OT: Sobering Look at the debt financing Bubble.com

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This is a partial quote from Contrarian investor William Fleckenstein: (Feb.11, 2000)

From the mania chronicles, a little field research A friend of mine sent me the following email this morning: "I'm hearing margin debt at one major Wall Street firm rose 50 percent last month. A broker there told me that one of his partners is writing more penny stock tickets than ever in his long career." Of course, we've been chronicling just that. Along that same line, here's another poignant story from a reader:

"As a 'levelhead' working in an office full of bubbleheads,' I have a great opportunity to watch the mania unfold before my eyes - I call my office the 'Stock Mania Research Laboratory' I was curious as to the extent debt is financing this unprecedented run in the equities, so I decided to take an informal poll of my bubble-headed friends.

"First, I rounded up 10 'investors' who had purchased stock, other than through their 401 (k) (which I did not count), in the past six months. I asked them a simple question: 'Have you used your credit card (s) to finance any stock purchase in the past six months?' The answer: two of 10 said they had actually used a credit card to buy stock - and are currently carrying the balance of the purchase. Not too bad for a bunch of bubbleheads, I thought - only 20 percent. Then I asked question number 2 of the remaining eight: 'Are you currently carrying any balance whatsoever on any credit card (s)?' Seven of the eight polled said, 'Yes'! 'Well,' I argued, 'that is the same thing as financing your stock with your credit card! - You see, you guys should sell your stock and pay back your cards. You are, in actuality, investing borrowed money - you might have bought a big screen TV for $5,000 and have $5,000 invested - so really you are carrying debt at the same time you are invested in equities. This should be considered reckless behavior!'

"So, in actuality, nine out of 10 bubbleheads I polled are using their credit cards (in some way) to finance their investing!!!! It's unbelievable!! I think that for me, this is a portrait of the 'wealth effect' in action - a portrait which will eventually be hung in the hall of shame. When this whole thing craters, the only thing left will be debt, and that will bring on what I believe will be the more severe crash. This thing is really going to end badly, with lots of aftershocks after the 'big one.' I predict the Internet will (mercifully?) accelerate the process - thanks to it, there are megasuckers born every minute."

The rest of the article can be found here: Panic selling drives tech stocks all the way back to Monday's prices

-- Susie (Susie0884@aol.com), February 13, 2000


Let's try that link again: lin k

-- Susie (Susie0884@aol.com), February 13, 2000.


All Americans get into debt as soon as they graduate from High school when they purchase their first car. Since they live with their parents and basically have no living expenses, quite often they drive a fancier car than their parents. Then as time goes on, they purchase a few more things on time, and before you know it they are deep in debt. Then they get married and buy a home.

Presently a good basic beginner home costs around $150,000. When you borrow that amount, in 30 years you pay back to the bank at least $450,000. So $300,000 you pay out in interest, if you pay for 30 years. During a lifetime of buying everything on time, Visa Cards, cars, furniture, carpeting, appliances, piano, sprinkling system, boat, motorcycles, loans for College education for your children, loans to pay for their weddings, etc. etc. etc, you can add another $200,000 in interest. That is a total of a half million dollars paid in interest during a lifetime!!!

Can you figure how many years you have to work for a half million dollars??? Does that not blow your mind? That is what youve been doing all these years! You must put a stop to living like that, otherwise you will retire totally broke! Can you see now how rediculous it is to get into debt in the first place? Can you see now that being in debt all your life, you make the Banks rich, and this strategy will keep you poor for the rest of your life? Would it not be much better to try and live your life in such a way, so you could cut that half million in interest into only $100,000 or less during a lifetime?

I understand there are some things you must pay on time, like a home. But to pay for it for 30 years is totally stupid! But almost 100% of Americans do that! And the bankers love their stupidity! Americans just dont know they are stupid. They have heard about plans to pay off a home faster by paying extra principal, but they are so deep in debt, they never get around to setting up a plan to pay off their home sooner. Does that sound familliar? The things that matter most like personal financial freedom is not being taught in the High schools. Most things you learn in High school you never use in everyday life. Children grow up seeing their parents buy everything on time, so they just copy them and do the same thing! Then as they grow up, their children do the same thing!

There is another way to live your life and that is what this information is all about, so lets get into the nitty gritty right now. You have to have a plan and then stick to that plan. I will teach you a System, that will get you totally out of debt in about five years or less, including your mortgage. Then when you are totally out of debt, use that two or three thousand dollars extra per month and invest it wisely every month to create wealth. You could buy rental property.

The first thing we did was buy a small home in a small town for only $21,000 and we paid cash. You can get some real deals in small towns. Now I rent out that home for $650 per month and the rent paid back my original investment in about three years. Now we receive $650 per month for life! And that amount will increase with inflation! That was a very good investment. We now are looking for more deals like that.

First things first. You have to take a serious look at your payments and bills situation and see where you can cut corners immediately. Most Americans buy new cars every few years. Bad financial strategy. That must stop if you want to become financially independant. My wife and I both drive ten year old cars.

They are both Ford Probes. Excellent cars and very stylish looking. Quite often people think they are new cars. In fact they both have about 180 thousand miles on them. They are excellent transportation and nothing to be ashamed about. If you are driving fairly new cars, you must sell them and trade down. You can buy a very nice car about 3 to 5 years old for three to four thousand dollars. Always buy from a private party. In the nineteen sixtys and seventys a car with sixty thousand miles was considered junk. Now cars last much longer. Find a car with about sixty thousand miles on it and you save big bucks!

Then look at other things that are luxuries which you really dont need and hardly ever use. Just get rid of them and sell them. There, now that is a start to financial freedom. But you have a long way to go. Now sit down with your spouse at your kitchen table and go through your monthly bills and write them all down. Do not include utilities like electricity and water, etc. Those you cannot do anything about. Now rearrange those bills with the smallest bill with the lowest payment on top and the largest bill on the bottom, which will be your home mortgage. I will make some assumptions and write down on the next page a possible scenario of payments, so youll understand how this this System works.

Sears. $200 balance.............$50 per month. Piano. $500 balance............ $100 per month. Visa #1 $700 balance..............$100 per month. Visa #2 $1350 balance.............$150 per month.

Car #1 $1800 balance.............$200 per month.

Car #2 $2400 balance.............$300 per month.

Loan #1 $4400 balance..............$400 per month.

Loan #2 $6000 balance..............$500 per month.

Mortgage $83,700 balance.............$700 per month. Total debt $101,050. Payments $2500 per month.

This is what you do. This is a plan of attack. You MUST do this, or you will be in debt for the rest of your life! Pay the bankers all your life and you will eventually retire poor! Try to live more frugal, so you will have some extra money left over at the end of the month. Lets assume you can scrape together $200 extra per month that you usually would just squander on junk.

You take that $200 and immediately pay off Sears.

Now you have $200 plus the $50 Sears payment to attack the piano bill. That is $250. You pay the piano off in two months.

Now you have $350 per month to attack visa # 1. You pay that off in two months.

Now you have $450 extra to pay off Visa #2. You pay that off in three months.

Now you have $600 extra to pay off Car #1. You pay that off in three months.

Now you have $800 extra to pay off Car #2. You pay that off in three months.

Now you have $1100 extra to pay off Loan #1. You pay that off in four months.

Now you have $1500 extra to pay off Loan #2. You pay that off in four months.

It took only 22 months to pay off all your bills, except your mortgage. Now it is time to attack your mortgage with all you've got!

Now you have $2000 extra plus the $700 per month house payment which is $2700 per month to attack your mortgage balance. You can now pay $32,400 per year on your mortgage!

You will have to consider the amount of interest. However, that amount per month will dwindle down very fast as you continue attacking your mortgage balance. Simply add up all the months and you can see that with this scenario, you would wipe out a $100,000 debt in less than 5 years!

You will have a set back once in a while, like if you need a new washing machine, etc. Simply pay cash and continue your attack. Follow this System and you will save several hundred thousand dollars in a lifetime! This is money that you now can use to invest for your retirement! Good luck, and I know you can do it, because weve done it and many others who have our System have done it. Please drop us a line about how youre doing with your attack. Were interested in hearing about your success in getting out of debt and on the road to financial success. May the force be with you!

-- freddie (freddie@thefreeloader.com), February 13, 2000.

Panic Selling? Maybe, but even though the coffee is brewing I'm not sure the majority smells anything at all, yet.

Watching money chasing returns is becoming a hobby of mine. rotating into and out of sectors, funds, stocks. This fight between the bulls and bears is becoming a back street brawl with the ever victorious bull looking a little worse for wear.

Someone called for the Fed police but he is involved in a domestic violence call at the home of Mr. Open market committee and Mrs Treasury department, the cop may not make it the fight before the bull is cut by the sharp knife of inflation and gives up the ghost.

Discretion is the better part of valor. If you have any borrowed bets on the market consider taking profits or cutting losses before that phone rings. There is nothing more desperate then having every position liquidated to pay a margin call and being told there still isn't money to cover what you owe.

The first rule of investing is perserve your capital, the second rule is preserving your capital, the third rule is preserve your house.

Best of luck to all of us.

-- Squid (ItsDark@down.here), February 13, 2000.

Very interesting! Credit card dept and living "above means" is a pretty dangerous way to live. Its always good to see this information, as a reminder for responsible money management. Thanks to both of you, for the post and information.

-- suzy (suzy@nowhere.com), February 14, 2000.

thought this was rather interesting, mr fleckstein is a hedger... Disclaimer William Fleckenstein periodically publishes columns expressing his personal views regarding particular securities, securities market conditions and personal and institutional investing in general, as well as related subjects. Mr. Fleckenstein is the President of Fleckenstein Capital, which manages a hedge fund in Seattle, Washington. This fund regularly buys, sells, or holds securities that are the subject of his columns, or options with respect to those securities, and regularly holds positions in such securities or options as of the date those columns are published. In particular, this fund regularly holds short positions in such securities as of the date those columns are published. The views and opinions expressed in Mr. Fleckenstein's columns are not intended to constitute a description of the securities bought, sold, or held by the fund. The views and opinions expressed in Mr. Fleckenstein's columns are also not an indication of any intention to buy, sell, or hold any security on behalf of the fund, and investment decisions made on behalf of the fund may change at any time and for any reason. Mr. Fleckenstein's columns are not intended to constitute investment advice or a recommendation to buy, sell, or hold any security.

Mr. Fleckenstein is also a Director of Go2Net. The views and opinions expressed in Mr. Fleckenstein's columns are his alone and not those of Go2Net or of its subsidiary, Silicon Investor. Go2Net and Silicon Investor disclaim all responsibility for Mr. Fleckenstein's views and opinions.

-- lock'n'load (lock'n'load1@hushmail.com), February 14, 2000.

Gee Freddie, YOU try to spend two years of your life with abs. no discretionary income to spend. Our two year old got a severe ear infection: 1,800 hospital bill. And we have insurance. Try that with none like the 40 million people in this country. The grandparents had their 60th. All the grandkids chipped in $200 so they could have one real vacation before they died. Spouse's used pickup truck threw a rod. 103 yr old house in small town has a 35 yr old furnace that needs replacing. Don't ask about the windows. Daughter needs soccer shoes. And team pictures. And school lunch money. And a yearbook. Fred, I love ya, but life happens when you make all those plans to "get out of debt". The banksters know this. You are asking for the impossible: for life to "stop" and be put on hold with no sickness, no accidents, no joys to celebrate, no births, deaths, anniversaries or weddings. We had a couple of very good former friends who followed all your advice. They lived frugally. Scotch wife: no curtains, just blinds. They doubled the housepayment. Paid off in 15 years. 55,000 in the bank. Her darling spouse just ran off with the office cutie to Lake Tahoe for some apres ski. Sometimes, you gotta live and that means carrying some debt load It is VERY difficult in today's world. We cut corners where we can. Garage sale, flea market furnishings, garden, you know the drill. We rejoice when we "burn a hospital bill" that plagues us for the better part of a year. Or the appliance bought on credit. But this is reality for most of middle class America.

-- Not a Yuppie (boomer@ngbounce.org), February 14, 2000.

The question of credit is not hospital bills but the use of credit for discretionary items. How many have that big screen projection TV that they use for their Sony Playstation and all the latest games, of course there is no time because they are going on a cruise why its been 9 monthes since their last vacation. All financed on revolving credit.

We all know someones who haven't learned the word saving. The funny thing is there is a friend of mine who has a family a very nice home that is almost paid off and his spouse doesn't work outside of the home. He makes less than me but was able to pay those emergency bills and expenses that come with two active boys and still save. If any of us look at our spending habits for month or week we would be amazed at how fast those quarters and loose dollars add up.

-- Squid (ItsDark@down.here), February 15, 2000.

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