How the Toy Companies Get You

Robert Cialdini

Lately, I've been reading the book Influence: Science and Practice by Robert Cialdini.  The book give s the reader a nice glimpse into the many social and psychological reasoning behind persuading and making an impact on people.  I'll do a full book review later in the future, but I wanted to share with you one example that I thought was quite interesting.

In the book, Cialdini talks about a strategy toy companies use to squeeze out a few extra dollars from us in their slow months of January and February.  Their strategy involves displaying adds on your child's favorite TV shows for this years hit toy sometime in November and December.  Think Furby or Cabbage Patch Kids.  After listening to these commercials for a month, your child begs you to buy one this Christmas.  Not wanting to seem like a bad parent, you agree and promise to purchase one.

The shopping season rolls around, and parents across the land are shocked to discover that this year's hit toy is severely under-stocked in all the toy stores.  Uh-oh, what's a parent to do?  Well, you certainly cannot give your child nothing to open for Christmas, so you buy some other toys and pay about the same amount you would have for the hit toy.

A month rolls by and it is now late January.  You see that that the hit toy is now available in your local toy store, and you now have the chance to fulfill your promise to your child.  You purchase the toy, and have a wonderfully thrilled child.  Congratulations, the toy companies managed to get twice the spending out of you.

So what's a parent to do.  The first solution is to never promise your child a toy.  Another strategy is to become better at buying the year's hit toy the first time around.  In the end, the only thing that is hurting in this scenario is your budget.  Meanwhile your child is extremely happy...what's wrong with that?

Wonderful Moment of the Day: Beautifully sunny days in Winter.

Happy 100th Blog Post and Book Review: Advancing Your Career

It’s hard to believe that I’ve already written 100 posts to this here little blog.  My first goal for this writing experiment was to reach 100, and I’m proud to say that I have not missed a date with varying degrees of writing quality.  So here’s to another 100!  It’s always important to set goals, and even more important to set goals you can actually achieve.

In honor of advancing this blog, I’ve recently read a book about advancing your career which I’d like to share with you all.  The Harvard Business Review’s: Advancing Your Career is a collage of assorted articles and writings from Harvard MBA professors and other intelligent experts.  Just to give you an idea about the types of material in this book, here is a list of the article titles:

1.)    How Will You Measure Your Life?

2.)    Turn the Job You Have into the Job You Want

3.)    How to Stay Stuck in the Wrong Career

4.)    Job-Hopping to the Top and Other Career Fallacies

5.)    Are You a High Potential?

6.)    Why You Didn’t Get That Promotion

7.)    Why Men Still Get More Promotions Than Women

8.)    Five Ways to Bungle a Job Change

9.)    The Right Way to Be Fired

10.) How to Protect Your Job in a Recession

11.) How Leaders Create and Use Networks

Right off the bat, you can see some pretty interesting and useful topics.  I’ll focus on two in particular and my own opinions.

How Will You Measure Your Life – It’s interesting that this book about advancing your career and improving your pay and job position starts out with a sobering look and reminder as to what should actually be important to you.  Author and Harvard Professor Clayton M. Christensen discuss his own personal experiences in this field and remind us that family is the most important part of life.  Secondary, it’s also important for a manager to understand that their job can be the “most noble of occupations” as only a manager can truly help someone achieve more with their career and life. 

This article was a nice sobering reminder of what management could be.  Despite the workforce confrontations, the stress of managing a team, and the overall problems a manager could face, it’s important to realize that you as a manager could have more of an impact to a subordinate then that person’s own family.  In my own experience, it’s a shame that more managers don’t know this.

Job-Hopping to the Top and Other Career Fallacies – Author Monika Hamori discusses four main fallacies in the workforce and how career-focused individuals routinely make the same errors.  Fallacy 1: Job Hoppers prosper.  Fallacy 2: A move should be a move up.  Fallacy 3: Big fish swim in big ponds.  Fallacy 4: Career and industry switchers are penalized. 

What I found most interesting in this article was Fallacy 1 and 2.  I’ve seen countless times the career-minded person switch to another job at a competitor only to sour their former relationship with their employer and hurt themselves in the long run.  This type of thinking is often hard to grasp, but keeping a long term perspective will help you in the future.  Secondly, a move doesn’t have to always be up.  If you’re thinking about making a career change, you may need to demote yourself in another industry in order to garner the experience necessary to pursue that enterprise.  While this is a humbling concept, it could be just what you need to pursue a life of fulfillment and happiness.

At 192 pages, this book was a pretty quick read, and offers some whole-hearted career advice that is pretty simple to understand.  My only caveat with reading this book is that it is more focused on the “already executive” type person.  Whereas this information is helpful wherever you are in your career, it is far more focused on those who are already in an executive type position.

Overall, this was a great read and a nice way to focus on your own career.

Wonderful Moment of the Day:  Training on my TSlim today.

Book Review: A Random Walk Down Wallstreet

Not wanting to take my financial knowledge for granted, I decided to go back to some financial and investing roots and review A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing.  Originally written by economics professor and investing guru Burton G. Malkiel, this 2002 update looks more deeply into the latest dotcom bubble and lends further support to his original investing rules.

The book is essentially divided into three sections which consist of a history of market bubbles going back to Tulip Bulb Mania in the Netherlands, a section on explaining why most investing strategies fail, and then he finally wraps it up with some concrete advise and his own personal investing strategy.

History of Market Bubbles:

I have to admit that I was not expecting such an elaborate history lesson from an investing book, but I’ve got to give some credit to Mr. Malkiel as it was very entertaining to learn about investing failures of the past.  Malkiel classifies these market bubbles as investor’s search for the proverbial “Castle in the sky”.  Everyone is looking for a get-rich-quick scheme and sometimes this scheming can lead to worldwide investing mania.  He then goes throughout history, and ends with the latest dotcom boom and bust. 

A few things stuck out when talking about bubbles, namely that they usually revolve around some form of misunderstood technology (i.e. biotech in the 1980’s, dotcom in the 1990’s, and new investing formulas in the housing market of the 2000’s).  Another noteworthy point is that many investment professionals know that they are speculating in a bubble market, but as long as they aren’t the last one holding the asset, they can make a real quick buck.  In fact, whole fortunes are based on these trades.

Failure of Most Investment Strategies

In this section, Malkiel shows us why almost every investment professional cannot beat the overall market return given the risk (or beta) level.  Remember the Capital Asset Pricing Model?  He then looks throughout the past 100 years or so to show us why Technical analysis and even Fundamental analysis miss the mark.  He also debunks many investment strategies such as “Dogs of the Dow”, or “The January Effect”.   In the end, he ultimately shows that given  desired risk level, a diversified portfolio of index funds over multiple asset classes reduces overall risk and returns more than 3/4ths of the mutual funds out there. 

To elaborate why some mutual fund managers repeatedly beat the market year over year, Malkiel gives us a simple coin tossing analogy.  Imagine flipping a coin, heads you beat the market and tails you lose against the market.  Out of 1000 flippers, 500 of them flip heads.  They flip again (signifying another year of returns), and 250 of them get heads again.  We do this for a 3^rd year and now 125 have consistently beat the market 3 years in a row. These folks would be hailed as masters of the market, but instead they just got lucky.  I have to admit, I was a little disappointed with this realization.  Knowing that no one knows what’s going on out there is a little disheartening to your average investor, but there is hope.

Malkiel’s Investing Strategy:

As mentioned before, Malkiel’s strategy is not a complicated one.  In fact, you can achieve complete market protection with just three simple index funds such as a total stock index, total bond index, and an international index.  He goes further into giving advice on dollar cost averaging, Treasury Inflation Protected Securities (TIPS), and even insurance tips. 

Overall, this book is a must if you are serious about investing in the market and your own future.  It’s written for all levels of investment knowledge, and even though I consider myself a little above average compared to typical investment knowledge, I did learn a bunch of new concepts.  Check it out for yourself, or ask your library.

Wonderful Moment of the Day: Made it through my PC build!  More to come on this.

5 Easy Funds

Earlier this week, I received my first addition of the Kiplinger's Personal Finance magazine.  I managed to acquire this magazine through a survey I completed which wasn't all that taxing, and provided me with a free year's subscription.  Not too bad if you ask me.  I read through the magazine and was not disappointed.  With all my own personal finance experience, I can sometimes find these kind of subjects a little too basic for me, but Kiplinger's had articles for everyone in their financial journey.  One such article that I found incredibly interesting was the simple portfolio suggestions.  The rest of this article is my take on the investments they subscribe.  Each one is slightly more complex than the previous.  I won't get into too much detail as to whether the funds will provide decent returns.

"The Ultra-Simple Choice"
1.) 60% Vanguard Total World Stock Index (VTWSX)
2.) 40% Vanguard Total Bond Market Index (VBMFX)

This portfolio is about as simple as you can get while achieving maximum diversification.  Expenses are low, and you profit when the world profits.  The only downside is, like any index fund, you get the good with the bad.

"For Small Accounts"
1.) 33% Amana Income (AMANX)
2.) 33% Homestead Small Company Stock (HSCSX)
3.) 33% Schwab International Index (SWISX)

I've been preaching the Schwab funds ever since they made them free for Schwab clients.  They are cheap and easy to diversify your investments.  I like to point out that this portfolio is diversified and only requires $1,500 to create.  Future investments are also cheep. Amana invests according to "Islamic Principles" if that's something you're interested in.

"ETF's for Income"
1.) 30% Vanguard Dividend Appreciation (VIG)
2.) 20% PowerShares International Dividend Achievers (PID)
3.) 20% SPDR Barclays Capital High Yield Bond (JNK)
4.) 30% Pimco Total Return (BOND)

The goal of this portfolio is straight up income, and currently provides a 3.1% annual cash return.  Keep in mind that this portfolio will have some volatility, but none of that really matters if income is your main driver.

"ETF's for Long-Term Growth"
1.) 30% iShares S&P 500 Index (IVV)
2.) 25% iShares Russell 2000 Value Index (IWN)
3.) 30% Vanguard MSCI Emerging Markets (VWO)
4.) 15% SPDR Dow Jones REIT (RWR)

This portfolio is for those that have a long time to wait until retirement.  Due to stock market and real estate fluctuations, you want to hold this portfolio for at least 10 years.  What's nice about it is that you get some more exposure to small cap stocks through the value fund, emerging markets through the Vanguard fund, and real estate through the REIT fund.

"A Kipliger 25 Package"
1.) 25% Fidelity Contrafund (FCNTX)
2.) 15% Akre Focus (AKREX)
3.) 10% Haror International (HIINX)
4.) 10% T. Rowe Price Emerging Markets Stock (PRMSX)
5.) 40% Harbor Bond Institutional (HABDX)

I'm not too familiar with most of these funds, but Kiplinger's recommends them based on the the skill of the fund managers.  Overall, it still maintains the 60/40 stock to bond split.

Generally speaking, I find all of these funds a little too conservative for me.  Starting in your 30's with a Stock to Bond mix of 80/20, you should increase your bond exposure by 10% each decade you live.  That means, in your 60's you would only have 50% of your income in stocks.  Let's face it.  You could live to be 100 years old, and you should start investing like it's possible.

I'm still digging through the magazine, but overall, I give it an 8/10.

Wonderful Moment of the Day: Fall leaves.

Early Retirement Extreme: Book Review

For awhile now, I've been an avid reader of Jacob Fisker's blog called Early Retirement Extreme  (ERE for   short), and subsequently became enchanted with the idea of reading his book by the same name.  The concept of early retirement is not anything new; in fact people have been living off their savings, the land, or any other "retired" means for as long as humanity, however Fisker is of a new breed of modern pioneers striving to spread the gospel and question the status quo.  

Upon opening up the book, you are immediately prefaced with some caveats on the academic nature of this book.  Make no mistakes, this is no "xx tips to a debt free you", but instead Fisker focuses on the philosophical, theoretical, and mathematical concepts behind seeking early retirement.  Through his visions, he offers a philosophical path to find your own early retirement while also giving some practical insights that question your current level of spending.

The beginning of the book and subsequent first few chapters were rather depressing yet spoke true to the mores and ideals of today's consumer society.  Fisker questions such basic concepts of working a 40 hour work week, buying new appliances, or even the traditional concept of a house.  His goal here is to open your eyes and become what he calls a "Renaissance Man/Woman".  This I thought was a very important concept in that I too am currently striving for this goal, but what does it mean.  He comments on how in today's world, everyone has become so specialized that finding a new career or source of income once you loose your current job often becomes very strenuous.  Imagine a graph with the x-axis being the array of human skills and the y-axis being the depth of knowledge.  Today's modern day experts study one field and so are visualized as a vertical spike on said chart. If technology or society were to change so that the need for knowledge shifts, the expert will find themselves without a beneficial impact to society.  Instead, he suggests that everyone should strive for a breadth of knowledge visualized as a gradual hill along the x-axis (imagine a flat bell curve).  Technology changing or society's views shifting has very little impact to the Renaissance man, and so he can adapt and find future forms of employment.

Fisker doesn't just stop there.  Drawing on concepts derived from such philosophers as Marcus Aurelius's Meditations and Plato's Allegory of the Cave, Fisker finds a way to tie this all together into a completely different frame of mind.  As one gradually reads through his "Manifesto", you will slowly move away from the philosophical and towards the practical.  He questions all things and makes suggestions such as living in a trailer or mobile home (even a boat) instead of a brick and mortar home.  Having a PhD in Theoretical Physics, he can't help himself in touching upon the mathematics of personal finance and investment theory.

I learned much from this book, but I do challenge some of his theories.  One problem he poses is related to the 40 hour work week.  He correctly concludes that the world has become twice as productive as it was in the 1950's, so why don't we work half as much?  I answer this for two reasons; one in relation to competition, and the other for always seeking self-improvement.  First, if you were a company and only let your employees work 20 hours per week, I'll come along and make my folks were 40 and thereby price you out of the market through improved efficiency.  The second revolves around the human desire for always wanting more.  I can survive on 20 hours per week of work, but I can thrive on 40 hours per week.

All in all, I highly recommend this book as a way to completely change your mindset on the world.  As someone who was already the proverbial choir to his preacher, I can say I am already on board, however I may want to live more than the bare minimum when I retire.  Take the time and request your library borrow or purchase this book, which is how I came across it.

Wonderful Moment of the Day: Surviving the day on 3 hours of sleep due to a late flight the night before.

Millionaire by Thirty - Book Review

Last week, I decided to take advantage of my local library and wanted to see if there were any financial schemes to mass riches that I haven't thought about already. Well, I found the perfect candidate in the "Millionaire by Thirty" book written by Douglas, Emron, and Aaron Andrew. I was enticed by the cover, the title, and especially the subtitle which said "The Quickest Path to Early Financial Independence". I was up for some good reading, or maybe a quick laugh, so I dived right in.

The book starts out nice enough, a couple short stories from the authors' own personal lives, but then lists three types of people:

1.) People who make things happen
2.) People who watch things happen
3.) People who wonder what happened

Well, let me tell you, I wanted to be the one that made things happen.  Needless to say, I started getting engaged.

Further reading through a few chapters on proper budgeting, and getting your financial house in order were basic enough, but I kind of already new all this stuff, and wanted to get to the point.  Finally, we reached the crux of their wealth generating tactics; home equity and arbitrage.  Basically, what they want you to do is purchase a home as early as possible with as little down payment as you can manage.  Next, work it out so that you will have the lowest initial monthly mortgage payments as possible.  They even suggest you get a differed interest or interest only mortgage so that you can take the money you would have spent on it and sock it away towards a higher interest bearing investment.  Every so often (maybe 1 or 2 years), take out a home equity loan on the appreciated value of your property, and use the money to invest in your higher interest investment.  Does any of this sound familiar?  It should, because what they are suggesting you should do is become your own bank and commit arbitrage (however, it's legal in this sense).

In case you didn't know, banks make money by taking your deposits in your checking or low interest savings accounts, and using that money to loan out at higher rates.  The margin between what they are paying you and what they are receiving from clients is the revenue that runs the whole organization.  What the authors are suggesting you do is the same thing; borrow at lower interest rates and invest in higher interest rates thereby reaping the margin in profit.

Finally, they suggest that you take the money ready for investing and put it into MFTA or Maximum Funded, Tax Advantaged Life Insurance.  Basically, this is a whole or universal life insurance policy that you can fund for a few years and then borrow from.  What's nice about this is that from beginning to end, this investment is tax advantaged meaning you don't get taxed on the money going in, accumulating, or coming out.  The problem with this investment is that there could be a bunch of fees if you're not careful.

This all leads me to my big problem with this whole concept: home prices took a huge dive back in 2008-2009.
The graph on the left shows the Case-Shiller home price index.  You can see that dotted line is the indexed value of American home prices.  Notice also that catastrophic drop in value in 2008 to 2009.  If you had invested the way these authors suggested to do it back in 2007 or 2008, you would now be in a situation in which all your homes would be loaned out more than their values, and now your mortgage payments are due.  Unfortunately, you cannot access your money for a couple more years, because you put it all in this life insurance policy that's only generating about 4% return...in short your screwed!

OK, I can see where the authors came from when writing this book, in fact they did make huge amounts of money throughout the process, but those were in times where house prices did rise 7% per year, and investment rates were pretty good.  I only imagine how they weathered this whole ordeal.

I did learn a few things from this book that are helpful.  First, I learned a bunch on the tax savings you get from having a mortgage, plus all the other tax savings from the right kind of investments.  Secondly, I learned more about the concepts to maximizing my returns via home equity loans (which are hovering around 2.5% now).  It was a fun read, but I'm just glad to understand a scheme when I see one.

Wonderful Moment of the Day:  Realizing a crock of $%&# when I see it.

Book Review: Bringing Out the Best in People

The need for effective management in the corporate world is absolutely paramount.  I know each one of you have probably experienced a manager whose athority you quesitoned.  I know I've had my fair share, and I want to solve this issue by partly talking about a book that has impacted my life significantly: Bringing Out the Best in People by Aubrey Daniels.

I was exposed to this book via the company I work for in which its core principles are highly emphasised.  Aubrey Daniels promotes the concept of Precision Leadership and has designed his whole consultancy around this particular form.

The main point he emphasizes throughout his book is that precision leadership is all about understanding how to motivate people via the right incentives.  If you think about it, nothing we do is without some sort of positive incentive or reinforcer.  You might, for example, walk the dog, because you don't want to clean up a mess in your house.  You may cook foods your family likes, because you enjoy their appreciation.  Everything boils down to two fundamental acronyms; PIC and NIC.  The first is defined as Positive, Immediate, and Certain.  This is the optimal methodology for motivating people.  If you want to change someone's habit or encourage work they already perform, positive motivation is the best way to do it.  Even better is the second term, Immediate.  If you can give them positive incentives (whether it be a pat on the back, or some sort of accolades) immediately after your worker performed the action, it will have a far more dramatic effect than if you do it at some point in the future.  Finally, the last part of this acronym is the concept of Certain.  The employee should know that every time they do this action, they will get positive, immediate, incentives. 

Another way of managing people is through NIC's, or Negative, Immediate, and Certain.  Much like a PIC, a negative action will have immediate and impactful consequences when promoting some sort of behavior.  It should be noted that Daniel's goes into detail on how negative reinforcers serve more as an antecedent to prevent the action from happening again, but should not be the best form of motivation.  Would you want to work for a company that only provided negative reinforcers?  Sounds pretty bad.

The really great thing about the whole ideas behind precision leadership is that it is completely applicable to every situation in life.  Raising a child is all about finding out what incents them, same thing with raising a pet.  These concepts could be used in negotiations, resolving and issue with a spouse, or any number of situations; the list is endless. 

For me personally, these concepts in the book have taught me many strategies that I will use for the rest of my life.  Better yet, I borrowed the book from a friend for free...how's that for a return on your investment!

Wonderful Moment of the Day = Coming home to a beautiful salad dinner my wife made!