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 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Sun Apr 04, 2010 4:21 pm 
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It's interesting seeing a thread from the first half of 2008 in which people express with absolutely certainty that they could borrow money at 3% (or more) and then invest the money in stocks, mutual funds, real estate, etc. and still turn a big profit. I wonder if those people really did so, and whether they're still certain it's the right idea 2 years later.


Interesting to look back - yes - but the theory is no less valid today. Nobody ever suggested that one should expect large profits after holding equities for only two years, or even ten years. Given that sentiment has probably changed (now fewer people think this is a workable strategy) it probably means today is a great day to borrow at money 2 or 3% and buy stocks for the next couple decades.

Tim


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 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Sun Apr 04, 2010 4:49 pm 
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Not sure I think anyone should ever borrow money to buy stocks!

I know the math might justify it on an expected value basis but it just is too risky.


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 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Sun Apr 04, 2010 5:37 pm 
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DoingHomework wrote:
Not sure I think anyone should ever borrow money to buy stocks!

I know the math might justify it on an expected value basis but it just is too risky.


Would you also say that nobody should borrow money to start/finance a business venture? How many Fortune 500 companies made it without leverage? What's the difference between that and borrowing money to buy shares of someone else's business (except that buying shares can provide greater diversification and thus lower risk)?

My point is simply that equity investing is risky no matter what. But risk and return are intertwined. If we just wanted to avoid risk we'd buy CD's. I find it ironic that Dave Ramsey will tell someone to invest 100% of their savings in stock, but at the same time instructs people not to use leverage because it is too risky. Drawing the line right there seems arbitrary to me. People need to draw the line for themselves. For some of us, giving up our job to start a business with our life savings is indeed "just too risky." But thank God for the entrepreneurs and venture capitalists that are willing to take those risks.

Tim


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 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Sun Apr 04, 2010 5:48 pm 
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timwalsh300 wrote:
DoingHomework wrote:
Not sure I think anyone should ever borrow money to buy stocks!

I know the math might justify it on an expected value basis but it just is too risky.


Would you also say that nobody should borrow money to start/finance a business venture? How many Fortune 500 companies made it without leverage? What's the difference between that and borrowing money to buy shares of someone else's business (except that buying shares can provide greater diversification and thus lower risk)?

My point is simply that equity investing is risky no matter what. But risk and return are intertwined. If we just wanted to avoid risk we'd buy CD's. I find it ironic that Dave Ramsey will tell someone to invest 100% of their savings in stock, but at the same time instructs people not to use leverage because it is too risky. Drawing the line right there seems arbitrary to me. People need to draw the line for themselves. For some of us, giving up our job to start a business with our life savings is indeed "just too risky." But thank God for the entrepreneurs and venture capitalists that are willing to take those risks.

Tim


No, I would not say that people should not invest in their own business or use leverage. I agree with your point but I think that what you are missing is that when one starts a business or invests in venture capital it is very risky. One should only take the risk with money that can be lost.

Investing in public companies on margin is probably less risky, and I admit that the risk-adjusted return might make it attractive when interest rates are low compared to stock returns. But I think only people sophisticated enough to make the comparison mathematically should even consider margin. Fortune 500 companies have people that are smart enough to figure those things out and even they end up on the wrong side of the cliff occasionally.


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 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Mon Apr 05, 2010 10:06 am 

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The margin rates pretty much make leverage unappealing unless you have a lot of money and a long time horizon. There's only a few cheap options for borrowing money:

1) 0% credit card balance transfers. Unfortunately, the time horizon does not match up so while you might need to pay it all back in 1 year, you may incur losses during that time. It was good for CC arbitrage though back when you actually could get 5% in online savings accounts.

2) Low-interest student loans or mortgages. In effect, most people do use this leverage. If you put their extra money into investments instead of paying extra principal on debts, it mathematically is the same as borrowing that money against your house to invest.

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 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Mon Apr 05, 2010 10:37 am 
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Let's compare investing in your own business (or in someone else's venture) and borrowing on margin to buy stocks:

Investing in a business:
>> Typical cost of capital (interest rate): 10% -- this is a wld guess but probably not too crazy
>> Typical return on capital: 25% -- again, this will vary by business but is not unusual
>> Net return is 15% so it makes sense to use leverage assuming you have a solid business plan and execute it effectively.

Investing in stocks on margin
>> Typical margin rate: 8% (assuming around $50,000 borrowed)
>> Expected return on stocks: 10%
>> Net return is 2% but since you can only borrow up to 50% of a position this is really more like 1%

I have made the point Mossy is making that investing rathier than paying off your mortgage is a form of using leverage to invest. I am personally at this time consciously investing in funds AND paying down a mortgage at an accelerated rate. If I felt strongly one way or the other I would not be doing both. But my mortgage rate is low after tax considerations and my expectations for teh stock markets are modest so there is no strong incentive to lean either way.

If someone uses margin to invest in index funds it is probably relatively safe and over the long run should slightly enhance return. But I think the extra kick is hardly worth the extra risk for me.


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 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Mon Apr 05, 2010 5:51 pm 
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When did we start talking about buying stocks in a margin account at 8% interest? The discussion (I thought - from the link posted by Storch Money) was about prepaying low-interest student loan debt (or mortgage debt, if you prefer) vs. investing the money instead...

Tim


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 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Mon Apr 05, 2010 6:08 pm 
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timwalsh300 wrote:
When did we start talking about buying stocks in a margin account at 8% interest? The discussion (I thought - from the link posted by Storch Money) was about prepaying low-interest student loan debt (or mortgage debt, if you prefer) vs. investing the money instead...

Tim


I thought it was a general discussion about borrowing to buy stocks. I checked today and margin rates are currently about 8%. If we substitute a more typical after-tax mortgage rate of around 4-5% I still think the spread is too low to justify the added risk. But that is a personal decision every investor should make. If you know what you are doing and think the spread is attractive, go for it!


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 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Tue Apr 06, 2010 6:12 am 

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timwalsh300 wrote:
Would you also say that nobody should borrow money to start/finance a business venture?


Yes, I would say that.

timwalsh300 wrote:
How many Fortune 500 companies made it without leverage?


How many small businesses have fizzled out because of debt? You don't hear nearly as much about those, do you? But I assure you, they're out there, and their former owners will be bearing the financial consequences for the rest of their lives.

timwalsh300 wrote:
What's the difference between that and borrowing money to buy shares of someone else's business?


I suppose when it's your own business, you have slighly more control over the direction of the business. But they're both far more risky than I'd be comfortable with.

timwalsh300 wrote:
My point is simply that equity investing is risky no matter what.


Agreed. But investing with borrowed funds adds a whole new layer of risk to the situation.

timwalsh300 wrote:
But risk and return are intertwined.


Of course. But if you don't need those higher returns, and are simply being greedy, why take unnecessary risk?

timwalsh300 wrote:
If we just wanted to avoid risk we'd buy CD's.


Right. And if I had $5 million, that's exactly what I would do. But I don't have $5 million, so I'm required to take a little more risk. But I do have enough that I don't need to take even wilder risks, such as investing in penny stocks or taking on large amounts of leverage.

Maybe for some people, they can't save enough so that they don't have to employ leverage and take all that extra risk. But I was under the impression that most people here at GRS have the means to save enough to become financially independent without resorting to that sort of risky behaviour.

timwalsh300 wrote:
I find it ironic that Dave Ramsey will tell someone to invest 100% of their savings in stock, but at the same time instructs people not to use leverage because it is too risky.


I'll agree with you there. In this regard, Dave is woefully ignorant at best, and deliberately hypocritical at worst (he does, after all, get kickbacks from the financial advisors he endorses, and whom presumeably rely heavily on commissions from selling expensive equity instruments to Dave's followers).


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 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Tue Apr 06, 2010 8:12 am 
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I agree with everything you wrote, Kombat. Again, my point is just that people need to draw the line for themselves based on their needs, goals, comfort with risk, etc.

For you that means carrying no debt whatsoever, I guess. For someone else that might mean raising capital to pursue a dream of building the next Fortune 500 company. For many of us who are in between that simply means investing in stocks/bonds rather than pre-paying on some very low interest debt.

Tim


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 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Thu Aug 26, 2010 7:35 am 

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Hey folks. I was listening to Dave's podcast the other day, and he once again demonstrated why he should not be giving inveseting advice. A Twitter follower wrote in, asking Dave how to calculate how much he could have at retirment if he saves regularly. Dave appears initially confused, unsure whether the writer is asking how much he could have, or how much he should have (that is, what number should he be aiming for to ensure a comfortable retirement). Dave decides to address both questions. The following quotes are transcribed directly from the podcast. I've cleaned up some of his "uhms" and "you knows."

I know it's long, I apologize for the length. If you're too impatient to read the whole transcript, I've bolded his particularly egregious comments.

Quote:

"What's the formula you use to figure out how much money you could have at retirement? - or SHOULD have at retirement?"

Wait a minute, how much money you COULD have at retirement. Well COULD have at retirement is a formula that is in a financial calculator laying here. And so if you enter a payment amount that you're willing to put into an investment, a rate of return that you're expecting from that investment, and the amount of times you're going to enter that payment, meaning 12 times a year if it's a monthly contribution to a Roth, that kind of thing, then it spits out a number as to what you will have.

For instance, I'll just tell you one I've memorized, I don't have to put it in the calculator. If you save $100/month in a great growth stock mutual fund that averages 12% a year which I own several that have done that, SEVERAL that have done that, for those of you that are GOOBERS out there who can't figure out a way to find a mutual fund that averages that kind of a rate of return, go to one of our ELPs or simply go and buy Morningstar software. It's not really hard to find a fund that has averaged that over a long period of time. Anyway, making 12% on my money if I put $100/month away, and I do that from age 20 to age 60 for 40 working years, or 30 to 70, however you want to measure it, 40 years, I do that once a month, $100, becomes $1,176,000. Now that is a financial formula, there is a financial formula that you can actually do that longhand with a whole series of tables that we used to use back when the dinosaurs roamed the earth before we had a little financial calculator in our hand that would do it all for us, or in our computer program that would do it all for us.

I use a very very old-fashioned calculator, a Hewlett-Packard 12C 'cause that's what I was trained on. It's a different keystroke process and it changes it you know my mind works that way so the logic process on that I'm used to and so I've stayed with it and I can do it very very quickly with that do all kinds of things very very quickly with that particular calculator. But you'll use whatever you want to use.

Now that's how you find out what you COULD have at retirement. What SHOULD you have at retirement? I recommend that you try to have enough of a nest egg invested that throws off a rate of return that at 8% you can live on it. And so if you had $500k saved, a half a million saved, at 8%, that'd be $40,000/year. That'd be about a little less than an average household income. If you had $1 million invested and you lived off of 8% of it, you'd have about an $80,000/year income. Now, here's where I get that, and it's not a perfect formula, it's just kind of a rough and dirty thing to inspire you to save. If you want to get really really nerdy about it and really detailed about it and break it all down, you can. But I can just tell you that it's almost impossible to have life turn out like your plan is. So what you need to have are general concepts that help you calculate rough ideas, and then you move towards that, and as you move towards that you're wealth is going to increase and what's going to fool you is you're going to end up with more than you needed, just 'cause you were aiming at it, in most cases.

Now, so, so the way I get that 8% formula is this. If I have a million dollars invested at 12%, the inflation rate, meaning how much stuff goes up, a loaf of bread goes up, clothing goes up, in cost every year, has averaged about 4.2% for the last 72 years. The consumer price index is the measure of inflation. So if it costs me 4% more next year just to buy the same things, that I bought last year, then I need to have my investments steadily growing by 4% to break even with inflation. And so if I put a million dollars in an account, in 5 years, it will buy, about 25% less than it would buy now. It'd be more like I had $750,000. And so, you've got to have your, in other words a millionaire is not what it used to be. So you've gotta have your investment program including inflation.

Now, so if I'm making 12% on my money, but I need to leave 4% in there to break even with inflation, that means I can pull off 8%. And still break even. Now, some of my critics, if you read "I hate Dave Ramsey" and "Dave Ramsey sucks" on the Internet and that kind of stuff, and there's plenty of 'em out there that do nothing, but they criticise me, because they have nothing else to do 'cause they do nothing, but they claim you can't get those kind of rates of return and that's unrealistic. Well that's fine. If you want to do it at less than that, you can. Then you would say well I don't think I can get 12% so I can only get 10%. Well you still need to account for inflation, and so you need to be planning to live off of 6% If we're making 10 we're gonna leave 4 in for inflation, now we're gonna live off 6. And that's called a real rate of return, an after inflation adjusted rate of return.

And so, you know it doesn't matter to me. I know what I've gotten on my mutual funds, and I'm not a rocket scientest. I'm not an investment guru, I'm a guy with a finance degree with several other letters and licenses after my name that knows how to calculate this stuff. But you know there's people out there that are smarter than me on this stuff on investing. That's fine. But I'm still investing and still achieving an average over time with mutual funds with track records of over 12%. Now if you can't do that then you need to adjust your plan. And you know honestly, I've done better than that. But I mean, 12% is fairly conservative.

[In a mocking voice]"Well the economy just can't sustain.." oh you don't know what the crap you're talkin' about. Now we're getting into the philosophy of whether we're gonna think positively or whether we're gonna think negatively. Now we're getting into the philosophy of whether we think this country is crashing or whether it's going to get better. And now all you're doing is freakin' guessing. All I'm doing is looking at historical data that brought us to this point. Can we project that into the future? Reasonably? It's about the only thing reasonably we can project into the future, we can't project your negativity. It doesn't work. Or your freakin' guess. This is the Dave Ramsey show.



With respect to the first interpretation of the question (how much the writer COULD have),

It's interesting that Dave doesn't even seem to be aware that algebra can answer this question simply. He seems to think the only way to answer this question is by trusting a magical button on his calculator, or consulting some ancient tables of numbers (in which the calculations have already been performed for an arbitrary set of inputs).

Of course, there is a formula for calculating this value. It's admittedly a little complicated to try and dictate over an audio medium like a podcast, but he could have at least acknowledged that you can do the calculation without a magical calculator or ancient tables of numbers.

The formula is: B = A(1 + i)^n + (P/i)((1 + i)^n - 1)

where B is the ending balance, A is the starting amount (0 in Dave's example), i is the monthly interest rate (a wildly optimistic 1% in Dave's example), and n is the number of investment periods - months in this case (480 in Dave's example; 40 years).

When he addresses the second interpretation of the question, Dave makes the same classic mistakes I've complained about in the past. Specifically:

  • He doesn't seem to realize that 12% is an extremely optimistic anticipated rate of return.
  • He implies that during retirement, you should remain completely invested in the stock market, whereas conventional wisdom advises adjusting your asset allocation to decrease your exposure to stocks as you approach and enter retirement.
  • He completely ignores the impact of mutual fund fees. 12% isn't 12% after loads and fees are taken out. But then again, Dave said "12% is fairly conservative."
  • He either doesn't know (or doesn't care) that virtually all experts acknowledge that a 4% withdrawal rate is considered "safe." He instead advocates a rate double that, then admits he's not an expert. Well why not at least tell us what the experts do say?

It really makes you wonder whether Dave ever actually looks at his own investments and calculates his actual rate of return. How can someone who presents himself as a money expert be so incredibly ignorant and wrong-headed when it comes to investments? He dismisses the research of industry experts like Warren Buffet, Peter Schiff, and anyone else who warns that we should not expect the same aggressive growth we've seen in the past as saying they "don't know what the crap they're talking about."

Unbelievable.


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 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Thu Aug 26, 2010 8:05 am 

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Wow, that's pretty bad. Not to mention the sheer tone of his podcast was "Your a moron".

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 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Thu Aug 26, 2010 12:20 pm 
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Thanks for posting the transcript kombat.

If anyone reads that and still thinks Dave is not an idiot or a complete scam artist then PLEASE educate yourself. The errors and misrepresentations in his statements are enough to get a real financial advisor fired and banned from ever practicing again.


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 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Thu Aug 26, 2010 12:25 pm 
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kombat wrote:
It really makes you wonder whether Dave ever actually looks at his own investments and calculates his actual rate of return. How can someone who presents himself as a money expert be so incredibly ignorant and wrong-headed when it comes to investments? He dismisses the research of industry experts like Warren Buffet, Peter Schiff, and anyone else who warns that we should not expect the same aggressive growth we've seen in the past as saying they "don't know what the crap they're talking about."

Unbelievable.


Why should Dave worry about his investments. He makes his money off the suckers that buy his products and sign up for his "eduction". I'd bet a paycheck that if he were forced to disclose his investments we'd see that he is invested in no load, low fee mutual funds somewhere like Vanguard.

He just doesn't want his followers to know that because he woudl no longer make any money off them.


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 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Thu Sep 02, 2010 7:29 am 

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I may open a can of worms by saying this but I don't like Dave Ramsey at all. I know he's in a better place than me but I don't like him. |( I have tried listening to him but I just get irritated and go onto the next station.

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