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Gaby Lapera: Hello, everyone, welcome to Industry Focus, financials edition! In the spirit of
the holiday season and enforced family time, we thought we'd do an episode on the best
and worst financial advice given to us by family members and friends. We polled a fair
number of people at Fool HQ, as well as some personal experiences. Names will not be named,
but you know who you are.
I'm going to go ahead and get started. This is in no particular order, but, the one thing
I hear over and over again as terrible advice is, "Carry a credit card balance to improve
your credit score." I've heard this a lot, and I think it's because people don't really
understand how credit scores are calculated. Credit agencies really want you to pay off
your balance in full every month, if at all possible.
This is because, that ends up factoring into your credit utilization ratio, which is basically
how much you've spent over your total credit limit on all your credit cards. If it's over
30%, credit agencies are like, "Man, I don't know if this person can pay this back," so
they start lowering your credit score. So, if you're paying a balance from month to month,
you're less likely to have that below-30% credit utilization ratio that they're really
looking for.
The other thing that's really important, even if you can't pay off your balance in full
every month right this minute, is paying on time. Everyone knows you're supposed to pay
on time, but it's something that I frequently talk to some of my friends about, and they'll
be like, "Oh, yeah, I forgot to pay my credit card this month, it's okay. It'll just be
a few days late, it's no big deal." And I'm like, "But it is a big deal, it's affecting
your credit score every time you do that!" And I guess that's a weird thing for a 26
year-old worry about, but I worry a lot for them.
John Maxfield: I would say that's a good thing to worry about. Your credit score, at your
age -- and I'm a little bit older, I don't want to reveal how much older that may be
-- but, yeah, we're at that point in our lives where our credit scores matter, because we’re
going to be buying houses.
Lapera: Absolutely. And just in case you don't know, credit scores are really important for
big purchases like that, because it dictates what kind of terms you get on your loan. So
the better your credit score, the less you're going to have to pay in interest, which will
save you thousands of dollars over the course of your lifetime.
Maxfield: And keep in mind, when you're talking about credit score, Gaby's going through with
these five elements, there's just a formula that calculates your credit score. So, after
you hear the rest of these five things, all you have to do is look it up online, figure
out the exact formula, and tweak your own personal behaviors around that.
Lapera: We have nothing to do with this company, but I want to put a plug out there for CreditKarma.com.
They let you monitor your credit score for free. Most credit agencies will send you a
credit report for free once a year, so you only have a chance to check it three times.
But Credit Karma monitors it constantly, so you can log in and check whenever you want.
They update it every month, which I think is a really helpful tool for people who are
just starting out, or who, like me, are worried about identity theft, because, I don't know
if I told you this Maxfield, my fingerprints and social security number got stolen.
Maxfield: I didn't do it.
Lapera: I think it was hackers, I can't remember what country it was. I had security clearance.
And that's out there, in the world now, fantastic.
Maxfield: That's great.
Lapera: Anyways, worst advice number two, it's "Buy gold." And I'm not talking about
stock in gold, I'm talking about gold bullion. I dated this guy who had these crazy friends,
and his friend's dad was an immigrant from Eastern Europe, so what he did was, he bought
all of his savings, he would put it into gold bullion, he had the secret bunker somewhere
out in the woods of Massachusetts, where he had all his gold bullion stored. And as far
as I know, he's continuing to do that, because he's still working. And that's just not really
a great idea. It's not be super liquid asset, and the price of gold fluctuate so much, that's
kind of insane. What do you think, Maxfield?
Maxfield: Well, the first thing I think is that I want to go to Massachusetts and start
digging around in the woods, that's amazing! But other than that ... here's how I think
about gold, and this is how I would recommend that investors think about gold, or anyone
who's thinking about buying gold for any type of investing purposes. As a general rule,
investing in gold is a bad idea, and here's why.
When you invest, your biggest ally is compound returns, because that grows the size of your
returns without you doing anything on an annual basis, and pretty soon, your small returns
of 1 or 2% a year turn into 50%, 60% a year on your original basis. But in order to tap
into compound returns, you've got to be invested into an income-earning asset. And the problem
with gold is it doesn't own any assets. So, your biggest ally as an investor of compound
returns isn't present when you're buying gold. So, that is the main reason that, as a general
rule, you should avoid gold as an investment.
But there are three exceptions to this rule. The first is in times of stress and fear in
the market, when money flees to safety. We saw this during the financial crisis, when
the price of gold per ounce on an inflation-adjusted basis went from $350 an ounce all the way
up to $2000 an ounce, which makes it seem like, "Oh, gold must be a great investment."
Well, it is, in that particular time period.
The problem is, when you're dealing with times of stress, it's very difficult -- it seems
like you'd be able to time the market, get in when it's cheap and out when it's high
-- but that's actually a very difficult thing to do. We've seen that, we have quantitative
proof, that timing the market is very difficult.
The second exception is in times severe inflation. If you look at a gold chart, there's really
two huge spikes over the last 100 years. The first was the one I just talked about in the
financial crisis. Then, if you go back, there's another spike in the late 70's and early 80's,
when we had double digit inflation. Gold is good because it can store value in times like
that. But, right now, anybody who's thinking about inflation being a concern right now,
I would urge you to moderate that belief, because we really have no evidence that inflation
is anywhere even remotely an issue that the United States is going to be facing anytime
soon. So, that's something you should probably put to the side.
And then, the final one, and this is probably where you're getting to with the point of
your story, Gaby, is what I like to call a "hedge against anarchy." You have some people
that believe that society is fragile, and that if society breaks, you're still going
to need to buy things. And that when society breaks and you're still going to need to buy
things, paper dollars won't work, and therefore, gold bullion will be the thing you want to
transact with.
Well, that's fine and dandy. But, what I would recommend is that unless you have a ton of
extra money, you probably shouldn't approach that strategy, because it's not an investment
strategy. It's just like sticking toilet paper in your cellar, is all that is.
Lapera: Yeah. If we do end up in a world anarchy situation, I recommend that you loot a pharmacy
first, because I'm pretty sure antibiotics are going to be more valuable than gold at
that point.
Maxfield: That's a great point. That's the first thing I'm going to do.
Lapera: So, point number three, which is kind of related to point number two. This was really
common -- "Keep cash." Now, I'm not saying this is terrible advice in and of itself.
I keep cash, I used to be a bartender and used to keep quite a bit of cash on me at
all times. You never know when a business only takes cash. I guess, now you do, because
you can check online.
But, some people try to do all their purchases with cash, because it acts as a psychological
curb that says, "Okay, I'm physically handing over something for this, and I'm getting something
back," and it makes it harder for them to impulse buy as opposed to with a credit card,
there's not that feeling that you're really spending anything, you know what I mean?
Maxfield: The thing about cash is that, cash has a time and a place. It gives you what
our colleague Morgan Housel calls "optionality." If you have a ton of cash and the market tanks,
you have the dry powder, if you will, to go out and buy cheap stocks. If you don't have
cash, you don't have that.
But, everything in moderation. As a general rule -- I'm a lawyer, so I think in general
rules and exceptions -- you're going to want to keep cash. But if you're keeping more than
whatever you perceive to be necessary to give you peace of mind in terms of a safety fund,
what does at six months or a year, if you're keeping anything more than that, you're losing
value. Even though inflation isn't an issue, it is still increasing at 0.5% or 1% per year,
so you're losing value simply by keeping it in cash.
Lapera: I just want to interject here, and I think you're correct 100% in what you just
said, but I'm talking about physical stock piles of cash that you stash underneath your mattress.
Maxfield: Oh. Like Floyd Mayweather.
Lapera: Yes. Like, this is very common with, like, grandmas especially, to take your cash
and just stash it somewhere in your house. So, instead of having a savings account, you
just have all of that in cash somewhere. So, there's a few problems with this.
One, if you have a lot of money, where are you going to put it all? Two, even if it's
in a money market account, even though money market accounts aren't making a ton of money,
that money could be making some interest in the bank, even if it's not a lot. Three, this
is the same issue that you have with gold bullion, which is, what if someone breaks
into your house and steals all your cash? What if your house burns down? Your cash is
just gone, all your savings.
Maxfield: Can you imagine? That would be horrible.
Lapera: It's awful. I'm laughing, but it's so bad.
Maxfield: Yeah, it would be so horrible. Yeah, I would say there's definitely an added element
of actually keeping it in paper.
Lapera: This tends to be one you hear from older relatives who maybe lived through the
Depression and the bank runs and things like that. But it's not an uncommon sentiment,
is what I gathered from asking people in the office.
So, let's flip over to good advice that we've gotten. This is advice that I got from my
parents, who think that they did an excellent job raising me, which I personally agree with,
but you know.
Maxfield: The jury's still out on that one, Gaby.
Lapera: Noted. The advice is, "Talk to your kids about budgeting and personal finance.
Help them get started if you can." I have been shocked by the number of young people
that I know who, getting out of college, for example, they never had a credit card, which
meant that they couldn't rent an apartment by themselves, they couldn't buy a car post-college,
because they had no credit score, they had nothing. Or, kids who get their first credit
card and just go hog wild because they don't understand how it works.
Maxfield: Yeah, I mean, when I think about it, I have two young boys. Teaching them about
finance is such a central thing, because finance, if you look at what causes stress in so many
people's lives later on down the road, it’s the inability to manage finances. So, if you
can cut that off at the pass when they're young, it's a great benefit to them later on.
Lapera: Absolutely. And you hear about all sorts of different methods. For example, if
your kid gets an allowance, having them have to take part of their allowance and put it
in a savings, and part of it goes to charity, if that's important to you, and then the rest
of it can be spending money, that's a really easy way to start young kids understanding
how budgets work for them, and how they need to save up for things they want, they can't
just blow it all at once, because of what happens later on.
Another bit of advice that we got was more in terms of stocks. "Buy things you see around
you." The story that I got was a friend of mine who was really active in the lacrosse
scene growing up, and he would go to tournaments, and all the kids would have Under Armour.
And this is back before Under Armor was big, but his parents were like, "Maybe we should
buy stock in this thing, it seems like a lot of the kids are wearing it." And, as you know,
Under Armor's stock has just gone up and up and up. So, if you have young adults around
you, often, the things that they find popular and that they're using, tend to be market
movers. So, that's a good way to invest.
Maxfield: If you think about, last week, we talked about great books that we recommended
to investors. And one of the top five that people at The Motley Fool was Peter Lynch's
"One Up on Wall Street," where he really digs into the "buy what you know" philosophy. And
the other great investor who delves into the same philosophy in terms of investing is Warren
Buffett. But he pitches it as, you always want to buy investments that are within your
circle of confidence. That's why, as a general rule, he avoided technology stocks, which
had been good, but it just wasn't something that he knew about.
Lapera: Absolutely. You can apply this to your own life however you want. For example,
I really love burritos. I know what makes a good burrito, so I can go out and try a
bunch of different burritos, and say, "You know what? This is the best burrito I've ever
had," and then invest in that burrito company. That's a common-place example for how that
might work.
Maxfield: The funny thing is, you kind of chuckle about it, but you're right. I can
literally remember the first time I ever ate a Chipotle burrito. I loved it. To think back,
if I had acted on that impulse and bought stock, well, Gaby, I probably wouldn't be
a co-host on the podcast right now. You know what I mean? I'd be living a life of leisure,
the life of a gentleman. Trotting around on horses and things like that.
Lapera: I would have a Maxfield-shaped hole in my heart.
My last point of good advice I've received -- again, from my parents -- is, "If at all
possible, spend less than you earn." This is a really basic concept that a lot of people
seem to have trouble with.
Maxfield: Keep this in mind -- if you want to be a capitalist, you have to have capital.
And the only way to gain capital, if you don't inherit it, is by saving, spending less than
you earn, and allowing that to accumulate.
Lapera: Absolutely. In the vein of last week, when we gave our book recommendations, and
this week, when were talking about good financial advice and people who had their head screwed
on straight, do you want to talk about a book that you're reading, Maxfield? You were telling
me about it this morning.
Maxfield: The book I want to talk about is a biography of a man named Stephen Girard.
Stephen Girard was the richest American from roughly the year 1800 to the year 1831 when
he died. And what's so remarkable about Stephen Girard is that not only did he beat all of
the odds to become the richest man in America, but he also acted in an extremely, not only
patriotic, but also a very kind way, despite his incredible wealth. Let me give you a few
examples.
He was born in France, and when he was born, he had a defective right eye that contemporaries
described as grotesque. Keep this in mind, keep in mind the odds this man is fighting
against to eventually become the richest man in the United States. So, he goes on, becomes
a ship captain, he's in France, he's trading with the West Indies, some of which are French
colonies, and he's over in the West Indies at one point, on what we now call Haiti, but,
he was there right when the American Revolution broke out.
The problem with that, from his perspective, was that because he needed to get back to
France or somewhere else, Britain had put a blockade on all shipping, because it was
both in conflict with France and in conflict with the United States. So, he couldn't get
back. So, where he ended up going with to Philadelphia, which was the biggest port in
the United States at the time, and it was eventually going to be the capital of the
United States, before Washington D.C. So, he ended up in this wonderful place for what
turned out to be a man with incredible talent trading merchandise and building a trade network
that went all around the world. So, that's how we got so rich.
But here's the interesting thing about Stephen Girard. In 1793, he'd already gotten to the
United States, he's been there for a while, he'd been one of the richest people in Philadelphia,
albeit not the United States at the time. In 1793, there was a yellow fever epidemic
in Philadelphia that killed 10% of Philadelphia's residents. So, one in ten people in Philadelphia
died from yellow fever in 1793 over a period of five months. Well, yellow fever came from
the West Indies, which Stephen Girard had, it seems, because he never came down with
it, had built up some antibodies to it. But he didn't know it at the time.
So, the mayor of Philadelphia asked for people -- because 40% of the city fled, as any sane
person would do. But, the mayor asked citizens to stay and help people who are sick with
this extremely contagious disease. Well, Stephen Girard was one of twelve -- only twelve in
the entire city of Philadelphia -- who volunteered to stay.
But Stephen Girard didn't just volunteer to stay in some sort of administrative capacity.
He volunteered to run the hospital, a makeshift hospital that was called a "human slaughterhouse"
for yellow fever victims, because you couldn't take yellow fever victims to the Pennsylvania
Hospital, because then they would affect everybody else. But Stephen Girard didn't just run this,
he actually acted as a nurse in it, because he couldn't get enough people to help the
patients. So, this was a man who was literally in contact with yellow fever victims, literally
helping save their lives, at the time that he was one of the richest Americans of all
time.
He did all these incredible things. He helped bail out the United States in the midst of
the War of 1812, which, had we lost, we probably would have lost our independence again to
Great Britain. So, he's done all these incredible things. And then, at the end of his life,
and he really set the tone for what you see now today with your Mark Zuckerbergs, your
Warren Buffetts, your Bill Gates who are donating the vast majority of their wealth to charity,
he gave 98% of his wealth to charity.
But here's what he did, and this is really his crowning achievement, if you will, in
all of history, he put the money in trust, and the designated people in the city of Philadelphia
who would be the trustees of this trust. And this trust was created for the purpose of
creating an enduring forever more a school for low-income orphans from all over the United
States.
This school has been in operation, giving full scholarships to low-income orphans ever
since it was created in the 1830s. So, you're talking about thousands of lives that are
directly impacted this. And not only those thousands of lives that are directly impacted
by this, but, these are life-changing opportunities for people, because it is a free education
from kindergarten all the way through high school. So, many of them, we can presume,
are becoming the first people in their families to go to college, which is a transformative
thing for subsequent generations of a family.
So, in the spirit of Christmas and Thanksgiving and all of these different things, and at
the same time that we have this political scene going on, where vitriol is part and
parcel with it, it's so nice to think about these people in our history that lives extraordinary
lives, and extraordinarily kind lives.
Lapera: Do you want to say what the name of the book was and who it's by?
Maxfield: I do! It's kind of a niche book, as you can imagine. It's called "Stephen Girard:
The Life and Times of America's First Tycoon" by a man named George Wilson. It is a phenomenal
book. I loved every second of it. It's well-written, it's a fantastic story, and I highly recommend
it to anybody who's listening.
Lapera: Alright, thank you for that recommendation. It's time to wrap up now.
As usual, people on the program may have interests in the stocks they talk about, and the Motley
Fool may have formal recommendations for or against those stocks, so don't buy or sell
based solely on what you hear. Thank you very much for joining us, I hope you like this
week's episode. Write to us at industryfocus@fool.com to tell us about best and worst financial
advice given to you by your family members. Everyone, have a great holiday!