From time to time I put out an article here that depicts me as an old curmudgeon. Well, in some ways, I guess I am. My mom used to say I had an “old soul,” even at a very early age, perhaps because I spent much of my youth around older people. In fact, I’m only in my mid-thirties.
Since I was blessed to be around strong doses of equal parts wisdom and healthy skepticism growing up, I look at things much differently than most people in my age bracket. Some may call it pessimism. I get that. In fact, I have to be careful not to take a glass is half empty approach to all of life, for I have much to be happy about and I remind myself of that frequently.
However, I’ve also learned that in many areas of life it pays to put an ear to the ground, listen for the sound of the thundering herd coming, and run in the opposite direction. The “herd” is comprised of those that often blindly follow conventional wisdom.
The Financial “Herd”
In financial terms, you may remember members of the herd buying into tech stocks in the late 90s after months of ridiculous gains. They were late to the party, but wanted to join in and got creamed. More recently, the herd turned to housing, and before 2008, housing prices were sky-rocketing, and people were feeling good again a decade after the tech bubble.
Then the fall of 2008 came and went, and in its wake left many folks in underwater mortgages. Some managed to hang on, others (very few) benefited from a loan modification program, and a large majority simply had to foreclose because they couldn’t keep up the high payments, and couldn’t sell for what they owed.
My Years in the Herd
In my early 20s I followed the herd. I borrowed money when I was 20 to invest in a Roth IRA because I heard on the radio it was simply too good an investment opportunity to pass up, even if you had to borrow money to do it. Well, it is a good investment vehicle, but in my opinion, not so good that is worth borrowing the money to invest.
Around this time I also opened several credit cards in college because the herd was doing it, en masse, at football games, and other campus events. We traded in fiscal discipline for a free t-shirt, or a pizza. Bribery works with college kids, and credit card companies know it (and so do the colleges that allow them on the campus).
How I Finally Broke Free
Fortunately, I returned to my senses, and my old frugal ways before digging a hole so deep I could never climb out. We did eventually climb out, after years of scratching, clawing and fighting to pay for past financial sins. It was not a fun time, and our family adopted a saying, “Never again.”
After turning 30 I realized an entire decade had raced past me with little to show for it, financially. I was blessed to have a wife and two children, and a secure career, but I spent much of the decade treading water. That’s not really true. I was underwater, but able to come up for air just often enough to keep from drowning.
It was time to get back to the basics – old school personal finance with a paper household ledger, an envelope system for budgeting and living on cash. Gone were the credit cards, the student loans, the personal loans I foolishly used to invest, and all other “fancy” financial tools.
I recognized that for too long I had followed the herd. I thought car payments and credit cards were normal. I figured everyone borrowed money on their home, paid a little down, and then borrowed more money for a bigger home. I figured most of my friends, also in their 20s, weren’t concerned with retirement savings and emergency funds. In short, I lived it up.
To turn things around, I started living by the following what you might call “contrarian” principles, and over the last few years, it has paid off (or at least kept me relatively safe through the biggest financial storm in my lifetime…so far). I started observing conventional wisdom in a new way. I became skeptical of those pitching the next hot stock, flipping houses, and encouraging people to borrow their way to wealth.
I started paying more attention to our nation’s fiscal health, and considering the trends being repeated from the past. I don’t claim to possess some prescient skill to see into the future (else I’d be a very rich man), but there were some trends that just seemed large to ignore.
It was around this time (Christmas 2007) that I started this blog, primarily as a way to keep myself accountable. I knew what I was writing wouldn’t be popular, but I thought if things hit the fan, it just might be one day. Heck, I even remember bashing those stimulus rebate checks the government was handing out early in 2008 – remember those? Yeah, that was a popular stance at the time.
Besides managing to tick off a few people along the way with my blog ramblings, I did learn some real lessons throughout the journey and continue to apply them today.
Pay Off Debt When Everyone Else is Borrowing
This was especially popular in 2005 up to the recession. At the time we were leasing a house, and still had debt. I couldn’t begin to count the number of people who told us we were stupid for “throwing money away on rent.”
We didn’t buy our home until March 2009, when we were on solid financial ground, and after prices had already depressed significantly. My only regret – if I had waited a little longer we could have got a sub 5% mortgage, but you know what they say about hindsight.
Pay Off Debts When Consumer Spending and Borrowing is Increasing
When we started our debt-free journey after Christmas in 2007, things were still pretty rosy, economically. The herd was at the malls shopping and borrowing there way into oblivion, and refusing to save a nickel of their income.
When the first hint of economic slowdown appeared the government sent out stimulus checks, and encouraged people to “get out there and spend!” Most people followed orders. We put half of ours in the bank and the other half on credit card debt.
Pay Down Your Mortgage and Stay Put When Everyone Else is Trading Up
A few years ago, it was a popular move to fully leverage your home via maxed out home equity lines, thanks to unnaturally high home values and falling interest rates. Others who didn’t tap equity just traded up to a bigger mortgage – after all, rates were on the way down and times were good.
Unfortunately, many of those same people are struggling to make a mortgage payment after losing half their household income, and seeing their investments wiped out (but more recently re-inflated).
Work a Year or Two and Save Up Money to Attend School While Others Borrow Thousands in Student Loans
This one is always popular. I believe one of the biggest economic threats to the next generation is student loan debt.
New graduates face a crushing debt that will be with most of them for the first decade out of school, limiting their ability to enjoy solid financial footing until well into their 30s.
It isn’t all the students’ fault, either. Colleges and tuition boards have increased rates at a ridiculous pace because, well frankly, because they can. The student loan industry has been nationalized and colleges know they can charge ungodly tuition because students can borrow the money from the government.
If there were less easy money to be borrowed, colleges would have to once again compete for a family’s dollar, and tuition would likely come down. Not going to happen, so make plans now for your kids (or yourself) to find a way to get educated without going thousands into debt.
Buy What Everyone Else is Selling (and Vice Versa)
This is where my personal investment strategy has really changed over the years. I used to stay glued to CNBC and investment newsletters to try to get a scoop on the next big market. Then it occurred to me that by the time I read about it, or heard about it, those with big money had, too.
This is when I became sort of a contrarian investor, if there really is such a thing. Wikipedia sums up a contrarian investor’s philosophy quite well.
In finance, a contrarian is one who attempts to profit by investing in a manner that differs from the conventional wisdom, when the consensus opinion appears to be wrong.
So, I adopted my own two-pronged investment strategy. I would become a dividend investor – buying stock in strong, dividend-paying growth companies in industries that did well in both good times and bad. I would reinvest those dividends to build my positions in these companies, and one day, we just might be able to live off the dividend income alone.
I would also invest a smaller percentage of money (because there is more inherent risk with this approach), in stocks with strong fundamentals, but that had been beaten down thank to negative publicity, natural disaster, or were just oversold as part of the Great Recession. This led me to sectors like:
- Regional Banks. Many regional banks did not accept TARP money, maintained healthy balance sheets and avoided toxic mortgage markets in smaller locations. But, they still got beat up in the financial sector meltdown.
- Housing market. The housing market touches so many secondary markets besides the home builders themselves, who have been largely decimated the last couple years. Home improvement stores took a hit, too, and I thought rather unfairly, considering more people would be staying put and investing in home remodels, etc. when the worst was behind us. I joke with my wife that you can get a pretty good read on the local economy by visiting a Lowes (I used to work at one, part time) or Home Depot early on a Saturday morning.
- Nuclear Power. In the wake of the Japanese earthquake and nuclear disaster, nuclear power stocks took quite a hit, and one could easily understand why. During the threat of a full reactor meltdown, who wants to bet money on the future of nuclear power. Same thing happens after coal mining disasters, oil spills, etc. The fact is, we need some of all three types of energy to meet demand. I certainly don’t sit around hoping to profit from a disaster, but you have to be willing to buy when everyone else is selling, if (1) you can afford to lose money on paper in the short term, and (2) you know enough about a company’s fundamentals to believe the stock really is cheap.
This whole contrarian approach to finance won’t make you very popular at dinner parties, but it just might help you avoid debt and build wealth. For that, I don’t mind occasionally being called a “party pooper.”