is all they care about.  If their team is a 10 point underdog, they will take even odds because all they care about is a victory!

* Young folks who disrespect their elders.  Young folks haven’t seen as many highs and lows of life yet, which is why they are either overly optimistic, or overly pessimistic.  For example, If you find a 21 year old college student who thinks making $250,000 a year is easy because he’s had some success in the stock market or with his side business, hold on to him tight!  You can shake a good amount of money from him!  I don’t go after much older people because again, I respect my elders, even if there might be the occasional annoying one.

* The rich.  The rich are different from you and me.  They seek experience and convenience i.e. the thrill of betting with someone they know, rather than the cumbersome nature of going through a whole ordeal to get a bet on.  For their convenience, they are willing to “pay up” or give you favorable odds.

It’s important that after you lock in the wins, you must not brag.  Make your opponent feel like they have the upper hand until the very end when you take their money.  You can’t let them feel that they’ve been taken advantage of, partly because you can still increase the size of the bet before the results are in!  Always keep the window open for your opponent to increase their bets when your odds are in your favor.

I’M A CHANGED MAN AND WANT TO HELP

At some point, people started catching on that I’m not as dumb as I make myself out to be.  As a result, I’ve stopped getting action from people I know face to face, and have had to resort to the internet.  The biggest annoyance is when I approach the most arrogant, big-talker, and he refuses to put his money where his mouth is.  That’s just lame.

I’m no longer an 8 year old kid who has to beg his parents for money.  Now, I just beg the government when I need a generous bailout!  All this betting stuff is just for fun now.  I still love the arbitrage, but I’ve started to feel a little bad about taking other people’s money, even though they are delusional most of the time.  It’s not like I’m putting a gun to their head, forcing them to bet.  They made their own bed, just like I make my own and lose on occasion as well.

As a result of my conscience, I now use my proceeds for charity.  Oddly, the use of charity has made it more compelling for someone to bet against me!  That’s great to hear because the real winners are the charities, since no matter who wins, they win.  The bet structure is simply: If I win, the loser donates to my charity of choice and vice versa.

CURRENTLY ACCEPTING PRESIDENTIAL 2012 BETS FOR CHARITY

I am a firm believer that President Obama will win the 2012 presidential election.  He’s go the Jobs Act Bill, a united party, fantastic oratory skills, and is the devil we know.  I do realize there are many anti-Obama fans out there who believe he’s toast, since unemployment is at 9.1% and the economy has decelerated.  The beautiful thing is, the worse the economy gets, perversely the better Obama’s chances because he’ll just blame the Republican Congress for gridlock.  On the other hand, the better the economy gets, Obama will simply take credit.  It’s a win-win.  I’m delusional right?  Thank you!

I’d like to stop my pro-Obama arguments here, because I don’t want to scare you Republican believers away.  I’ve got about $1,200 from 5 different people for even money now, and I’d like to raise up to $3,000 for charity.  I ask that we put a $500 limit per person on the bet, to keep it friendly.  To reiterate, the bet is for even odds that the field wins and I take Obama.  The loser donates to the charity of the winner’s choice.

Hope you guys have learned a lot from this article, and that you are willing to bet against Obama and me.  There’s obviously a chance Obama will not win, which is why you should consider raising my money for your charity.  Remember, I am one big donkey blogger who doesn’t know his head from his ass.  It’s obvious the economy is falling apart and change is needed.  Let’s go!  Put your money where your mouth is and take some money off of me!

Readers, am I a bad boy for using these techniques to pick off overly confident fanatics? 

Is Robin Hood a bad guy? 

Any techniques you use to increase your chances of winning?

Do you know any big talkers out there who, once confronted, shy away?  Why do you think they brag so much but aren’t willing to put their money where their mouth is?

If you enjoyed this article, please sign up for my RSS Feed or E-mail Feed to keep in touch.

Best,

Sam

As the markets were melting down this past week I decided to go watch the World Champion San Francisco Giants beat up the lowly Arizona Diamondbacks in the middle of the day.  It’s quite a treat to watch every game this season because of our current world champ status.  Next season, we’ll be just another team, trying to figure out our way back to glory.

At $80 a ticket, access doesn’t come cheap, but with the ticket comes all you can drink cervezas.  Besides, 1pm games are the best on sunny days.  Might as well go!  When my friends and I got there, we were shocked.  The stadium was absolutely PACKED!  We are talking 40,000 people enjoying a baseball game in the middle of a work day.  See picture above.

I thought about it for a second and came to the realization that the reason why 40,000 people can spend on average $50 per ticket during the middle of the day is because despite the market meltdown, we all have job security or don’t need to work because we have the disposable income to spend.   With a sample set of 40,000, it’s obvious that the economy will be just fine and that unemployment is actually better than what the media drones on and on about.

Think about it.  If you were broke, you’d just stay at home or go to a bar and watch the game on TV for free.  If you were worried about your job, you wouldn’t ditch the afternoon to go watch a game.  You’d be working your tail off and trying to add value.  If you were unemployed, you aren’t sweating it because you’re getting $1,450/month in unemployment income for 99 weeks.  Spending $50 might be more wisely spent elsewhere, but it’s sunny, and it’s the SF Giants we’re talking about!

People have more money than you know.  Why else do you think companies like Apple, Prada, and Tiffany’s are doing so well?  I went to visit my friend’s new place this past weekend and it was awesome!  They had been living in a quaint 1,300 square foot apartment for the past several years and now own a 5 bedroom, 4,600 house on a half acre in one of the most prime areas for $3.3 million!  He said he wasn’t looking to buy, but couldn’t pass up such a good deal when he was able to sell some of his start-up company shares.  Not bad for a guy in his mid-30s just 5 years out of business school wouldn’t you say?

Don’t listen to media schadenfreude about how bad unemployment and the economy are.  They are just bitter they are tied to their desks and can’t come out and play.  I’ve got my finger on the buy trigger come flash crash, Moody’s/Fitch credit downgrade, banishment of US treasuries by foreigners and political gridlock.  And, I’ll bet you a hundred bucks that the rest of you are thinking the same thing as well.  Why?  Because you’ve got the cash baby!

Readers, do you believe the economy is better than perceived?  Do you have some some positive anecdotes you can share with the rest of us?  What could be some pessimistic viewpoints with my story for all you Debby Downers out there?

HIGHLIGHT POSTS FROM AROUND THE WEB

* Are Financially Independent Women A Turn On? by Young and Thrifty.  Does a bear poop in the woods?  Women who are confident, know what they want, can take care of themselves and look like Jessica Alba are definitely a turn on.

* Agreeing To Disagree by Couple Money.  This post is what Couple Money is all about.  Understanding how we can better understand each other in a relationship.  I’m always a little anxious in getting things done too like Elle.  But, in this case, I think it was better to take one’s time.  Congrats on the baby!

* August Blog Income Report by The Financial Blogger.  Mike has been impressively building a stable of blogs over the past several years that are generating thousands of dollars a month.  I like how he is investing a ton of money now ($35,000 a year for Virtual Assistants!) so that in the future, when he retires from his day job, he can collect the rewards.  It’s great how Mike is so transparent about his journey.  One day, I hope to join you Mike!

* What If Your Net Worth Was Revealed? by Life And My Finances.  Great question because you see a lot of folks with fancy cars and nice things and you sometimes wonder how they got there at such age.  As you’ve read from today’s post, my take is that people have nice things because they can afford it.  There’s a lot of hidden wealth out there, and it’s not just people piling into debt.  When I see someone drive a $55,000 BMW, it’s because I know they are making around $550,000 a year and not in huge debt.

* Are You Spending Your Time Wisely? on Investing It Wisely.  A very well written post by Marie who recognizes the shortness of our lifespans and reminds us to do the things we really want to do and break out of our old ways.

* Why I Work For The Government on Broke Professionals.  As soon as I saw 37.5 hours a week, I was smitten!  When I retire, I definitely plan to try and work for the government.  Sounds like a sweet gig!

* How Not To Crumble Under Pressure And Stay Focused on Untemplater.  I went out until 2am this morning, drank to much and woke up with a hang over at 7am.  I was determined to write a post this morning, so I ate a little pasta to hold me over, but ended up barfing it all up.  I felt horrible.  But after I brushed my teeth and rinsed my mouth, I went back to my computer to finish up this 1,000 word post before 9:30am.  That’s a blogger’s life.  That’s focus!

Finally, I wanted to send a shout-out to one of Financial Samurai’s newest supporters, Merchant Warehouse.  Merchant Warehouse was founded in 1998 and is the first company to offer credit card processing services, software and equipment over the net.  In essence, if you are a small business and want to accept credit card use over the net, Merchant Warehouse can help you.  Thanks guys!

Best,

Sam

It’s good to be frugal by nature.  You will likely never get into financial trouble as a result.  You will always be able to appreciate things since you’re never buying the best and most expensive stuff.  Sometimes, however, it’s good to splurge.

You’ve already read “‘No Point Making Money If You Don’t Spend Your Money“, and I’m sure many of you agree.  We work so hard every day for our money, and to just hoard all of it in a bank account is such a crying shame.  There is no dearth of ways to make money, so we are actually much more afraid of running out of money than reality.

Time and time again, I see people who’ve been let go find jobs and security again.  I’ve seen people invest their life savings in a project, only to lose it all.  But, they are still alive and finding ways to live fulfilling lives again.

I get a sense we’re now too cautious with our money.  We’ve been permanently scarred by the multiple evaporations of wealth over the past 15 years that we’d rather not spend on some of the most important things that give us happiness and comfort.  Look at wealth indicators now vs. 2008.  It’s taken 3 years, but on average, we’ve all breached our 2007 highs and some of us, by a lot.  This is important since I can’t imagine us going through such a massive downturn like that again, at least for the next 10 years.  In the meantime, don’t be afraid to spend your money on things you cherish, like a $1,000 doggie stroller for your beloved Chow Chow named “Bear”!

THINGS TO  SPLURGE ON THAT WILL IMPROVE YOUR LIFE

* Bed / mattress. You spend a third of your life sleeping.  It makes sense to get the absolute most comfortable, most supportive mattress as you can.  Go top of the line so that you are fully rested and rejuvenated to have a most productive day.  You can get a wonderful queen size mattress for $1,000-$3,000.

* Personal dental care. Buy the absolute best sonic tooth brush you can with all the bells and whistles.  You can’t grow back your teeth or your gums.  Floss and brush at least twice a week!

* Grocery food. Your body is your temple.  If you eat junk, you’re going to start feeling and looking like junk.  Your energy, mood, and outlook all are affected by the food you eat.

* A hot trainer. What’s more important than your health?  Not much!  A hot trainer works you good and teaches you all the right moves to improve your fitness and extend your lifespan.  Meredith has been great to me, and I’ve lost 8 pounds in 2 months!

* Home theater system. A 40″+ LCD/LED TVs and a 5:1 high end surround sound system.  You’ll never want to spend $25 for two going to the movies ever again with a money home theater system.  I spent $2,000 for my sound system and $1,000 for my TV which has paid off in spades since I’ve only gone to the movie theater three times in the past 5 years and have probably seen over 200 movies since.  200 moves X $25 = 5,000!

* Massages. Last year I spent $700 for a year long passage package that consisted of 14 hours.  I basically got two hours free if I bought 12, and it was the best $700 I’ve ever spent in my life.  It was incredible to just book a massage if I was feeling a little sore, tired, or stressed out.  I could also give hours to my friends, clients, or loved ones as well.

* Ski season pass. Tahoe lift tickets cost roughly $80-85 a ticket per day for adults.  With season passes averaging about $500, after 7 trips you’ve paid for your pass already.  So many times, I’ll go up to Tahoe for 4 days and only ski for two days because I don’t want to spend $85 bucks for a full day when all I can do is board for a couple hours.  With a season pass, I can now snowboard for a couple hours a day everyday without thinking about costs.

* Work clothes & shoes. Instead of buying a lot of mediocre quality clothes and shoes, buy only a few items as if you are building a boutique of high quality items.  Go for the most finely woven suit and the finest grain leather for your shoes.  Sure, you may have to pay 2-3X the average price, but the items will last longer, and you’ll have less clutter.

* Prime property. You want to buy property in the most prime of location.  Prices hold up better in a downturn and rise faster in an upturn because there is only a limited supply.  Think about prime property as being at the top of a triangle where there’s a huge base that’s looking to always get in.  During the downturn, the outskirts of San Francisco fell at one point by 30%+, whereas prime property corrected at most by 10% and are resuming their uptrend again.

* A solid college education. The only people who say a prestigious college education isn’t worth it either can’t afford it or can’t get in.  If you get into Harvard, you do whatever you can to attend over Chico State.  You’ll look back on your career and be thankful you did because $43,000 a year is actually chump change in the grand scheme of things.  Besides, many students get grants and don’t pay the full amount.  Don’t let a silly thing like upfront cost deny you the best education possible.  Your life, career, and children will thank you!

* A digital camera. Memories are our treasuries, and we can keep our loot always in the front of our minds with pictures.  You might as well get the fanciest digital camera with the nicest lense(s) money can buy.  What if you missed capturing that moving target crisply because your shutter speed was too slow?  Don’t you want to accurately capture that moment in all its honestly instead of having bleached images due to lack of functionality?

* Vacations. Many of us up until retirement are unfortunately confined to at most 6-8 weeks of vacation a year.  It’s taken me 10+ years to regularly get 6 weeks of paid vacation after only getting 2 weeks when I first started.  Given vacation time is rare, we should spend the most on them.  We shouldn’t skimp by not spending 60 Euros for the all day hop-on-hop-off bus pass to see Rome.  We shouldn’t try and save money by getting an indoor cruise cabin instead of one with a balcony.  I say go on that helicopter tour in Kauai, an spend the money to go swim with the dolphins in the Bahamas.  Get that 28-day dry-aged rib-eye with that vintage pinot noir for two.  We spend 80-90% of the year working.  We should maximize the time when we are not.

* Safety. Let’s say you’re working super late one night and the neighborhood your office is in turns sketchy after 10pm.  Instead of walking several blocks to wait for the bus, call a cab to pick you up!  Although I’ve recently had some issues with my insurance company, it’s worth getting as much coverage as you can afford – ideally, full coverage.  Health insurance, auto insurance, property insurance, personal liability insurance, and an umbrella policy are all recommended.  You never know what will happen and you want peace of mind, especially if you have a family.  Just be vigilant by not getting overcharged.

CONCLUSION

It’s important we identify things that are most important to us and spend accordingly.  For the most part, I always recommend buying less and focusing on quality.  All that stuff you’ve accumulated over the years that you don’t use is because you didn’t buy the nicest alternative.  What’s your list of must splurge things?

Best,

Sam