The wisdom (and foolishness) of crowds

In 1906, a British smart guy named Francis Galton attended a fair and there was a contest where people would try to guess the weight of an ox. Being a statistician (and therefore presumably single), he wondered how the crowd as a whole would do, and he figured that since most of them were not experts in cow-related matters (no, their wives don't count), they'd probably come up with something laughably wrong.

The ox ended up weighing 1,198 lbs.  The average of the answers the crowd came up with was 1,197 lbs, which means that the collective guess of those amateurs was only a pound off.

NPR recently replicated the experiment and uploaded a photo to the internet, asking people to guess the weight of a cow named Penelope.  Over 17,000 people submitted guesses.  The actual cow weighed 1,355 lbs, and the average guess was 1,287 lbs.  Not as close as the original, but still less than 5% off.  Of the respondents, 3,000 were "experts," people who knew a little something about cows, and their average was 1,272.  That's right, the self-proclaimed experts actually did worse than people who knew nothing about cows.  Not by much, but still.

While at the fair, they asked a group of kids how much they thought the cow weighed, and after the first one said 200 pounds (because kids are stupid), the others followed suit and gave answers that were pretty close.  Now, I'm tempted to attribute that to the stupidity of children as well, but adults do that too.  It's what's called "information cascade," and it happens because people instinctively look to leaders.  They assume since someone already blurted out an answer with some confidence, they must know what they're talking about.

There were a handful of people who guessed the exact weight, and the guys at NPR called up one of them at random, who turned out to be a 20 year old college student, who came up with the answer via the very scientific method of "googling that shit."  His extensive 90-second research told him that the average weight of a cow was 1500 lbs, and by comparing the provided picture of Your Mom with the picture of Penelope, he correctly guessed she weighed 1355.

The two points I'm making here are that the crowd tends to do better than the experts at predicting things, as long as they aren't swayed by the decisions of those around them (like the kids were, by that first little dummy), and that just because someone gets the right answer once, it doesn't mean they will be able to do it again.

In the same vein, if left to its own devices, the stock market tends to be a very good indicator of the actual value of a stock.  Investors are irrational, but collectively, they tend to arrive at a price that's pretty close to what it's actually worth, as long as they aren't swayed by "experts" or TV personalities who talk about this or that stock or investment.

That's also why it's so hard to beat the stock market.  The wisdom of the crowd is pretty good, and the people who beat it are often just lucky.  Remember the cow experts who did worse than the average non-expert at guessing the weight?  Financial experts like money managers tend to do the same with investments.  More often than not, they actually underperform.  Four out of five do worse than the market over a 20-year time period.

Now, the principle of crowd wisdom doesn't really hold when a certain investment is highly visible and when investors are influenced by others.  When people see everyone is piling into a certain stock, they think that it must be a good investment, so they do as well.  Then bubbles and panics happen:

Remember bitcoin?  The real estate market? Fuckin' Beanie Babies?

Chances are, once you hear about something hot, it's probably too late.  That was the case with bitcoin, the real estate market, you name it.  By the time the media reports on it, the smart people have made their money and will soon be pulling it out.  Of course, there is that 20% of experts and money managers who actually do better than the market, and those genius investors like Warren Buffett and Peter Lynch, who have 9- or 10-figure net worths, but good luck with that.  Your best bet as a novice investor (as I would assume most of the people reading this to be) is to ignore the chatter and not try to go for whatever the hot investment is at the moment.  Instead, you'll be better off by investing regularly in a low-fee index fund.  To read more about cows, crowds and averages, check out this article.

Good credit

A few years ago, before I really got into finance, I was in line at a Walmart, listening to a lady talking to her friend about going through the process of getting a house built by Habitat for Humanity.  These houses are built with donated labor and some donated materials, and the lucky homeowner generally pays a fraction of what they would if they had to buy it on the market.

She was worried that she might not qualify due to her poor credit, and didn't know what to do.  I helpfully chimed in that if she wanted to raise her credit score, all she had to do was make her payments on time.  

She scoffed, as if that was something that would never happen, and it dawned on me that not everyone had the same attitude towards debt as I did (namely, that it's bad, and you should try to stay away from it as much as possible, especially consumer debt).

I entered the military with about $4,500 in credit card debt and a credit score of about 580.  The debt was not, as you might think, from stupid purchases.  In fact, most of it was from necessities, such as gas and groceries.  I was just not making enough to get by, and racked up debt just to survive.  Of course, at the time, my money management skills were pretty bad.  

When I finally got a steady paycheck, one of my first priorities was paying off my debt, and I was surprised to see my score jump to 630 within a few months.  I was still in debt, but no longer maxed out, and making regular payments that were more than the minimums required.

For the past few years, my credit score has been around 750, which I thought was pretty good, but I was kind of disappointed it never went higher.  However, a few months ago, I was astounded to see it hit 810, presumably because I had crossed some mythical length of credit history. In fact, this is probably the highest my credit score can possibly go without a mortgage.  The highest is 850, in case you were wondering.

In case you thought I was lying

Here are the factors that play a role in your credit score:

1) Percentage of the limit used: 10% or less in generally best.  So if your credit cards have a $10,000 total limit, you want to have no more than $1,000 on there at any one time.  Higher is ok, but I wouldn't recommend having more than 50% of your limit in use.  I'm usually at 1-3%, because I spend very little, and pay it off in full every month.

2) Payment history: they want to know if you make your payments on time.  Never, EVER pay stuff late.  I never have, so my payment history is 100%.

These two are the most important things that go into your credit score.  There are people who are millions of dollars in debt, but still have great credit scores because their debt doesn't exceed a certain portion of their limit, and they always pay at least the minimums on time.

3) Derogatory marks: basically, if you have accounts in collections (if you haven't paid for a few months, it tends to go to collections), bankruptcies, etc.  If you pay on time, this one is irrelevant.

4) Age of credit history.  Never close the first card you ever got.

5) Total accounts: they want to see you make good on paying loans back on several accounts.  This includes accounts that have been closed.  I have 16, including old car loans, closed credit cards, and three cards that I still have open.  It's recommended you have at least 2 credit cards open.

6) Credit inquiries: every time you apply for a loan, they make what's called a "hard inquiry."

So in summary, for good credit, keep your debt to under 50% (preferably 10%) of your limit, and always make your payments on time.

The lottery

In 2002, a man named Jack Whittaker won over $300 million in the lottery. He was already a millionaire at the time, but like many other lottery winners, his life took a turn for the worse. He did donate 10% to churches and even more to charity, but he had a bad habit of leaving cash in his car and getting it stolen, he blew a lot of it on casinos, his house got robbed, and his granddaughter got killed, presumably for drugs or money.

I was surprised when I read it because rich people seldom play the lottery (except when the prize is high, and I'll get into that in a minute). Especially someone like him.  Jack lived simply.  Not many people knew he was wealthy. Self-made rich people tend to be very calculating with their money and know that the probability of winning is so low as to be non-existent. You'd be much better off just putting the money in a savings account. One reason most lottery winners tend to lose all their money within 3 years is that they overspend. Friends and strangers ask them for money, and many oblige. They buy luxury stuff that only makes them happy briefly. It strains their relationships.

Do you know what the difference is between someone who made $30 million and someone who won it? The first had to work for his/her money and the second was simply given it. Money you earn is much more difficult to part with.

Poor people play the lottery regularly, while rich people are more calculating and only tend to play when the prize is very large: http://www.businessinsider.com/how-rich-people-and-poor-people-play-the-lottery-2012-3

I still buy a lottery ticket every now and then, in spite of knowing that the lottery is a "stupid tax". If you ever win, make sure you set aside a good portion of it into low-cost investments (diversified index funds are my suggestion), and feel free to splurge the rest. Just make sure you can actually cover the whole cost of that house/car/island with the remainder and not have to dip into your investments.

Fitness

You know what I'm into?  Fitness.  As in, fitness whole burger in my mouth.

Lol, so punny

On a serious note, fitness is extremely important, not just for your health, but also for looks.  A fit girl with an ugly face will almost always be considered more attractive than a fat girl with a pretty face.  That's because something like 90% of looking attractive is about being fit.  I don’t see it so often here in California because people are more image-conscious, but in Georgia, I’d often see fat girls plastered in makeup or with a deep tan because they thought it would make them look pretty.  As the old saying goes, you can’t put lipstick on a pig.

Oh, wait

What people fail to realize is, like a lot of things, fitness doesn't happen overnight.  (Except when I go for fit'ness burger in my mouth.  That I can do in like a minute.)  You need to take small steps.  People who only work out 10 minutes a day but stick to it for several months will see better results than those who go hard once or twice a week.

Cutting back on sugar also helps tremendously.  For the past decade, my weight would fluctuate between 180 and 195 lbs.  I thought I was pretty fit, but I did have a little chub.  A few months ago, I took some medication that had a side effect of appetite suppression, which helped me to lose about 20 lbs.  So there I am at 165, feeling better than I had in years, and I decided to keep the weight off.  So far, I've managed to stay under 170, and it feels good.

I'm 5'10, by the way.

So in summary, stop whining about being fat, work out REGULARLY (even if it's just walking around the block), eat less, cut out sugars and be patient!

Also, if you're a girl, use the time you spend tanning to work out.  

Rappers and wealth

I was at a hookah bar in Temecula last night with a couple of friends from work, and they had a 300-inch TV on the wall playing hip-hop videos.  We watched it for an hour or so, providing commentary the entire time.

Every now and again, I'd see a rapper I'd never heard of come up flaunting his wealth in the form of cars, jewelry and houses, and I wondered how much he was worth.  So I looked him up.

I discovered that the lower the rapper's net worth was, the more he tended to flash.  Case in point; Young Thug.

I'd never heard of him, and the mumbling that passes for rap in this video means his career will last about as long as Sisqo's.  If you don't know who that is, don't worry.  The kids these days don't either.  He had his 15 minutes of fame in the early 2000's.

What about Soulja Boy, remember him?

He came to prominence in 2008-ish and faded like a particularly noxious fart in the wind.

Anyway, Young Thug's net worth is $500,000.  Half a million. Like, he probably wears a third of that around his neck.  On the opposite end of the spectrum, take a look at Diddy and Dr. Dre.  When was the last time you saw them flashing anything in their music videos?  A couple of decades ago, maybe?  That's because they don't have to. They are worth about $700 million each, easily making them the richest men in hip hop.

T.I. used to be all about the bling, but he's toned it down somewhat, and for good reason.  He's worth $50 million.



Then there's Rick Ross, who's still into showing off, but he's only worth $35 million

I wonder if he has tattoos under his tits

I'm not saying that you shouldn't buy flashy stuff if you have the money.  All I'm saying is that most people who feel the need to show off, tend not to be that rich.  An inferiority complex, if you will, kind of like how people with small dicks tend to drive Hummers and purchase large firearms.

Dan Bilzerian, in case you weren't aware

There's a big difference between being wealthy and rich.  Wealthy people think about the future and have no need to prove to others how rich they are.  Warren Buffett is one of the richest people in the world (worth over $70 billion), and he drives a 15-year old car.

Your face when you realize your $25 million ain't shit

What the hell?

Today, I experienced two things that left me flabbergasted

This was roughly my expression

I was at the gym, watching CNN in between sets, and the news ticker at the bottom was saying that in Kansas, welfare recipients may have to pay for "tattoos, tobacco and fortune tellers" out of their own pocket. As in, they're currently using taxpayer dollars for those things. 

Movies were also included, but that's a quality of life thing, so I won't complain about that.

On the way back home, I was listening to the radio, and an ad came on for a Duck Dynasty musical. Duck Dynasty is purportedly about "faith, family and food" but it's just a reality TV show about a rich redneck family that makes duck calls.

When I heard there was going to be a musical, I almost crashed.  There's a freaking musical? Why is that stupid show still around?

Anyway, what I'd like you all to get from this rant is this: I've been hitting the gym, so get at me, ladies.

Personal loans

Lending money has always been a tricky endeavor.  For one thing, you don't know if the person will pay you back, and if they don't, it may strain your relationship.  It's always best to give money to people without the expectation of ever seeing it again.  You'll be happier that way.

A few years ago, in 2011, an acquaintance of mine called me up and asked me to loan him $1,000.  I always try to help people whenever I can, be it helping them move, tutoring them, or giving them money, and since I had a good salary and substantial savings, I agreed immediately.

He said he needed to go to a funeral or something.  I think he was surprised I had agreed so readily, because he then said "Well, actually, can I borrow $1,100?"

"Sure, no problem," I said.

Then he asked me to wire him the money, as he needed it ASAP.  It would have taken a day or two for a check to reach him by mail, as I was in Georgia and he in North Carolina, but whatever.  He needed it now.  So I spent $20 to send it via Western Union.

He swore up and down he'd pay me back, and being the naive person I am, I trusted him.  The first payment of $100 came about 6 weeks later, when he was in town, and I got it without a problem.  After that, I had to send him repeat reminders to get anything.  And it was like pulling teeth.

Now, all this wouldn't have been so bad if he were in a bad financial position.  I've loaned money to people who promised they'd pay me back in 3 months, and it ended up being eight, but I sympathized because they truly didn't have any money.  I've been there, and it sucks.  I totally understand.  Plus, they actually tried to pay me back ASAP.

What bothered me wasn't the fact that this fool had a job that paid well.  Or that it was taking a lot longer than he'd promised.  What bothered the shit out of me (and I'm sure you all can sympathize) is when I'd go on facebook and there would be a post on his wall saying how much fun he was having traveling around, visiting friends, club-hopping, going out to eat or for drinks, or even gloating about a watch he'd just purchased.  Those outings were probably setting him back at least $50 a night.  Fifty motherfucking dollars he could have been using to pay me back.

A few weeks after the first payment, when I still thought he'd be paying me back regularly, he called me and asked if I could co-sign with him on an apartment lease.  I almost would have, too, if I hadn't remembered a conversation I had with someone just a few days prior, in which they told me that they readily give money to friends and family, but will never loan their credit.  I politely refused, and it's a good thing I did, as he ended up losing the apartment.

You may be wondering why I helped him.  I'm naive and very trusting, and I tend to believe people are generally good and will do what they say.

Over the next 18 months, I got back a total of $700, culminating in a phone call in October of 2012 where he asked me how much he still owed me.  I said $400.

Him: "Really?  I thought it was $350"

Me: "No, it's $400"

Plus that 20 I had to spend to send you the money, dipshit

Him: "Are you sure?  I thought it was $350"

Me: "You know what?  If you just send me $200 by November, we can call it good."

Him: "Really?  That's great, thanks so much.  I'll be sure to send it to you.  Thanks, man."

You can probably guess that I received precisely zero dollars the following month.  I never heard from him again, and we are no longer friends.

On the plus side, he'll never ask me for money again.

Yaaay.