As I’ve said time and time again, it’s good to air out all your successes AND failures. And today I’ll be airing out another one of my failures, well more like a mistake. In any case, it’s something that should have been done better.

Yesterday I published the post An Easy Shortcut to Successfully Budget Your Finances. On it I stated a “basic rule” to significantly simplify your budgeting, all the while leaving you with a surplus of money if done right. The rule is sound, but for whatever reason there was a mistake in the translation from my head to my written words (my blog post). It wasn’t a late night post when I was really tired type of mistake, it was written in the middle of the day. It was a classic mistake of my brain saying one thing while my words said another slightly different thing.

Even after re-reading it a few times, it was still perfectly clear in my head. I knew what I meant to say and I had said it. It actually wasn’t until Freewheeler (unfortunately the comment was anonymous) commented on the post that I realized the rules I had written down weren’t exactly what I meant to say. They were close, and I can easily see where I went wrong.

What I wrote was:

Where it should have been:

The good news is that the rules I stated would have been even more in your favor, giving you an even bigger surplus. But it would also have made budgeting much harder.

The biggest mistake was on the income, the first digit shouldn’t have been altered, but it made sense in my head. What I meant to say was round down, but what I instead said was round down and then some.

The good news is that my examples showed what I meant to say. The examples are correct, it’s just that the rules weren’t as accurate as they should have been. Good thing they favored the budgeter.

All that to say I apologize for the mistake in yesterday’s post. And it’s been corrected.

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** Update: The rule below has been updated to reflect a small correction.

Most of us want to budget, we’re just not very good at it. To properly budget means that we need to keep track of all our expenses and all of our income. For most people the income part is simple, it’s the paychecks you get from your job. It’s the expense part that’s difficult because it requires detailed and regular record keeping to be accurate.

Have you ever tried to calculate all your expenses for a month? Generally this involves buying software like Quicken and entering in all your information (as well as downloading all your banking information into the software). Then hopefully at the end of the month the discrepancy between what you entered and what you spent isn’t too big. And have no doubt, there’s always a discrepancy, you always spend more than your budget says somehow. The budget (or software) must obviously be wrong then!

Or could it be that there are lots of cash expenses that just don’t get tracked. Those daily cups of coffee that ad up to $40 a month. Or what about that lunch the other day that was $16? Oh and that popcorn and drink at the theatre last week that cost over $300 after coupons? It all adds up.

So unless your extremely meticulous, which most of us aren’t, your budget will always be underfunded. Or so you might think. But today I’m going to show you a very simple way to minimize this discrepancy, and possibly come out ahead! And best of all, it’s much much simpler and takes almost no effort. The only downside is that it’s not as accurate so you really need to do it right. If you don’t, you can come out behind.

It all comes down to one very basic rule that’s used in software estimations. It’s the rule of padding. However unlike software estimations, we won’t pad as aggressively. The rule is:

* Anything that’s under $10 becomes $10.

Very simple. In other words you downplay how much income you make and you over-estimate how much you spend. This gives you room for error. It also allows you wiggle room for un-budgeted expenses such as going to the coffee shop, the ugly gnome lawn ornament you just had to have.

Let’s look at an example. If you make $1230/month, then you only count it as $1000 revenue a month. If you make $5498/month, then you only count it as $5000. If you make $12,942/month, then you only count it as $10,000. Already we’ve reduced our income by a good amount. That’s already a good padding.

In terms of expenses, an $8 coffee at Starbucks now becomes a $10 coffee. That $1.25 chocolate bar now becomes a $10 chocolate bar. Your $1200/month rent now becomes $2000/month rent. If it’s $825/month, then it now becomes $900. Notice that only the first digit changed in the last two examples. Remember, only the first digit is applied. This is to balance things out and keep everything in scale. If you’re rent is under $1000 then you’re probably dealing with amounts on the scale of hundred of dollars. If it’s over $1000, then you’re probably dealing on a slightly larger scale, in the thousands of dollars. By only looking at the first digit, it allows the padding to be on the right scale for you. To keep going, your car payment of $325/month becomes $400/month. The $175.54 grocery bill becomes a $200 grocery bill. And on it goes.

As you can see, by underestimating how much money you make and overestimating how much money you spend, you give yourself some room to breathe within your budget. You don’t need to be as accurate, you just need to correctly round your numbers. In other words, you’ve just given yourself a margin for error. And as an added bonus, these rounded numbers are also much easier to add up and calculate in your head.

By using just this simple principle of padding I was able to come out ahead financially for years. Every month I had some surplus money. Even today I still actively use this principle on a daily basis! However the main difference now is that I own and run my company (LandlordMax) which has forced me to calculated the detailed numbers at the end of each month. I need this accuracy to report my expenses and income to the government for taxes. When I was an employee, all I needed was an accurate number for my income (taxes), no one ever cared how much I spent. It just didn’t matter. With a company you need to know because you can write off your expenses on your taxes. Otherwise I still use the estimation method for my personal finances.

There you have it. The simplest and easiest shortcut to successfully budget your finances. For every income decrease the first digit by 1 and for every expense increase the first digit by 1. And any amounts under $10 becomes $10.

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Today I had a discussion with someone who didn’t fully appreciate what I wrote about in yesterday’s post (Biggest Stock Market Tip), so I’m going to expand my original explanation with a better example.

Let me ask you this question, would you prefer to own a share of LandlordMax sold for $1000 or one sold for $1? Your answer should be “I don’t know” because you can’t possibly know based on the price alone. Maybe the $1 portfolio is worth a lot more than the $1000 portfolio!

Let’s assume LandlordMax is worth $10 million dollars (we’ll take it for granted that LandlordMax has at least $10 million cash in it’s bank account). If we look at the following two scenarios the values of the portfolios are quite different.

Scenario 1 ($1000/share):

LandlordMax is worth $10 million dollars and has 10 billion outstanding shares sold at $1000/share. That means each share is worth 1/1000th of the real value. In our case this means that our $100 share is worth $1 of real value. A really bad deal.

Scenario 2 ($1/share):

LandlordMax is worth $10 million dollars and has 10 outstanding shares sold at $1/share. That means each share is worth 1/10th of the total price. In this scenario, our $1 share is worth $1,000,000 of real value. A phenomenal investment!

Conclusion:

As you can see from the above examples, the stock price in of itself is pretty much meaningless. It needs a context, at the very least the total value of the company and the number of outstanding shares. If you don’t believe me, please contact me IMMEDIATELY and I’ll sell you some LandlordMax shares at any price and quantity you want, as long as I get to control the total number of outstanding shares.

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Listen closely because this is the biggest tip you’ll ever get on investing in the stock market. This one tip is enough to make or break your fortunes! And fortunately for you most people don’t use it, even after they know about it.

What’s the amazing tip? It’s very simple in principle, actually it’s almost too simple. But before we get to it, let’s take a quick step back to look at how most people invest in the stock market right now. Read this before you skip to the tip, it will make it that much more poweful.

Imagine that I tell you a stock is worth $100. Is that good or bad? Is it expensive of not? What if we compared that stock to another $10 stock? Which is more expensive? Which is richer? In other words, which is more valuable?

I’m willing to wager that the majority of you will say the $100 stock is more valuable? Why is that? How do you know? Because the price is higher? And that’s where the problem lies!!! The price of a share of stock is a horrible measure of value. The price of one single share of stock is meaningless. Yes MEANINGLESS. It’s completely useless without a context.

Why? Because the price alone doesn’t tell you what percentage of the company you own. If you’re a little confused don’t worry, that’s why I’m going to give you a concrete example. Let’s take a look at two different companies

• Company A has 1000 shares selling for $10 each. The total price of the company is $10,000.
• Company B has 100 shares selling for $100 each. The total price of the company is $10,000.

In these two examples, owning $100 worth of shares of either company is equal. That is owning 10 shares of company A at $10/share is worth the same as owning 1 share of company B’s stock at $100.

Now this is an easy example, real life is more complex. The total market value is never the same, nor are the amounts of shares available or the price. To compound this, you have to remember that the total market value of a company is rarely equal to the real value of a company.

So where does that leave us? We’ve covered that looking at the share price is a very bad indicator of value, but where’s the real tip? The real tip of today’s article, the biggest tip I can give you, is that when you buy stocks in a company you should pretend as though you’re buying the whole company, and not just a few shares. Pretend as though you’re buying a mom & pop store on the corner of the street, a coffee shop, whatever. The key is pretend as though you’re buying the whole company.

By doing this you’ll force yourself to look at the company as a whole. You won’t just look at an arbitrary stock price without any context, you’ll look at the real price to acquire the company. And yes the stock price is completely arbitrary, a company can issue a split (or reverse split) at any time. When this happens the stock price changes drastically, but the price of the full company doesn’t.

But if you think about it some more, it will make you look at buying stocks very differently, and this is the most important part of the tip. For example, you’ll not longer be looking at just the price of a stock, you’ll want to make sure it’s worth it. Would you buy a coffee shop losing a million a month? Yet many people buy stocks like this. Would you buy the coffee shop at 10x it’s current value, say for a million when you know it shouldn’t ever be more than $250,000? Happens all the time in the stock market. Not only that, you’ll want to do more research. As much as you would do when buying a coffee shop.

Another major shift in thinking will be your hold time, that is how long you plan on holding onto a stock before you will sell it. When you buy a coffee shop do you buy it with the hopes of selling it in a few days or weeks? Not likely. After all, if you’re going to spend all that time and effort into researching and acquiring it, you’ll make sure it’s a valuable asset for a longer time frame. Buying and selling stocks quickly will dramatically reduce you’re returns, more than you can imagine. It’s worth picking solid stocks, or should I say coffee shops now that you’re perspective is already changing.

This one tip, the tip of looking at buying a stock as a full company rather than as a single stock will dramatically shift your overall thinking. It’s a simple tip with profound impacts. And it’s from this different way of viewing stocks that your biggest gains will come from.

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There’s been a lot of panic recently associated to the collapse of Bear Stearn, one of the largest financial institutions in the world. Yes this is dramatic and will have far reaching consequences, but there’s something far scarier than that which pretty much everyone is overlooking. And in this case, this ignorance is what’s preventing the economy from collapsing. Ignorance is bliss!

Yes a major financial institution collapsed. Yes it happened in just a few days. Yes it’s a catastrophe. But there’s something far larger and more ominous looming just beneath the covers. The really really really scary part is that no one wanted to acquire them for pennies on the dollar without the Fed’s adding $30 billion to sweeten the deal!!!

Why is that? I can only come up with two reasons, both of which are incredibly scary.

1. Everybody else is on the edge of insolvency and can’t afford a fire sale deal, even for pennies on the dollar.
2. The number on the balance sheet are much worse than they appear and hence the revenues are collapsing (mortgages defaults are much much much higher than expected).

All I can say is WOW! Both of these options are incredibly scary and lead me to conclude that the worse hasn’t even yet begun.

[Disclaimer: Please note my numbers in the following analogy aren't to scale as I haven't yet had the time to fully absorb the details. ]

To take an analogy on a smaller scale, imagine that you own a house worth $600,000. Everything seems to be going fine, then within two days you somehow can’t meet your obligations. In other words you’ve become insolvent because of a cashflow issue almost instantaneously. Now imagine further that you can’t find any buyers for your house, even at $20,000. Yes the house does come with a mortgage that you have to assume, but it’s also being rented and is earning revenues. Up until a few days ago, you were supposedly maintaining profitability on it.

Which is scarier? The fact that you went insolvent or that there are no buyers when the house is going for a steal? By far the scariest thing is that there are no buyers. But now imagine further that to eventually get a buyer you need to have a third party (the Fed’s) add a large sum of money to make the deal happen. Getting pennies on the dollar wasn’t enough.

Which means either the revenues on the property weren’t exactly as good as you you stated or there is no one else with enough capital to buy a house at a fire sale price. I sincerely hope it’s because the deal wasn’t lucrative enough (the revenues weren’t as good as stated), otherwise the alternative is much worse and you can expect many more insolvency in the near future!

If it’s the later, than ignorance truly is bliss and might even save the economy!

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Today I will tell you about a very little known secret on how to increase your credit score (FICO). The only downside of this tip is that it will only those of you who have been delinquent on their payments and are now being pursued by collections agencies. It also won’t always work, but when it does it can make a very significant difference. According to a recent Business Week article, it helped one person increase his FICO score from 513 to 600!

The idea behind this tip is based on a stipulation in the Fair Credit Reporting Act. It basically goes that for a creditor to list you as delinquent on your credit report they must be able to provide you with the original paperwork. Now what happens with collection agencies is that by the time someone is trying to collect from you, your defaulted loan has probably already changed hands a few times, and because of this the ORIGINAL paperwork is likely to be lost. If it’s lost, then by stipulation of the Fair Credit Reporting Act your defaulted obligation cannot be listed on your credit report. You’ve basically wiped out your defaulted obligation!

Again, as you can see, this tip will only help those people who’ve defaulted on previous obligations. And the more the obligations have changed hands, the higher the probability of this tip’s effectiveness!

Related Article: 7 Simple Tips And 5 Secrets to Increase Your Credit Score

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Many people thought the housing market crash wasn’t coming anytime soon, that prices would continue and continue to rise. I even heard people saying that they had to get in now otherwise they could never afford a house at the going rate. Like any other boom, people forgot to look at the fundamentals.

Well today the fundamentals are right in your face. There’s no escaping them. No Ponzi scheme can save you. CNN has just reported a 6.7% price drop in prices from last year. If you adjust for inflation, that’s closer to 10%! The largest drop recorded since the index began in 1987. It marked the 10th consecutive month of price depreciation and 23 months of decelerating returns. With no end in sight.

I hate to soapbox, but as far back as 2004-2005 I was already suggesting that the market was overpriced. The numbers no longer made sense. It had to stop and prices had to come back down. I even wrote on ways to protect yourself. For example in December 2005 I wrote: The Simplest and Best Way to Protect Yourself from the Real Estate Crash. If you followed that advice you’d be significantly protected from the current housing market crash right now.

Knowing that there was a shakeup coming, I personally prepared. I followed my own advice, I ate my own dog food. For example I locked the mortgage on my personal home at 5.4% for 25 years! Yes that’s a fixed rate of 5.4% for 25 years. I had the option of 4.8% for 10 years, 4.3% for 5 years, or a variable for 3.9% if memory serves me right. Back then when I told people how excited I was to get 5.4% locked for 25 years I was continually shocked by their reaction. They couldn’t believe I was willing to pay that much interest. 4.3% was a lot better. And why not variable, interest rates were low and dropping.

This is when I tried to explain that interest rates can’t keep going down anymore, and definitely can’t stay at those rates. That we were just above inflation. It just can’t stay that way forever. Over time rates have been closer to 8-10%. They would climb back.

I also kept telling people how I didn’t want to be part of the upcoming mortgage refinancing storm. As rates increased people wouldn’t be able to refinance when their mortgages came up for re-financing. Basically the whole house of cards would come tumbling down. This is basically what’s happening now, and why we can expect to see a continuation of this housing crash for at least several more years. At least until the last of the 5 year fixed mortgages that can’t be refinanced dwindle away.

The good news is that unlike what the media portrays, there is an end in sight. It’s just a few years away.

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Today’s list is probably the largest of the series. I’ve included all kinds of investing books, from stocks, real estate, to you name it. As you’ll probably notice, the focus is mainly on value investing, no matter what the vehicle (stocks, real estate, etc.).

For those of you just found this page today, the category of books I’m sharing this week include:

• Software Development (language independent)
• Business
• Marketing and Sales
• Technology
• Investing
• Personal Success
• General (a catch all for remaining books that I learned from)

Investing Christmas book ideas:

Don’t forget to come back tomorrow to see my list of investing books for Christmas ideas (probably the biggest list of all the categories). You can also subscribe to my RSS feed so that you don’t forget. If you don’t know what an RSS feed is, don’t worry you can also subscribe to receive the articles by email here.

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Ideas are a dime a dozen, and today I’m going to give you my latest business idea. It’s easy to say I came up with this idea (I’m probably not the only one) and I could possibly make decent money from it, but the reality is that it won’t go anywhere unless I do something. Again, ideas are a dime a dozen, execution is 99% of the battle. And I can honestly say that in this case there won’t be any execution. Even if it was the best idea I just don’t have the time or resources to execute on it. So if you’re interested in pursuing this idea, please by all means take it and roll with it. It’s all yours!

The Idea:

Today there is a large discrepancy in the price of new car for the same model between Canada and the US. The difference is large enough that people are taking trips to the US with only the intention of buying a new car. Even after taking into consideration the loss of the warranty, the costs of the time, lodging, dinning, export fees, currency exchange, and so on, you can come out quite ahead. For example I recently saw the same new car advertised for $40,000 CDN and $25,000 in the US. When you consider that the CDN dollar is worth more than the US dollar right now, that’s crazy! $15,000 goes a long way to paying repairs in the first 5 years of ownership, more than your warranty will ever cover.

So the business idea is not to buy and sell cars, that’s too complicated and there are already tons of car dealerships doing that. Rather what I’m proposing is a delivery service, much like FedEx. The business is composed solely of picking up a pre-purchased car at a dealership in the US and bringing it to a specific location in Canada for pickup. A simple delivery service. It would include going through customs and paying the appropriate fees, but in essence it’s just a very niche delivery service taking advantage of a limited time price difference.

Again, this is simply a delivery business. Nothing more. You don’t buy the cars, your customers have already done this. At no point do you ever own the car. You’re just picking up a parcel, in this case a new car, and bringing it to another location.

Why would someone pay for this? Well if you charge a reasonable amount it’s worth it. You’re basically saving your customers the hassle of a road trip, the time to wait at the border for customs to process your car, etc. The advantage for you is that if you do this with a car carrier truck you don’t just bring one car at a time, you can deliver a small fleet of cars at once. You get the advantage of economies of scale. Not very large, but large enough to make a pretty good profit margin.

Of course this business opportunity won’t be around forever. Eventually the new car dealerships will have to adjust their prices. That’s just a matter of time. But if you’re willing to make the effort and execute on the idea then I’m pretty confident there’s profits to be made for at least several months. If you charge somewhere between $2,000-$5,000 per car, that should easily cover your expenses and give you a decent profit margin.

Since this is a limited time business opportunity, you also don’t want to grow too big. Therefore I would suggest local advertising, possibly something even as simple as classified ads. If you’re even more ambitious you could definitely get some media attention. I can easily envision seeing this on the nightly news.

So there you have. A free business idea. Will it work? I don’t know for sure but I’m pretty confident there’s profit to be had here. The idea does have a lower barrier to entry, anyone can come up with it and execute on it. The question is how many people will actually do it. Ideas are a dime a dozen!

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Every once in a while a specific blog comment will elicit a full article rather than a simple blog comment response. Recently Andy Brice from Successful Software (founder of Perfect Table Plan) wrote such a comment on my recent blog entry Manias, Panics, and Crashes: A History of Financial Crisis:

“Interesting. I’m expecting the insane UK housing market to level off or crash any time now. But I’ve been saying that for the last 5 years…”

Andy is a very smart person whose blog I regularly read (and sometimes comment on). Whose opinion I respect. In this case I absolutely agree with him. I’ve been saying the same thing for North America for some time now, as is evident even in my first month of blogging over two years ago here on FollowSteph.com.

The interesting part of his comment is that he (myself included) know just how hard it is to accurately predict a full economic shift from mania to bust. It’s easy enough to see when we’re in a mania; the fundamental economic principles no longer govern asset prices. But what’s hard is to predict when the general public will realize this. It’s just like the Tulip Bulb boom of long ago; as long as there’s a bigger “sucker” willing to pay more for the asset (in that case rare tulip bulbs) the prices are going to keep increasing.

But now comes the reality. Again it’s not possible to exactly predict when a boom or bust will actually happen, it’s easy to predict when we’re in a boom or bust phase. If the economic fundamental no longer justify the prices then we’re in for either a bust (overly priced as is today) or a boom (under priced as often happens when people overcompensate after a depression). The bigger the discrepancy the bigger the boom or bust.

The good news is that although we can’t accurately predict the exact time a bust will happen, we can still accurately predict when it’s a good time to get in and out at a profit. As Benjamin Graham expresses in his book The Intelligent Investor, as long as you’re buying your asset for less than the real value (intrinsic value) and selling it at a higher price than the real value you’re ahead. He doesn’t show you how to maximize your profit, he just helps you identify how much your asset is overpriced or under priced. No one can accurately tell you when an asset has reached its maximum price (over valuation), that’s speculating on you knowing and understanding the publics psyche which no one can do.

To put it in other words, asset (stocks, real estate, etc.) prices will always shift above and below their true economic value (known as intrinsic value). If you buy them for less than their intrinsic value you’re ahead. If you sell them for more than their intrinsic value you’re ahead. The key to investing is not to try to buy assets at their lowest price and then sell them at their highest price, no one can do this. It would be amazing if that were possible, but it’s not.

What does this all lead to? Well over time an asset can only deviate so much above or below its intrinsic (real) value before it has to re-align itself (adjust its price back to a reasonable value). Right now, at least in North America for sure, prices of real estate properties have deviated significantly above their intrinsic value, so much so that they are now correcting themselves and trying to re-adjust to their intrinsic value. And don’t think we’re there yet, they’ve still got a lot of re-adjusting to do. I expect significantly more fallout before it stabilizes. As a very basic general rule of thumb, a real estate investment property should generate you at least a yearly revenue of 10% of the purchase price (including all costs - renovations, closing costs, etc.). Right now we’re not even close to this, many properties are running at negative cash flow values! This isn’t sustainable.

Knowing this however doesn’t mean you can’t profit from the boom and bust cycles. All it means is that if you buy assets in the under priced area of the above graph and sell in the overpriced areas you should be able to consistently make profits and protect yourself. The “margin of safety” is generally considered to be the discrepancy between the actual price and the intrinsic value - that is how much the asset is under priced. The further off you from the intrinsic value you are, the bigger the profit potential and the closer you are to the max and min’s of the boom and bust cycles. Of course you need to be extremely careful the further away you are from the intrinsic value, especially for overpriced assets, because when the adjustment happens it will be faster and more volatile!

It’s possible to consistently achieve respectable profits, all you need to do is look at the intrinsic value to know when to get in and out. Although sometimes it may take years for an assets actual price to at least come back to it’s intrinsic value, it eventually does. But as Andy’s comment suggests, knowing when a market has peaked is hard to predict. He already knew that the intrinsic value was no longer aligned with the actual price of the asset (in this case real estate), but he still couldn’t know when the adjustment would occur. No one can!

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