There are many many many many many books that teach you how to make money, but almost none that show you how to avoid losing your money. I personally had never really thought about this, at least not until I read the book What I Learned Losing A Million Dollars (an amazing book that I strongly recommend). Like everyone else, I was more concerned about making money rather than about how not to lose it. But as Jim explains it, there are many ways to successful make money but few to lose it all. You can invest in opposite strategies and still make money! The key to long term wealth is to understand the psychological forces that induce us to lose our money, even through our best efforts.

The book What I Learned Losing A Million Dollars starts off with Jim’s personal story of how he quickly climbed up the success ladder and then in a matter of a few months lost his entire wealth. What’s most interesting about the book is that what happened to him could happen to anyone. But the scariest part is how fast it can happen. It’s not that he did stupid things or spent wildly, it’s that he got caught up in a psychological trap. One that we all fall prey to from time to time, just on smaller scales.

Once it was all over for Jim, he went on a quest to find what the best investors did. What he found is that there was no consistency, they were all over the place. Many of them contradicted themselves and still succeeded. This lead him to question how this was possible, after all in most cases when two people use the opposite strategy one person has to come out ahead at the expense of the other. That’s how the markets work.

What he found out was that this wasn’t necessarily true. What happens is that successful investors know when to stop, when to drop an investment. Investors using opposite strategies aren’t always in the market, they’re in the markets at different times. They know when to wait on the sidelines until the markets favor their strategy. They don’t fall prey to as many psychological traps as ordinary people do. That is the only common thread he was able to find for highly successful investors!

And today we’re going to discuss one of those very common traps. It’s the effect of looking at your previous costs in determining whether or not to go forward today, otherwise known as the Sunk Cost Effect.

To give you a common example unrelated to investing, just to show how prevalent and strong this effect is, let’s take the example of car ownership. Let’s assume you own a car that’s a few years old (still pretty new) and you’ve just spent $2000 in repairs on it a couple of months ago. Suddenly this week it starts misbehaving, you bring it to the garage, and find out you need to spend another $1000, $2000, or even say $4000 on it. What do you do?

The best answer is to look at the value of the car TODAY and determine if it’s worth it TODAY. However, and this is where we almost all fall prey to the sunk cost effect, is that we also look at the fact that we just spent $2000 a couple of months ago. We’ve already spent that much money on it, so we might as well go forward with the new repairs. We don’t want to lose that $2000 in repairs from a couple of months ago. We may even rationalize that what we fixed a couple of months ago won’t break down again for some time so the car is better for it. And that’s a big problem!

What happens now if in another month we get another bill for another $2000? Well you have to get the repairs, after all you just spent $3000-$5000 in the last few months. And then what happens in another couple of months if it repeats. Oh my god!! We just spent $5000-$9000, there’s no way we want to lose all that money and/or effort. And so the vicious cycle has started and we start to lose more and more money just because we didn’t want to lose that initial $2000!! Trying to avoid losing that initial $2000 repair bill has now cost us around $10,000, and it’s only going to get worse! If the car is a lemon, how long will it take for us to give up? If you think it was hard at $2000, imagine now at $10,000! The more you lose, the harder it gets to pull out!

And it’s not just with cars, it can happen with just about anything. It can happen with your job. You may have already committed 3, 5, 10, 20 years to this job. You may hate it, it may be paid below market rates, and so on. But since you’ve already committed so much to it, you’re probably less and less likely to quit with time. This is why people get caught up in jobs they don’t like for years and years.

With investing, in real estate it could be you’ve already spent so much money renovating a property that you now have to wait to sell it until the market recoups, losing money each month for years and years, possibly losing everything through bankruptcy to avoid losing that $10,000 you initial spent on renovations. In the stock market, it’s a stock you bought at too high a price that you’ll now hold onto until it goes back to at least it’s original price. The list goes on and on.

The reality is that we should always look at whether something is worth it as of today. Period. It doesn’t matter how much time or money we spent on it in the past, we need to look at how much it’s worth today. If you can do that, you will save yourself a lot of trouble and money!

And that’s what smart investors do. They evaluate an investment in terms of what it’s worth today, they don’t look at how much they’ve already invested. In other words, you should always ask yourself: If I wasn’t already committed would I invest into this today? If the answer is no, then you need to seriously consider getting out of your investment before you fall prey to this trap, otherwise it will be that much harder as your position gets worse!

	Wall Street (1987) There are numerous lessons to be learned from this movie. It’s probably THE most famous business. What’s more, it’s still amazing today, 20 plus years later! Some of my favorite quotes include: “It’s not a question of enough, pal. It’s a zero sum game, somebody wins, somebody loses. Money itself isn’t lost or made, it’s simply transferred from one perception to another”. “Life all comes down to a few moments. This is one of them”. The most valuable commodity I know of is information”. And probably the most quoted: “Greed is good.” Although the above quotes are mainly about greed, which is the central theme of this movie, there are many many many lessons to learn. There’s ambition, taking chances, the power of information, and so on. An interesting tidbit, one of the pivotal scenes of this movie is quoted as part of another movie in this list (The Boiler Room).
	Startup.com (2001) The story of a group of friends from high school who decide to start a dot com business at the height of the dot com boom (aka mania). It starts off as you would expect, with lots of excitement and energy. But as the business grows, VC money becomes more and more important since there is no real revenues. To avoid spoiling the movie for those that haven’t seen it, let’s just say a lot of issues have to be dealt with. This is a great movie for people thinking of starting a business with a group of friends, of exactly what can happen and what you should discuss beforehand. Plus it show the importance why a business should be run to be profitable. The whole movie is really about getting the next round of VC (Venture Capital), it’s not about how to grow the business to earn more money. I don’t even remember this being discussed once in the whole movie!
	The Secret of My Succe$sThe Secret of My Succe$s (1987) The Story of an ambitious young man who wants to conquer corporate America. Although he doesn’t climb through the proper channels and there’s plenty of 80’s style “you can do anything”, there’s lots of good lessons. For example, in the movie he was able to climb just by filing the proper paperwork! Some great lessons include the power of charisma, the power of  information, the value of social networks, and so on. Although this may be a more arguable point, that sometimes it takes a bit more than hard work to get ahead, you also need to create your own luck. I would of course not recommend creating luck the way Brantley (played by Michael J. Fox) did in the movie, but the idea is that he took his destiny into his own hands.
	Jerry Maguire (1996) Ignoring the two big quotes from this movie: “You had me at hello” and “Show me the money”, this movie is what entrepreneurship is all about. Jerry is a successful agent for his clients at a large firm when he comes to the realization that things aren’t working for him. He writes a mission statement of what the company should be, where agents should have less clients so that they can foster better relationships. Needless to say, this doesn’t go well. So he sets off on his own to start his own company with his own clients which will be run according to his mission statement. He will focus his business on managing less clients but taking more time and effort with each client. On building relationships with them. And like any business, the start can be rough. It never quite goes as planned (it honestly rarely does – double to triple your estimates, and not your best estimates), and in this movie he almost loses everything. But he is able to pull through, and he does succeed.
	Hitch (2005) You might be wondering why this movie is in the list, it’s because it’s not just about romance. Business is about understanding your customer’s problems and finding solutions to those problems. In this case Hitch is a successful consultant not only because he’s good at what he does, but also because he’s figured out what his customers want, even when they don’t really know it. What’s also interesting is this is one of the few movies you see someone be selective with their customers, and even fire their customers. Hitch interviews all his clients to make sure their intentions are good, and only then will he work with them. If he finds out later that they aren’t, he immediately fires them. All around a good movie showcasing the importance of understanding what your customers problems are and finding solutions for them. As an added bonus, he always demonstrates the power of word of mouth marketing! His business is not exactly something you want to advertise on a billboard, so it has to be through word of mouth. And he is successful.
	Forrest Gump (1994) Shrimp anyone? Even Lieutenant Dan didn’t believe Forrest could start a shrimping business. The main lesson here is that it doesn’t take brilliance to start a business, anyone can. Sure Forrest had a little luck because of a storm that wiped out his competition, but had he not tried he never would have gotten anywhere. And he definitely wouldn’t have been on the cover of Fortune Magazine as depicted in the movie. Starting and running a business takes more than skill. It takes a lot of hardwork. But most important, you have to actually start the company! As I’ve said before, Ideas are a Dime a Dozen. Not to downplay them, but the concept is that coming up with an idea is not  hardest part of a business, executing the idea is. And in the movie, we see Forrest does just that!
	Baby Boom (1987) A high powered executive (known as the Tiger Lady) inherits a baby and suddenly finds her life turned upside down. She eventually makes the decision to move away to the country to raise the baby. Once there, she comes across the idea of creating high quality baby foods for a niche market. Being the 80’s and all, there’s the classic montage of her building her business into a very successful business, so successful that her previous company offers to buy her out. The biggest lessons learned from this movie are about the importance of niche markets. How it’s important to focus on thing and be the best at that thing. Had she created another brand of baby food, it would’ve just been another baby food company, and she would’ve had no chance. Instead she found a segment of the market she wanted, then she spend some time analyzing that market for it’s potential (yes, you actually see her analyze her market segment/niche in the movie). It’s important to have a USP (Unique Selling Proposition), and J.C. (the high powered executive) definitely figures hers out.
	Boiler Room (2000) You would think this is the movie to show you what not to learn about business because it’s all about scamming your customers. True, I agree, but there are still several things to learn. My favorite quote: “And there is no such thing as a no sale call. A sale is made on every call you make. Either you sell the client some stock or he sells you a reason he can’t. Either way a sale is made, the only question is who is gonna close? You or him? Now be relentless, that’s it, I’m done.” That’s right, this movie is mainly about high pressure sales tactics. Although I personally disagree with this kind of sales tactic, but it’s still important to understand because it will eventually be used on you. They also discuss about market segmentation, but not exactly in those terms. They discuss how some customers are more profitable then others, and how to identify them. How to determine which are the fat whales. There are some other great lessons in this book, especially the importance of questioning a too good to be true deal. You’ll definitely get learn something from this movie.
	Pirates of Silicon Valley (1999) Who doesn’t know Bill Gates or Steve Jobs? What better movie can there be on business than the story of how those two started their companies. Although it’s not exactly known for it’s accuracy, it’s still an amazing movie with a lot to learn from. These are two different people that both succeeded wildly yet took very different paths to success. What’s also very interesting is the impact of some of the decisions they made early on. There’s a saying that basically goes along the lines of, you can be good in business and succeed, but you need to be both good and be lucky to succeed wildly. They were both good, and fortunately for both for them, they also both made some very good decisions early on.
	Office Space (1999) How can this movie not be on the list. It’s a classic! Of course it’s not so much about learning how to run a business as it is about how NOT to run a business! But still this movie is just too hilarious to leave out. Examples of how not to run your business include TPS reports. Or having a dozen managers ask you about your TPS report. Can you imagine having to deal with that many managers? One of my favorite quotes is: “Yeah, I just stare at my desk; but it looks like I’m working. I do that for probably another hour after lunch, too. I’d say in a given week I probably only do about fifteen minutes of real, actual, work.”. How can you expect any company to excel and lead if you’re people are that de-motivated.
	Cocktail (1988) In this movie Brian (played by Tom Cruise) is a very ambitious young man excited to get his start in the business world. He quickly learns that none of the big companies are interested in hiring him without a degree, so he unrolls at the local city college and starts a part time job where he meets his counterpart for the movie. Together they go through quite an adventure. They decide they’re going to open their own bar called Cocktails and Dreams. But to do this, they need money, and this is where they start to diverge on their paths. This also where the biggest lessons can be learned. Having a business partner is not something to do on a whim. It’s very difficult, you need to have the same goals, you need to be able to work together through the tougher times, you basically need to work better together than an old married couple. Above that, and the usual business lessons, another interesting aspect of this movie is that not all money to start your company is equal. That is to say, just because you can get money, it doesn’t mean you should. It may or may not be worth the costs. So be careful when you take money for your business, make sure it’s worth the cost for you, not just personally, but also that you’re not giving away too much for it.
	Rudy (1993) Rudy is here because it’s so inspirational. Rudy is a movie based on the true story of a “5 foot nothin’, 100 and nothin’ with barely a speck of athletic ability’ man who achieved his dream of playing in a football game for Notre Dame. No one believed he could, not even his family or friends, no one. However through sheer will and determination Rudy was admitted to Notre Dame, got on the football team, and got to play one game. That’s amazing considering he had everything going against him! He worked hard, he persevered where most people would’ve quit. He worked so hard that when the coach said he wasn’t going to be able to play him on his last possible game, the football team revolted and refused to play unless he got dressed. Not only that, they got him on the field. And best of all, as far as I understand Rudy was the only person ever to be carried off the field on the shoulder’s of the other players. That’s how much they respected his dogged perseverance!
	Trading Places (1983) In this movie two investors/businessmen decide to make a $1 bet to see if they can turn a successful person into a homeless criminal and homeless criminal into a succesful business person. It has all the charm of an 80’s comedy. But above that, the two main characters invest and work the commodities market, along the way exposing mis-perceptions about the American Dream. And as a benefit, you’ll actually get to learn about how the commodities market work. And if you’re a bit confused by how the end goes, the following is a good explanation.
	Working Girl (1988) Ignoring the massive 80’s Big Hair, this movie is the story of Tess’s climb up the corporate ladder during the big Merger & Acquisition fad of the 80’s. Above the normal business lessons, this movie really shows the importance of social skills in business. Not only do you need to be smart, but you need to be able to work with people. You need to understand other people’s needs. You need to be able to communicate with other people. And most importantly, it really helps if other people believe in you.
	Aviator (2004) This is the story of Howard Hughes, from his beginnings all the way to the end. Even though Howard had some personal issues, but he was still an amazing businessman. How many people are willing to make the types of bets he did on succeeding? Betting the whole company many times over? There’s no doubt he was a very smart person, but he also had a lot of ambition and was willing to put his money where his mouth was. And not just on a small scale, but on a massive scale. What I found most interesting is that all the while he was creating and growing his company he was also battling some very big inner demons. He was able to succeed where most people would’ve crumbled, and he built a largely successful company above that.
	Newsies (1992) Business is not all about making smart decisions and executing on them, it’s also very much about the people behind the business. Without people there is no business. And this movie is in this list because it shows the importance of people. Not so much about getting the right people, that’s another lesson, but in treating your people right. In the movie, the owner of the newspaper company basically decides to decrease the pay of the newsies, which they don’t appreciate. This leads to a strike. Do remember of course that this movie takes place many years ago, when child labour was common and striking wasn’t unionized as it today. In any case, the lesson here is to remember to treat your employees well. This not only includes paying them what they deserve, but also treating them the way you’d like to be treated. It will make a difference in the long term, as Hearst (the owner of the newspaper company) learned the hard way.
	Click (2006) As important as your business is to you as an entrepreneur, you also have to realize that there are other things that may be even more important. In this movie, Michael (played by Adam Sandler) learns the hard way that climbing the corporate ladder isn’t the most important thing in his life. His family is the most important thing. When starting, and even when running a largely successful company, too many entrepreneurs focus solely on their companies forgetting almost everything else, even their own basic health! And in some cases, they sometimes wear this as a badge of honor. Yes your business is important, but is it the most important thing in the world? You should always ask yourself what the most important thing in the world would be if you had a heart attack today?
	Risky Business (1983) First there’s the obvious standard business lessons. You need a product that people want. You need to market it. You need to … But what’s more interesting is the underlying theme of this movie, which is how greed can corrupt people. Joel starts off innocently enough, but by the end of the movie his business venture isn’t exactly what you’d call mainstream. Mainstream or not though, all businesses obey the same core principles. As he describes at the end, his business is “Dream Fulfillment”. Find what a customer needs and fill that need.
	Tucker: The Mad and his Dream (1988) To quote the tagline: “When they tried to buy him, he refused. When they tried to bully him, he resisted. When they tried to break him, he became an American legend. The true story of Preston Tucker.” If his story doesn’t inspire you to build your company, I don’t know what will. What’s great about this movie is that it shows that sometimes you need more than sheer will, you also need a bit of salesmanship to go along with it. You need to to sell people on your idea, and more importantly on you!
	Gung Ho (1986) Although dated, this film shows that business isn’t just about ideas and execution, it’s also a lot about culture. And although this movie is about the 80’s business Japanese business culture clashing with the 80’s American business culture, it’s about a lot more than that. Mergers and acquisitions aren’t always as rosy as they appear on paper. Just because two businesses can appear to have “synergy”, it doesn’t mean they will work well together. But the biggest lesson to take away is that all business have cultures that get established within them. These cultures can be good or they can be bad for the business. It’s therefore very important to cultivate cultures that will benefit the company, especially because it’s extremely hard to change them later.
	Tommy Boy (1995) “Holy Schnike”, Tommy Boy is on this list? Yes it is. Why? To quote Ray Zalinsky (played by Dan Aykroyd): “Truth is, I make car parts for the American working man because I’m a hell of a salesman and he doesn’t know any better.” In other words, a great product doesn’t make a great business. It sure helps, but it doesn’t guarantee you’ll succeed. Betamax was better than VHS. The Mac was better than Windows in the 90’s. There’s countless examples of products that were superior but lost out. To succeed at business you need to be able to sell and market yourself.
	You’ve Got Mail (1998) Although the central theme of this movie is the love story between Joe Fox and Kathleen Kelly (played by Tom Hanks and Meg Ryan), it’s also about a small company having a big competitor move into it’s market. It’s generally better if you can be the aggressor, but if not, you need to be prepared and learn how to differentiate yourself. In this movie Kathleen’s store is very different from Fox Books, it’s personable, it’s memberable, and so on. But it’s still not enough to compete with discount prices on commodity items (the same book can be purchased cheaper down the street). She wasn’t able to learn how to differentiate herself enough before it was too late. Therefore the lesson here is don’t try to compete head on with a big company on their terms, find another way to compete with them on your terms, one which you can hands down beat them. And go from there.
	Family Man (2000) With anything else, you need to have balance. And to reach the very top of success requires a lot of sacrificing, which Jack (played by Nicholas Cage) has done in this movie. But is it worth it? Is all the money worth it? Maybe, maybe not. Assuming you don’t want to be the very best of the best, it’s important to realize that starting a business does require some sacrifices. If you want to start a business at night and on the weekends, then that’s coming out of your free time. Also expect it to take a long time, there’s no way you can do it in just a few short months. If you want to go even bigger than that and quit your job, then expect to be working more and harder than your full time job to get your company started. Success does require a great deal of effort, it isn’t easy. Otherwise everyone would be doing it.
	In Good Company (2004) The most obvious business lessons to take from this movie is that there are multiple ways to successfully run a company. And there are the multiple approaches to building up your client base. In the movie Dan does it through social networking while Carter does it through cross-promoting, etc. Both are very successful in their own ways. Another lesson I personally cherished is that just because there’s a new way to do things, it doesn’t mean it’s always the best or right way. In many cases it is, but not always. How many of you remember the main business strategy of the dot com era? The idea of getting as many eye balls on your company’s website as possible, no matter what the cost. Dominate the market segment and then figure out how to be profitable. Always, always, listen and understand why it was done the way it was done before you jump into a new way of doing things.

Honorable Mentions

The following are more great business related movies that you can benefit from watching, movies that I could have made fit in this list but would have made the list too long to read. They include:

• Click (2006)
• Clerks (1994)
• Mr Mom (1983)
• For Love or Money (1993)
• Greedy (1994)
• Fun With Dick and Jane (2005)

More Mentions

The following are related movies that are suppose to be really good but that I just haven’t yet seen:

• The Triumphs of the Nerds (1996)
• Glengarry Glen Ross (1992)
• E-Dreams (2001)
• Barbarians at the Gate (1993)
• Rogue Trader (1999)
• Code Rush (2000)
• Big Night (1996)
• The Corporation (2003)
• Capitalism: A Love Story (2009)

If I missed any please add them below in the comments.

Let me start by asking which you’d prefer:

1. A 10% raise?
2. A 3% raise?

If you’re like almost everyone, the answer is hands down #1. But let me re-phrase the question a bit. Which would you prefer?

1. A 10% raise in 1980?
2. A 3% raise in 2009?

Is your answer still the same? I bet you think it’s a trick question because I added a year to the options. You’re right, it IS a trick question! The years 1980 and 2009 are special. Can you guess why? 1980 is very well known for having a very high inflation rate whereas 2009 is known for being a deflationary year (a year where the inflation rate is negative). In 1980 the inflation rate was 13.5% whereas in 2009 it was -0.4%. Having brought this new information to light, is your answer still the same?

In other words, which do you prefer:

1. 10% raise at 13.5% inflation in 1980 = a real -3.5% raise in terms of purchasing power
2. 3% raise at -0.4% inflation in 2009 = a real 3.4% raise!

Looking at the numbers adjusted for inflation, option #2 is now by far the best economical choice, beating option #1 by almost 7%!! Option #1 is actually a pay cut!

Now here’s the kicker, although most people realize option #2 is the best economically, the majority of us FEEL that the person in option #1 is HAPPIER with their raise than the person in option #2. Notice here I said feel happier, NOT that they were financially ahead! Although we’re able to differentiate between the two, most people still believe they would feel happier with option #1!!

What’s more, this same research paper (Money Illusion) also discovered that people believe the person in option #2 was more likely to leave their job. Basically, as William Poundstone summarized in his book Priceless, the overall theme of the paper is:

“$$$ = happiness = actual dollars NOT ADJUSTED FOR INFLATION”.

So how do you get a pay cut and be happy about it? Get a raise, but have that raise be less than the rate of inflation.

I hate to admit it, but I have more printers than I have computers. Why is that? Is it because I love printers? Not at all. It’s because it’s economically cheaper to buy a new printer almost every time I run out of ink.

For example, today on Amazon I can buy the Canon iP3600 Inkjet Photo Printer for $43.08. Don’t be fooled by the sale price, just do an Amazon search for printers in the $25-$50 range and you’ll find lots of printers in that price range. Many are cheaper than this Canon printer, I just picked it because the discount wasn’t as heavy as some of the other models.

Now if we look at the price of ink cartridge to replace it, what they call the value pack, to replace all the colors including black, it comes to $41.05. Yes, it’s actually cheaper to buy a new printer than to buy ink. And I get a new printer!!

I understand that ink is where printer manufacturers make their profits, and that more often than not the printers themselves are loss leaders, but this is a bit ridiculous. Is it just this one case?

Epson has a WorkForce 30 Color Printer selling for $59.99. To replace the ink requires a $16.49 purchase for black ink and a $32.99 purchase for color ink. Combined, that’s $49.48, just $10 shy of a brand new printer!

And it’s not just Canon and Epson that do this, pretty much all printer manufacturers are in the same boat. Too often the price of replacing the ink is equal to or greater than the price of a new printer.

I do understand that the ink packs they give you with new printers aren’t the same size as replacements, but most people don’t generally think about this when they’re in the store itself making the purchasing decision. What we’re thinking is in the first case I get a free printer. In the second, for $10 more we get a whole new printer!

With this in mind, it’s easy to understand why people such as myself have too many printers.

And don’t get me started on how shoddy most printers are built these days. How many printers have you had that lasted more than a year or two before they stopped working?

PS: The prices on Amazon have already changed from when I initially wrote this post.

Identity Theft is a very prevalent issue in today’s world. It happens too often to be ignored. I’m sure you know at least one person who has been the victim of Identity Theft. And the sad thing is that in most cases it’s very preventable. Even sadder is that most people don’t realize that they might be the cause. Not as in being the victim’s themselves but as in innocently putting other people in harms way. Well intentioned people are doing things they believe are safe but are instead very dangerous.

Let me give you an example. I founded and run a software company called LandlordMax which sells real estate rental management software to property management companies, individual real estate investors, and so on. As part of this, the software allows you to store information on your tenants so that you can figure out what’s going on with your properties. For example, you can keep track of your tenant’s leases, payments, their address, invoices, receipts, employers, contacts in case they skip out on you, notes, basically a lot of information.

What’s scary is that we continually get requests for the software to store additional pieces of information that shouldn’t be stored on any desktop computer. Even on computers secured by computer security experts. For example did you know that Visa and MasterCard explicitly tell you NOT to store the full credit card numbers in your databases, that you can potentially be held liable for doing so. All you’re allowed to store is at most the last 4 digits. The next time you buy something at your local store with your credit card, look at your receipt. All you’ll see is the last 4 digits of your credit card, nothing more. This is not random, it’s a security measure to prevent credit card theft.

Knowing this, you’d be surprised by what confidential information we’ve been asked to store within the software on our users computers. We’ve been asked to store tenant’s credit card numbers, driver’s licenses, scanned images of driver’s licenses, passports, Social Security Numbers, and  so on. Confidential information that should never be stored on any desktop computer.

The scary part is that a desktop computer is not that secure. Not only that, but these are sometimes desktop computers used in homes or businesses of people with little or no security expertise. With no IT (or security) professionals setting up these computers.

But even if only the most advanced computer users stored this type of information, it’s still not enough. These are computers used for everyday usage, not hardened and locked down computers. All it takes is for someone to surf online to one bad website with a browser that has a zero day exploit and it’s game over! In many cases it’s the action of the user that compromise the system, not the system itself. This is also why secured computers are never used for daily activities such as surfing the net. They are locked down so tight that they’re pretty much dedicated to one and only one function (such as a database server).

And even with these systems it’s still a very bad idea. But what’s scarier is that many of the people making these requests are already storing this type of information in plain old Microsoft Word and Excel documents on their laptops. Computer files that are completely unprotected. I also know some people are scanning things confidential documents and saving them as images on their computers, again completely unprotected. These are computers connected to the internet!

This problem isn’t just limited to computers either. How many physical filling cabinets do you think contain all kinds of identity information they shouldn’t? Have you ever rented an apartment or house where the landlord wanted to keep a copy of your drivers license and/or your credit card number?

It’s not that these people want to do harm, it’s that they don’t know any better. Whenever we’re asked about storing these types of information we always tell them we don’t, and then we proceed to very strongly advice against it explaining the issues and how they could potentially be help liable for damages. In most cases that’s the end of it, but unfortunately it’s not always.

What about the poor tenants themselves? How comfortable would you be knowing that your landlord (or the company managing the property you’re renting) has all your information on a desktop computer? Scary isn’t it?

And this is why we will NEVER offer the ability to store this type of information within our software. It’s just bad news on all levels. No good can come of it. This information should never ever be stored on a desktop computer (or in a filling cabinet). Never ever!

And this is why I wrote this post today. From now on we’re going to point people who make such feature requests to this post, and hopefully some of you will too. Let’s try to prevent this from happening. Please do go ahead and comment and share your stories, hopefully we can help people better understand the implications of storing this type of information on their computers. It’s not that they mean any harm, it’s that they don’t really understand the potential dangers. Let’s teach them and hopefully we can reduce identity theft together!

Every once in a while we get someone contacting us asking why they haven’t received their license. In most cases it’s because the spam filters have somehow blocked the email or have sent it in the spam folder and they just missed it. In either of these cases it’s a very easy fix, especially if the email is still in their junk folder (which it usually is). However once in a while it turns out the person tried to buy the software from another website (completely unsanctioned by us) at a very significant discount. And I don’t just mean 10%-20%, I mean up to 70%-80%. Nice discount isn’t it? Maybe a little too nice…

Unfortunately it’s not too nice. In these fairly rare cases it’s from fake websites trying to illegal process credit cards with no intentions on fulfilling the orders. It’s all a fake storefront to just get people to buy whatever (in this it’s software but it could be anything, shoes, tv’s, you name it). As soon as the money is processed, you won’t ever hear from them again. Within a month or so more, the website/domain is completely gone and has moved to another domain/website. I don’t know how they get away from credit card chargebacks and such, but they somehow seem to. And I don’t even want to think what they do with the credit card information!

Now I can understand falling prey to a scam, especially if the price is within a small percentage (say a 10%-25% discount). Even 50% is not unheard of if you’ve been dealing with the site for a long time and/or it has a good reputation. But when a site that you don’t know (the domains have generally been purchased within less than a few months so there’s no way you can know it), that has no SSL certificate (they often state it’s a secure connection on the webpage when it’s completely bogus), and the discount is more than most liquidation sales, doesn’t that make you wonder? Wouldn’t you at least contact the company first to make sure it was legit?

The worse part, at least for us, is that a few of these people who contact us after the fact expect to get a license because they “paid” for the software. Yes I agree they paid something, but it was nowhere near the price and not to us. It’s the same as if you tried to buy a Rolex watch for $100 from a random site and wondered why it was a scam. Then contacting Rolex and demanding that you get a real Rolex watch since you already paid for it. It just doesn’t work that way.

The good news is that we’re generally very accomadating to these people, probably more so than we should be. That is assuming they are courteous and respectful (after all we aren’t the ones that scammed them and we didn’t try to get a riduculous discount). For example, today I was in communication with a gentleman because he was scammed in exactly this way. Because he was so courteous and nice, we helped him out as best we could. Had he been abbrasive and demanding, odds are very high I would given him the Rolex example above and ended it right there. Common courtesy can get you further than you might expect. Remember, we aren’t the ones to blame in this situation. If you buy a Rolex from a street vendor in a shaddy part of town for $100, don’t be surprised if you get taken.

So if you see a version of LandlordMax (especially an OEM version because there is no such thing) selling for a fraction of the real price, RUN!!! RUN AWAY! And it’s not just us, it’s almost every other software out there. If a software (or any other product for that matter) is discounted by more than 50% of it’s normal price and it’s coming from a site you don’t know, RUN! RUN AWAY! If it’s too good to be true, then it probably is too good to be true.

It depends. Don’t you absolutely hate that answer? But the reality is that it really does depends and any other answer is wrong.

It really does depend on the situation and circumstances. For example, it might be a good time to buy real estate in New York city while simultaneously being a bad time to buy in Los Angeles. And even then, and much more importantly, it might be a good or bad time for you personally to buy real estate (or any other revenue generating asset such as stocks, bonds, etc.)!

Let’s look at a simpler case study than real estate to get a better understanding. Let’s pretend you’re the owner of a movie rental store. Instead of real estate,  you buy and rent DVD’s. Is it a good time to buy DVD’s? It depends. Firstly how much do the DVDs cost in terms of how much you can rent them for? In other words,  will the DVDs make you money? And how long will it take you to start being profitable from buying and renting DVDs?

Before we go on, remember that although you can buy a DVD for say $40, that’s not necessarily your true cost. You also have to include the cost of employees, rent for your store, marketing, people bringing back the movie late, lost inventory, insurance, accountants, etc. However for the sake of this discussion let’s keep it simple, let’s assume the real cost is double the purchase price.

Taking an example, if our total cost to buy a DVD is $80, and we can rent the movie out at $5/day, then it will take 16 days to start making any profit. Not bad. But wait, it’s not that simple. Is the movie going to be rented 16 days in a row? That’s a probability, and you have to assume no. In real estate, we use a similar concept, the vacancy rate, which signifies the percentage of unoccupied units. For now we’re just going to assume the DVD is fully rented. And since most people rent a DVD one day and return it the next day (sometimes two), we’ll use 32 days as a safer assumption. At 32 days, it’s not looking too bad.

But we’re not done. What about late returns? Right now most video stores allow you to return a movie late (by over a week) with no late fee. This will unfortunately over complicated our example, so let’s just assume we can’t charge late fees. Therefore instead of 32 days, we’ll pad our estimate to 60 days, or 2 months. It’s simple and should be good enough.

Is it a good time to buy now? It still depends! Can you actually rent your DVD’s at $5/day in your local area? Are you in a poorer area where $5/day is considered a luxury? Maybe you can only charge $2/day. Or maybe you live in Beverly Hills and you can charge $20/day because you offer mocha lattes for each of your visitors as they peruse your store. The price you can charge for your revenue generating asset, in this case DVD movies, will greatly affect whether or not it’s a good time to buy. At $2/day, it will take you at least half a year of continued rentals to make any profit. Can you rent the DVD for half a year non-stop? Not likely. Most movies fade out of popularity within months, if not weeks, before other newer movies take their place. Hence at $2/day, it’s probably not a good time for you to buy. However if you can rent the DVD at $20/day, it will take you only 2 weeks to start making a profit instead of 2 months. A much better time to buy. Well maybe.

We still can’t know if it’s a good time to buy. Why? What about the specific asset, or in our case the specific movie. If the movie we’re buying is the latest multi-gazillion blockbuster, then it’s probably looking good. But what if it’s the latest Hollywood straight to DVD flop that absolutely no one wants to see? Probably not. We might never even be able to rent it once! It could be a complete lost of time and money. Again, it depends.

But let’s assume it’s the best movie ever made in all of history, and we can rent it out at $10/days and it will only cost us $50 total to buy. Is it still a good time? Again, it depends. What if all you personally have left in your bank account is $10 (and maybe even that $10 is allocated to other pre-existing payments). Then you can’t afford it.

Can we get a loan for the $50? Maybe, but can we afford the payments? Can we carry the loan? We’re assuming it’s the best of the best movies, but what if it’s not? Poseidon anyone? Ignoring that we might make enough money to cover our loan payments on the principal, what about the interest? Can we get an affordable loan at an interest rate that will give us a comfortable return (I say comfortable return because we all have different thresholds for risk)? In other words, even if it’s the greatest deal, can we afford it. Does our personal financial situation allow us to capitalize on it?

So the next time someone asks you: “is it a good time to buy?”, I hope you’ll say it depends because it really does depend! It depends on the specific situation, circumstances, and the assets you want to buy.

PS: I didn’t include the long tail in this example, that is movies that have been out for years and still continue to get rented often. These are very profitable. And the same is true for real estate properties, stocks, etc. Generally the longer you hold onto them, the more money you’ll make. Instead I tried to focus on whether or not you’d be able to get to that longer tail, that if you can at least start making a profit on the assert within a reasonable amount of time.

I’m Immortal and I can prove it using valid and correct statistics! It’s pretty simple actually. To prove my immortality, I’m going to use the data from my life.

Here’s how the proof goes. Since the day I was born I’ve never had a day in which I died. Being my age, that’s just under 13,000 days. A fairly decent sample size (I think that with 13,000 flips of a coin we could determine the odds of getting heads or tails). But maybe for those of you who aren’t yet confident, let’s increase the sample size. In all 18,408,206 minutes I’ve lived (give or take a bunch) I’ve never died. Not once!

So based on my past data, the odds of me ever dying are less than 0.00…1%. In other words I’m virtually immortal! How cool is that?

However as we all know this logic is flawed, I will one day die. I’m no more immortal than anyone else. However there is no error in my logic. My sample size is large, quite large (over 18 million data samples with not one instance of me dying). Definitely enough to get a very high level of confidence, statistically speaking that is.

The flaw is that I can’t prove something positively, I can only ever really disprove something. In this case, just because I’ve lived over 18 million minutes without dying, doesn’t mean I’ll live another minute. In other words I can only prove that my theory is false, I can never be sure that my theory is true. I can be more confident, but I can never be sure.

And this is exactly what’s gotten the world in such financial trouble. Statements like “The market never goes down x% in a given month.” or “The US government can’t collapse.”. Our sample size just isn’t big enough. We can never prove this to be true, we can only disprove it. Just like we can’t disprove/prove we’re immortal until we die.

Therefore you have to be careful of what’s being said out there. Remember that rare events do happen, and they happen much more frequently than we think. Several are happening right now. The Feds bringing the interest rates to near 0%. The real estate market collapsing on itself. Deflation looking like it might be a real possibility. The government needing to bailout the corporate world on a never before seen scale. It’s all happening, yet it’s not possible. Another once in a lifetime event is happening again and again and again…

However there is good news. Learning and knowing to appreciate rare events can be an incredible benefit. You should plan for them, because although rare they do happen very frequently (that last sentence sure sounds like something Yogi Berra would say).

If you’re interested in learning more about this, I strongly recommend the books Fooled by Randomness and The Black Swan (the inspiration for this post). Both are amazing books that will really open your mind. And they’re not just about finance, they can be applied to anything in life.

Thank you also Jian for recommending these books.

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.

** 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 leave the first digit and reduce all other digits to 0 AND For every Expense increase the first digit by 1 and reduce all the other digits to 0. And any amounts under $10 becomes $10.