I’ve written a few times about doing your own research without explaining what that entails. It’s similar to due diligence, which is a period of investigation before a merger or acquisition is undertaken by a business. Businesses take every purchase/investment/acquisition seriously, and so should you. When it comes to your money, how you spend it and invest it, you want to take the time to verify what’s being sold or portrayed to you is accurate, and can be verified by some independent or legal sources. I think that a lot of unaffordable mortgages could have been avoided during the “easy money” period of 2004 to 2007, if everyone hadn’t jumped in head-first without bothering to do any research because the hype just sounded so damn convincing.
True Story Interlude: I went and saw a few new condos back in early 2006, blissfully unaware of the impending bubble burst that would come that fall. All I knew was that home prices just kept going up and up and I better get in on that, quick. I saw a few 1-bedroom condos* in the NW area of Washington, DC (where I lived at the time) and I’m a sucker for new construction. I was also a sucker for the gym, movie room and rooftop deck and spa. After the tour, the sales consultant talked to me about my financing options. The price for the 1-bedrooms were about $375,000. She said that with good credit (which I had and have, even though I carry debt I have a credit score of 720), I could possibly get an interest rate around 6%, but the option she was really pushing for me was the adjustable rate mortgage (ARM) so that my payments in the first two years would only be around $1,200. Then she showed me that after those two years, the interest rate would go up or down, and my payments would most likely go up because the interest rate would probably go up by 2 to 3%. I don’t remember all the details, but I could do enough simple math to see that the financing was a shit show and I would end up being unable to handle that kind of monthly mortgage ($1,800 or more) when my rent was $1,000 and included utilities and cable. I really wanted to have a place of my own. But I wasn’t blinded by the hype, when the truth was right there on those laminated sheets in front of me: this payment is going to go up and so is your interest rate.
So the point is that you want to take the time to research things you want to buy, stocks you are thinking about investing in and anything else that involves money. Here are a few things I have learned over the years.
Financing a Purchase: The whole point of getting out of debt is to not finance stuff, but I have financed things in the past and I can handle listening to all of the jargon to make sure I am not getting screwed. If someone says they are going to offer you 4.9% APR, make sure the papers you sign state exactly that. At the dealership, I was offered 4.9% APR but when the finance guy was typing it into the computer, he had me check the screen and it said 4.99% APR. I pointed it out, he fixed it. That .09% reduction saved me a few hundred dollars in interest! A few other tips when signing an 80-page loan document:
- Ask what fees there are, if any. Then ask for those fees to be waived. (My general rule on any fee is that you should ask for it to be waived. It’s a bullshit fee, I promise you. They can take it off 80% of the time.)
- Make sure there are no prepayment penalties.
- Read the whole document, or at least skim it. Hopefully those “gotcha” clauses will jump out at you.
Investing: I was a very amateur investor before the past year. I’m still an amateur, but I am learning how to view investing, what to research and analyze and how to analyze the market without following the market and the emotional, irrational trading that results from following the market. Even though I majored in business, worked in management consulting and advised large corporations on their investments, I still didn’t know sh*t about investing. To be honest, I would like to go back to my investment classes in college and call out my professors for not giving us the following essential reads:
- The Richest Man in Babylon by George S. Clason (Click for the complete book as a PDF)
- The Intelligent Investor by Benjamin Graham
The other essential part of investing is reading company’s annual reports, SEC filings, and financial statements. You can also listen to earnings calls (usually done every quarter) online, and all of this information is public and free. A few websites that I find useful are:
To sum it up, I like doing my own research because it puts me in control of the situation. I ask a lot of questions of everyone, and I read everything I can before making a decision. All “doing research” means is just double-checking what people are telling you. Do you have it in writing? Do you understand what it means? Are you getting what you expected? Do you have an uncomfortable, queasy feeling about going through with something?
If you answered yes to every question but the last one–you should be good, dude!
*Never buy a 1-bedroom condo unless you want to keep it forever. As the saying goes, you’ll be the first and last owner when you buy a 1-bedroom.