Unfair Comparisons on Cost of Living

I’m livid after reading Marketwatch’s recent article on cost of living differences, in which it tries to make a blanket comparison between Asian cities and American/European ones.

The key part is in how they designed the study:

The study rated the cities according to how expensive it is to buy basic items there at supermarkets, mid-priced stores and specialty outlets, using the price of food, drinks, clothing, recreation and entertainment and the cost of buying and running a car (including the cost of gasoline).

It also includes recurring expenses, including the cost of renting a home, utility bills, private schools and domestic help.

I understand why they’re doing this – to create an apples to apples comparison. However, there’s a reason the government changed the index of inflation to account for substitutions. Essentially, to have the same or better lifestyle in an Asian city vs an American one, you can go without certain things. The cost of owning and operating a car in Tokyo, Singapore, or Hong Kong is exorbitant because of incentives/taxes against congestion. Plus you don’t need a car to get around anywhere. It’s actually probably faster to take the metro/subway to avoid the surface congestion. Whereas in an American city you absolutely need a car to live.

Another aspect is private schools. I understand why they’d want to keep that in the comparison – the article is geared at high powered corporate expats who want to replicate a western lifestyle in Asia (note that they include domestic help in the calculations). However, again in the US you need to send your kids to a private school to get any kind of decent education. Not so in Asia. There, the locals hardly ever do so because public schools are so good (extremely competitive by world standards). This is anther example of a cost that’s not experienced evenly between Asia and America.

Finally, I’m not sure how they calculate food, but in my experience food in Japan (assuming you eat Japanese style meals) is much cheaper, tastier, and of better quality than the equivalent American ones. Restaurants are also cheaper, mostly due to not having to pay tip.

My gripes about this article are similar to my wife’s experience moving back to the US from Asia.

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Don’t Do Something, Just Stand There

Another week, another all time in the stock market. North Korea’s saber rattling and the devastation wrought by the hurricanes don’t seem to have put a dent in the market’s relentless ascent. Furthermore, with this being the “most hated” bull market in history (or so they all say), things don’t seem primed for a major collapse. A mild pullback on the order of 5-10%? Sure, perhaps it will happen within the next year, but a major recession doesn’t seem to be in the cards.

What’s the best mentality for an average investor to have? The same as always – don’t change your long-term strategy due to short-term circumstances. Ignore the noise going on around you and robotically invest what you won’t touch in the next 5-10 years. The mantra that my mentor in medicine told me, which brings “do no harm” into the modern world, is encapsulated by the title of the post. Sometimes it’s simply better to do nothing than to react like a jumpy cat to every slight movement.

Take this advice of this article for instance:

“If you don’t want to invest in equities because you fear a market crash, then you should never be in equities, because equities always crash,” Ritholtz said, speaking at Morningstar’s annual ETF conference.

He noted that there was a bear market in equities—defined as a 20% drop from a peak—every five years, on average, although the recent market environment has been bereft of even much smaller declines. Current valuations have led to concerns that such a crash could be imminent, but “If you’re under [the age of] 50, you should be rooting for a market crash, because it would be nice to have a 20% discount and then 20 years to compound that discount.”

He added, “there’s no escaping this: markets go up and down, that’s what they do. But if you’re still worried, you should significantly lower your expectations for future returns” by buying safer—but lower growth—alternatives. He noted that over the past century, U.S. stocks have returned about 10 times what Treasurys have, although they also experienced numerous massive selloffs over that time, something the government bonds hadn’t.

“The risk you assume when you buy equities is that there will be a significant drawdown in the 20 to 30 years you own them. But you get rewarded for that risk. Treasurys don’t have the same kind of drawdowns, but don’t deliver the same kind of returns.”

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Can You Avoid Paying Income Tax?

Elon Musk is depressed from overwork, just like many American his age. This is why your life goal should be to strive for full financial freedom by creating enough income streams such that your needs are fully met without you having to devote your time to it.

If you’ve read my book, you’ll know that I’ve identified being a digital nomad operating your own online business as one of the best ways to achieve that end. While I was pondering this, I wondered if there was a loophole in the system, a backdoor lifehack to circumvent existing laws regarding residence, territoriality, and taxation. That is, can you avoid paying all income tax completely?

As it turns out, others have wondered the same thing. Basically, most countries will not tax you if you haven’t lived in that country for a certain amount of time to qualify for residence. Usually it’s something close to  less than half of the calendar year. By staying below that level,  you avoid being considered a tax resident of that country. The US is a little different, being one of only two countries (along with Eritrea) to tax you on worldwide income regardless of residence, though it does give a foreign earned income exclusion.

The loophole is due to laws regarding residence and taxation that have not yet caught up with modern innovations in travel, communication, and technology. Before with income tied to jobs which were tied to location, countries can get their share of tax from your employer or from you based on your residence (if you operated a small business, for instance). However, now we have online web businesses that we can run from anywhere in the world. If governments can’t tax us at the source of production (because the business is “based” in a tax haven) or by residence (due to the digital nomad being constantly on the roam, never staying long enough in any country to gain residence), we’re free from all income tax.

As an example, let’s take a British citizen who wants to start a web business offering cultural sensitivity consulting to large established companies. This adventurous individual incorporates in Bermuda or the Cayman Islands, and then proceeds to travel the world, never staying long enough in any single place to owe taxes. This is made easy with visa free access to many of the world’s most fun destinations, and eventually our nomad settles on a regular cycle of Ireland -> Thailand -> Singapore -> Australia -> Panama -> Ireland. Meanwhile, all the web income generated from work done remotely is not subject to tax in any of the countries visited, since the corporate income is categorized as earned in the tax haven.

Let’s celebrate this with a Joan Baez song glorifying the joy of avoiding taxes:

 

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How Not to Support Spending

What’s one way that you can stretch your spending beyond your means? By financing it. What used to be bought entirely with cash has turned into longer and longer payment schemes. From 10 to 30 and even longer mortgages, and ever increasing auto loan durations, it’s one more way for cash strapped modern families whose wages haven’t grown to keep up with their neighbours.

I can understand doing it for housing – it’s generally a productive asset that will increase in value or at least hold its own. Many may say cars are a necessity for modern life, so that’s fine, but do try to be frugal with how luxurious a car you get. What’s inexcusable though is financing every aspect of your life including luxury spending and consumption. That’s just asking for debt trouble. Live by the old mantra that if you have to go into debt to buy a depreciating asset, it’s probably not a good decision.

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Get Out of a High Cost Area

You probably know that coastal cities are expensive. Actually, if  you’re reading this blog, chances are better than not you’re an educated person living in an urban area. It’s also not surprising that the high cost of living serves as a wall that prevents the migration of poor workers from e.g. Ohio or West Virginia. Interstate mobility in the US has decreased, and part of that can undoubtedly be explained by pull (family ties) and push (cost of living) factors. This has contributed to political polarization, overall wage stagnation, class-based segregation, and increased resentment all over the board.

The key tenet in my book is that wages are not going up, at least not as fast as cost of living. This article makes it abundantly clear that it’s driven by housing:

Housing costs have grown much faster in high-income places than low-income ones since 1960. Housing has always been more expensive in high-income places, but the difference is getting more extreme. In 1960, on average, US states with 10% higher incomes had housing costs that were 10% higher. In 2010, states with 10% higher incomes had 20% higher housing costs.

I would also add labour to that mix. As part of overall price pressures, you have to pay more for help, since they need to be able to afford to live there or otherwise be compensated for a long commute in from the exurbs.

So if you’re living in an expensive city, carefully examine your own life and entertain the notion that you may have more disposable net income after moving to the sticks. (Note: this doesn’t factor in the potential for career advancement and networking opportunities in the big city)

Better yet, take advantage of geographic arbitrage using techniques from my book.

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How to Buy a Car (From an Expert)

I somehow got subscribed to the daily Quora mailing list with interesting questions and answers. The one for today was about how to get a good deal when buying a car. Pasted here is the entirety of the response:

Let me make your life easy (I own a few dealerships). It takes 5 minutes. Once you know exactly what kind of car you want, simply go to the dealer, a salesmen will greet you. Tell him you’d like to go inside and talk about the car your interested in. Go inside, tell him you’re comparing with two other brands but you like this one the best. Tell him, I’d like to buy this car now if you can match the other dealers’ offers which is $100 over invoice. Tell him kindly, “Please let your manager know my offer is $100 over invoice, which is what the other dealers offered me, and if he accepts, I’d like to see a copy of the invoice (which they must do legally – you’re welcome), and then we can wrap this up now and I’ll buy you lunch for your great service.” That’s it. Unless it’s a specialty car, it will go down just like that. If you’re paying cash, it’s a done deal 99.9%. If that doesn’t work, call the next town over, tell them you were offered $100 over invoice but you don’t like how they do business so want to go to the competitor. If they agree (which they will because the car biz is super competitive) ask them to email a copy of the invoice. Once they do, call them and tell them you’re on your way. Side note- best time to buy a car is New Years Eve, 2 hours before closing using this method….just tell them “Come on guys, let’s wrap this up quickly so we can all go spend time with our families.” It’s not as hard as people think. Believe me, the salesman just wants to sell a car, he cares more about closing the deals than anything else because if he doesn’t, he doesn’t get paid. Another note, the faster the deal, the better. And be POLITE, good salesman ARE expert salespeople and they’ll rip your head off without you knowing if you’re an ass. Oh, and all your friends who think they’re experts…are not! Even if you buy the car for 50 cents they’ll tell you that you’ve been screwed, lol. Buy a decent car for $100 over invoice and go home happy. And don’t over spend on cars, they all have four wheels….just get a good running car. The more you spend, the more they depreciate and they’re all worth $2500 in 10–15 years. This is advice for new cars. Used cars….offer 3k less than the asking price OR 500 over wholesale book whichever is less (use blue book online between trade-in & private party value)(pay cash)…also 5 minutes. But only do these if you’re ready to buy in that moment. Test drive all first. If you don’t have cash, get pre-approved at a credit union and take the letter to the dealer to solidify your seriousness. If you have bad credit….it’s the bank that will screw you, not the dealer. Also with bad credit, the dealer had to pay bank fees so they can’t come down as much on the price. Bank fees range from $500–$3000! depending on how bad your credit is. My thumb is tired now…good luck!

All I can say is that these recommendations make sense. I usually go through Costco Auto which gives a pre-fixed price, but direct bargaining with a dealer can work as well. Go in with a no nonsense attitude, have an anchoring price, and come prepared with a preapproved loan (or cash). That takes away the multiple possible ways that the dealer can screw you over. Be prepared to walk away if the dealer can’t meet your pre-established price though.

It also helps to go in at certain times of the year (4th of July sale, Christmas sale) at the end of the season when sales reps are trying to meet quotas. Also what can help is buying a model that is not that popular that the dealer is trying to move off the lot. Sedans right now are losing ground relative to SUVs and light trucks, so it’s a good time to scoop up one and go against the grain.

Of course, going for a slightly used car instead of a new one can save you money, as this post shows.

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To Buy or Not to Buy at Market Highs

There is always a bit of fear when evaluating buying in at all time highs. The sentiment is understandable. Everyone is afraid of buying in at a market peak and eating the recession that follows. After all, after almost a decade of uninterrupted growth, aren’t we due for a downturn?

However, the data analysis (done by someone else!) and existing scholars such as Tobias Moskowitz supports momentum investing. In other words, when the market or an individual stock is rising, it’s more likely than not to keep rising than to suddenly reverse.

Applied to current market highs, I would still encourage ordinary people to invest their new capital in accordance with prior allocation ratios, to achieve a healthy rebalance despite stock market highs. More likely than not, the market will be even higher (even after adjusting for inflation) in the next decade. If prior trends hold, we may be on the cusp of a 1-2 decade run of sustained all time highs.

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Link Roundup: The Value of Hard Work

During times of plenty, when there are more interesting articles than I can do a feature review of, I will combine them into a single post called a link roundup. Here is one such event.

  1. The value of hard work. This reminds me of my time growing up in the crucible of competitiveness that is the Bay Area. Investments made in oneself through education and knowledge pays compound interest down the road, establishing a solid foundation for improved performance and confidence, that feed off each other in a virtuous cycle. Take for example a high school student taking summer classes to prepare for the next quarter’s math and reading classes. That person will get a leg up in results for the rest of his or her life, because of repeated exposure and increased familiarity, not to mention having an easier time in the class. Compared to someone like this, if you’re not working hard every day, you’re falling behind your peers. Just like in athletics, average is over. Every day you’re slacking or doing something else is a day falling behind your peer competitors.
  2. What do future jobs look like? The thinkers of yesterday and today have a vision for how the future looks, and it doesn’t bode well for some. Unskilled work will be replaced by robots. Technical and computer skills will become more valuable. Good future areas to specialize in include AI, robotics, and VR. At the same time, some jobs like in health care that deal with human emotions, where empathy is essential, will be relatively shielded from the effects of technology. But then again, you would know this from reading my book.
  3. As a corollary to the above, university students increasingly recognize the reality of a tough job market for graduates, and are tailoring their studies accordingly. This means fewer liberal arts graduates and more social science, business, engineering, and “trades” graduates. That’s probably a good thing for individual finances but a tragic loss for the country. After all, from their pen would have come art, literature, and poetry – the stuff that gives colour and meaning to life. That’s what separates us from somewhere like Singapore or India, which are
  4. If you have truly niche technical skills, you can make bank. Just look at blockchain developers. Btw, software is one of the fields where if you have the interest and the talent, you can teach yourself and get a great job without having a degree in the field. That’s the path my dad took.
  5. Here’s a great story of a self made web entrepreneur with the vision to establish a business reselling cheap Chinese toys from Alibaba to American consumers willing to pay more. Wait… why don’t Americans just buy directly from Alibaba? Doesn’t sound like a very sustainable business model but somehow it works.
  6. Concierge medicine is taking off, and whispers are that you can have a lucrative practice with low patient volume, if you cater to the rich and treat everyone like a VIP. It’s not my cup of tea, but I see disruptive potential in different delivery methods for health services. Target mini clinics are good, as is the underutilized format of telemedicine.
  7. I can’t harp on the concept of geographic arbitrage enough. By moving to a cheaper location, your dollars stretch so much further. Not only that, but your kids can grow up multicultural with foreign language skills, interesting life experiences, and a great prebuilt application essay for Ivy League schools telling them how unique you are.
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Luxury Is Cheaper than Land

Of all the innovative uses for geographic arbitrage, one of the most satisfying is monetizing one’s home and trading it for an itinerant life. That wanderlust can be satisfied in a variety of different ways. The online travel blogging community has made being a digital nomad in cheap areas like SE Asia and Latin America so commonplace that it’s become trite.

An interesting choice is to instead live on a cruise ship. It’s not just a way of life for the wealthy to live on a luxury boat like The World, but even worldwide voyages with one of the mass market lines (Princess, HAL, Oceania, etc) can be affordable, when considering all the expenses racked up on land in an expensive place like New York City.

At a certain point, if you own property in NYC and decide to rent it out, it may be able to generate enough income to subsidize all (or a great portion) of the cost of the cruise. And when you factor in food, entertainment, and travel all being bundled into the price of the cruise, it becomes an even better bargain.

Of course, this type of lifestyle is not appropriate for everyone. Not everyone likes life on a ship, whether due to claustrophobia, seasickness, or boredom. But it’s worthwhile knowing about the options to enhance life that others have found worthwhile and workable.

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Secrets to Successful Investing

It feels like we’re always hammering the same points on investing over and over again. Don’t watch your portfolio. Stop tracking the market’s daily gyrations. Focus on the long term. Stay diversified. Don’t try to stock pick or market time. Stick with the asset allocation determined earlier and rebalance. Stick to these tried and true principles based on solid research and you’ll be fine.

Sometimes, we feel that we can be exceptional or lucky and we try for the moon. Humans are poor learners from others’ failures, and rather learn best from a strongly emotional personal experience (like a major loss in the market due to a self-inflicted error). I believe everyone should learn that by starting out playing single stocks with small amounts of play money, ideally earlier in life rather than later, so we can quickly return to the right path having learned our lesson in a way that sicks.

In other words, use the “the martyr system” to your advantage, letting the hippocampus impart the long-term financial scars from personal failures that will leave lasting memories of what not to do.

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