We don’t usually have much fun here at Weakonomics. Okay, actually I have a lot of fun and don’t care if you do or don’t. But I want everyone to have fun today.

As everyone should know, Warren Buffett is considered the most successful investor of the 20th century. Through his company, Berkshire Hathaway, he owns tons of stock in well known companies such as Wells Fargo, American Express, Washington Post, Coca Cola, and Kraft. But Hathaway also owns a number of privately held companies, and these are wholly owned. Those names include Fruit of the Loom, Russel Clothing, and GEICO.

Hathaway has owned GEICO for as long as they’ve made interesting commercials. Some may be annoying, but there is no denying that GEICO’s advertising success is the stuff for textbooks. Buffett has been known to say he only buys things he understands, which is why he owns a lot of well known companies in consumer-based businesses. But what he hasn’t said is how he remains involved in the companies he’s purchased. For years, he’s participated in an employee produced video for GEICO. And this year, the employees took his role to an extreme. Please enjoy:

Now if they could only get him to throw in $10 million for a renovation of their offices. Being near DC I’ve seen GEICO corporate headquarters. Dismal building.

Hat tip to @jodiecongirl for the link.

Ladies and gentlemen, I have the secrets to making money in the stock market, and I’m here today to share them with you. The process is very simple, but does require time and effort. You can do this if you follow my simple guide.

Step 1: Go to school. You need to get a good degree from a good school that prepares you for a life of high finance and chumming with the captains of industry.
Step 2: Start working with a reputable company that gives you good experience in the normal work life.
Step 3: Go back to School. After a few years of working somewhere in business you need to go get an advanced degree. And I’m not talking about a Master of Fine Arts in history. Here’s a list of the schools attended by the richest investors in the country: Penn, Columbia, London School of Economics, Harvard, Princeton, NYU, MIT, and Berkeley. Most of these people have MBAs from the business schools at these institutions, and one sports a PhD as well.
Step 4: Convert to Judaism. Don’t ask me why, but I’ve talked about this before. For whatever reason, it helps.
Step 5: Get a job at a top financial institution. Step 5 is really big because it’s going to put you in the state of mind you need to be in to successfully invest in the stock market. The most successful investors devote 40-80 hours a week evaluating companies. They screen thousands of stocks looking for the right match. They read news on the companies, comb through financial reports, and even speak to employees and managers of the firms.
Step 6: Strike out on your own. Now you’re ready to start making your own money. Do exactly what you were doing before, spend 60 hours a week combing through stock reports and making smart investments. Constantly watch CNBC, stress about the slightest move in the market, and carefully decide when to buy, sell and hold. You’ll find it hard to take a vacation because your whole year’s worth of earnings could be wiped out in a week.
Step 7: Take huge risks. The greater the risk, the greater the (potential) reward. The guys worth the big bucks have made huge bets.
Step 8: Get lucky and make lots of money. Honestly, half of your success in the market is pure luck, which is why so few people do it consistently (probability theory demands a few people regularly make the right investments).
Step 9: Pay taxes. If you trade on a regular basis, good luck with that.
Step 10: Go back to Step 6.

OK, so maybe it isn’t a secret and it’s definitely not easy. You might could skip the first 4 or 5 steps, but if you want to get into the billions you’ll need them. You could just become a part-time trader and work full-time elsewhere. But no one has heard of anyone that regularly makes decent money part time. Making money in the stock market is a full time job.

The unfortunate thing about the situation is that for every Warren Buffett or John Paulson out there, there’s 10 guys just like them that have failed miserably. They went to the same schools, maybe even at the same time. They did all the right stuff but just made the wrong bets. Why? Again, luck may be a big part. So how do you really make money in the stock market?

Mutual funds.

Photo: David Prior

What created this recession in the first place? People were sold mortgages they couldn’t afford. Payments caught up to them because the interest rates reset. Had they gotten fixed rate mortgages they wouldn’t have had this problem. Of course, had they gotten a fixed rate they probably wouldn’t have been able to afford the house.

During 2006 and 2007, we had a flood of loans reset, mostly of the subprime variety. This is why we call the financial crisis the subprime crisis. By the time we got out of 2008 the subprime resets were over and most of the other types of loans were in decent shape.

But now we have new problems. Housing prices have collapsed. People still can’t afford to make payments, and it’s getting worse due to unemployment. We’re in a slow recovery, but it’s like trying to hide a red cape from a bull already standing inside a china shop. Don’t piss him off.

There are a number of bulls in the shop. Consumer confidence is tanking, house prices continue to fall, unemployment isn’t going down, commercial real estate is an abomination, foreign governments are running out of money, etc…

The last thing we need is one more thing to worry about. But what if the thing that got us in this mess comes back to bite us in the butt again? Take a look at the chart below.

This is from a presentation in 2009. I’ve taken the liberty to update the graph with a new “you are here”. If you don’t know how to read this, the higher the graph goes the more mortgages will be reset at that time. In other words, 2011 has the potential to be a bad year. And if you think it was only subprime loans that caused this problem, think about the option arms. They have the potential to be worse because they gave homeowners the option to make small payments each month. So small that with each payment, the balance on the loan goes up! Alt-A mortgages are less risky than subprime, but more risky than prime. But prime is hardly good if the person is underwater and now unemployed.

We could end up with another credit crisis in 2011. That makes 2010 a race against time. What’s the race? We have to get people back to work, stabilize home prices, and start spending. If this doesn’t happen 2011 and 2012 may be as bad as 2008 and 2009.

I’m not saying this to be pessimistic, in fact, I’m quite optimistic about the future. I just don’t want to get too optimistic. The one thing that has and will continue to help is the low interest rates. This is why The Fed will probably not hike rates anytime soon. Each increase of 0.25% (or 25 basis points) in the funds rate probably equates to some number of people not being able to afford their homes anymore. Will any of these people refinance? I hope so. Are they still working and can maybe fit in these payments? I hope so. But don’t think it’s all safe and all we have to think about is a slow recovery. We could still get pulled right back to 2007.

Senator Chris Dodd has shown us what happens when you don’t have to worry about meeting the obligations of your biggest campaign donators. For Dodd, that was the financial services industry. But since he isn’t running for reelection he doesn’t have to worry about that anymore. That’s why he’s putting his name on the biggest financial reform bill since the Great Depression. This bill has support from both sides, so it stands a chance of making it through Congress.

But like any bill it’s filled with way too much crap, and creates so much new government we won’t have to worry about unemployment anymore. It’s over a thousand pages.

But there is good in this thing. There will be a Consumer Financial Protection Bureau. It will have enforcement capabilities for banks larger than $10 billion in assets. They’ll make rules, check for scams, and be able to act fast. To keep them from having any biases, they will be independent from the government. The bad news is that it will be run by The Fed. For one thing The Fed is run by economists, for another, a number of big bank execs sit on the various Fed boards. Being independent means no one can question what they’ll be up to.

Some more good things about the CFPB will be the creation of an Office of Financial Literacy (where do I apply?). I hope they get in contact with the Dept of Education.

Here’s some other highlights of the bill:

The next new governing body is the Financial Stability Oversight Council, which will focus on system wide risks. One of their primary goals will be to keep too many firms from becoming too big to fail. Good luck with that. The council will be headed by regulators from all the big names, SEC, CFTC, FDIC, Treasury, Fed, etc… Their meetings will be based around discussions of the research findings of ANOTHER agency, the Office of Financial Research. An interesting note in here is the requirement of large firms having to submit regular plans for how they’ll wind down their business quickly if they go under. Unlikely to happen or be enforced, but interesting nonetheless.

The legislation goes on to outline new rules and guidelines for what agency is in charge of what. I tried to figure it out but it’s still pretty confusing. I’ll take their word for it that it actually clears up misconceptions over who’s in charge of what.

One big change is formalizing the derivatives market. In other words, a number of financial products (like the dreaded CDOs) were not sold on formal markets. This legislation creates formal markets (clearing houses) that will be regulated by the SEC and the CFTC.

Previously hedge funds had very little regulation around them. You could basically start one yourself if you had enough investors. Now, funds with $100 million or more in investments will have to register as investment advisors and disclose some data. This isn’t going to really do much in my opinion, but it looks good.

ANOTHER new agency will be created within the SEC, known as the Office of Credit Ratings. They will investigate credit agencies such as S&P and Moody’s and keep them in check. Remember the banks that created CDOs and such had to pay these agencies to rate the quality of the product. It was like your insurance company paying your doctor to tell you you’re fine. Now, investors will be able to sue agencies that make bad ratings. Threat of lawsuit is a much better way to enforce a law than just writing the law and issuing fines.

Do you hate how much CEOs make? Say on Pay will give investors power to help control CEO pay. The SEC will also be able to require firms show 5 year charts of executive compensation relative to stock performance.

Companies that sell financial products such as CDOs will be required to keep some of the products on their own books. This will supposedly keep them from selling crap. Doubt it.

The bill includes a bunch of other stuff like increased powers at The Fed, some auditing powers of the Government Accountability Office of The Fed, and some regulation on municipal bonds (local government bonds) and stock brokers.

All in all we’ve got a crapload of new acronyms, more government power, and even more bureaucracy. It’s all in the name of greater oversight and transparency. But I’d be willing to bet that half of this stuff doesn’t make it through Congress, we get at least 20 pieces of unrelated pork, and that there are plenty of loopholes.

Banks and other companies will have to grow their compliance departments, so they’re going to fight this bill tooth and nail.

One huge omission from this bill is any mention of Fannie and Freddie. What is to be done with them? They’re still one of a few 800 pound gorillas in the room.

I think this bill could be a lot more efficient, and it will cause new problems. But it might just keep some of the old problems from happening again. Ask me again in 30 years, if it gets passed.

Since the 1980s the Social Security Administration (SSA) has been collecting more in taxes than it pays out. This is a good thing because it allows the administration to build up a surplus that will be needed later. The 80s and 90s were when the Baby Boomers were making the good money, and paying into Social Security. Now they’re old, reaching retirement age, and ready to start drawing on that surplus they build up.

But, the government couldn’t keep their paws off the SSA trust fund and started borrowing from it. This was a better alternative than going to foreign investors to raise money for government spending. But, like any borrowing, it must be paid back. Starting this year, the SSA is going to be calling in those loans. That’s because this year the SSA starts paying out more than it takes in, about $29 billion worth.

These IOUs are in the form of Treasury bonds and they are kept in a physical location. The Bureau of Public Debt in Parkersberg, WV houses a safe that contains all the post-it notes bonds. This is a different method of bond tracking because most bonds issued by the government exist only in electronic records. Supposedly the government printed these bonds to show a commitment to repaying them. Thank goodness, this of course means they aren’t committed to paying back all the other debt.

This is an important milestone in the eventual bankruptcy of the US predicted financial issues of the future. 2010 is the first year we really start the process of supporting the Baby Boomer generation. The government is going to have to borrow more money than before to keep all programs afloat and pay back the SSA. I do not know whether current deficit estimates include the increased borrowing to pay back the SSA, I hope they do.

News like this raises the question again of what is going to be done to fix Social Security? Right now you get full benefits at 66 (67 if born after 1960). There are only two realities with Social Security, you must either increase the tax or increase the age limit to ever balance this thing again. My expertise in the area is limited, so I don’t know what will be best. All I’m doing is assuming that I’ll pay into Social Security for my entire career and never see a thing back. Unless you’re a boomer, you shouldn’t assume you’ll get anything either.

Nowadays I spend a lot less time in my car than I used to. This means I listen to a lot less podcasts than I used to. This is partially because I lost my iPod and don’t like using my iPhone in the car as an MP3 player.

Now I only listen to a few podcasts, most of them technology related. But there is one that has nothing to do with technology, finance, or any one subject. It’s called “Intelligence Squared.” For the record, it comes in many forms not just podcasts.

Intelligence Squared is a formal debate with a motion for or against a topic. For example: America is to blame for Mexico’s drug war. An audience is present during the debate and they vote at the beginning based on their current thoughts. There is a vote at the end to see how many minds were changed, the side that moved the most people wins.

The debates usually have 6 well-informed individuals, 3 on each side, debating the topic. They are smarter than you (and I suppose me too). The debates are usually very good, and though I don’t usually have my mind swayed, I at least learn more about why I should feel the way I do.

Here’s a list of past and future topics. Something is bound to interest you:

• California is the first failed state
• Obama’s economic policies are working effectively
• Good riddance to the mainstream media
• It’s wrong to pay for sex
• Organic food is marketing hype

Check out the Intelligence Squared website for videos and audio streaming. You can get the podcast on itunes. It will make you smarter, and if you read this blog that’s obviously a goal of yours.

When you are faced with any sort of debt, it can be tempting to find the quickest and easiest solution of the day to pay it off. However, these are actually weak ways to deal with your debt, and can result in more problems and sometimes even more debt down the track. Unfortunately, if you are struggling with debt, you may not be able to see which strategies are the weak ones, so here is a list of some weak ways to pay off debt, that you should avoid.

1 Using your balance transfer card

Signing up for a balance transfer card is a very financially sound way to get control of your debt as it allows you to transfer the balance from a credit card charging you high interest, to one which charges you a low or 0% interest rate so more of your payments go towards your debt, and you have a fighting chance of paying down your balance.

However, this debt payment strategy is weakened when you spend on your balance transfer card. Purchases made on a balance transfer card don’t usually enjoy the same low rate as your transferred balance, instead they attract a higher purchase interest rate; an interest rate you will be paying until you have repaid your balance because credit card payments go towards the oldest balance first. Therefore, you won’t even be able to benefit from interest free days because you won’t have paid down you transferred balance before your new purchases start accruing interest.

2 Consolidating your debts

Consolidating all your credit card and personal loan debt into one new loan can seemingly make the payments easier to manage. However, a debt consolidation loan usually has a higher interest rate than what you were paying on your debts individually so a consolidation loan is actually costing you more. Plus, by consolidating debts such as a credit cards into your mortgage when you open a home loan account wipes out your credit card debt for now, but also means you are now repaying that debt over thirty years, which is much longer than you would be repaying your credit card debt for if you paid it off alone.

3 Declaring bankruptcy

Clearing your debts by going into a chapter 11 bankruptcy wipes out a lot more than just your bills. When you go into chapter 11, you have to wait an additional seven years for your debts to be cleared from your record for you to start fresh. This means it is almost impossible for you to get any form of credit from a mobile phone contract or electricity provider, to a car loan or credit card. Therefore, try and remember that chapter 11 is not only a weak option, but one which should only be used in extreme situations.

4 A payday loan

Getting a loan against your next pay check to pay your bills is a weak way to pay off your debt because you are essentially using one form of debt to pay another. Instead of borrowing against your pay check to make a credit card payment, try and negotiate with the credit card provider if you are unable to make a payment. A bank or credit card company is a lot more likely to be understanding and lenient – even setting up a payment plan where you pay a little each week – as compared to the companies which offer payday loans. Realistically, if you can’t pay the bills you have now, taking on the debt of a payday loan will be hard to repay too and the companies which issue payday loans are usually a lot less understanding if you can’t pay, charging you very high interest rates and taking any measures necessary to get their money back.

5 Using a high interest savings account to save up for your debt

You may think you can accumulate enough money in a high interest savings account to repay your credit card balance, but the interest rates on most high interest savings accounts are nowhere near as high as those you are paying on your credit cards. Therefore, you’re still paying more interest on your debt, than you’re earning on your savings, so you would be better off directing the money destined for your savings account to your debt to pay it off sooner and stop paying interest all together.

6 Paying off someone else’s debt

It is possible to have someone else’s debt transferred into your name, so you can make the repayments for them. It may be a friend or family member who has gotten into financial trouble, but taking on the responsibility of their debt is not going to help anyone. Firstly, if you become legally responsible for someone else’s debt, and you fail to make the repayments it affects your credit file, not theirs; plus if the relationship becomes strained or breaks down, the debt is still officially yours. Secondly, point out to your friend or family member that having someone else pay their bills is a weak way to pay off debt, so rather than helping them by taking on their debt, you’ll help them find a strong way to repay it.

7 Ignoring your debt

This is possibly the weakest option of them all, because nothing is ever gained by denial. If you ignore your mounting debts and fail to make repayments on those debts, the people you owe money to will keep a record of your behavior. If the situation continues your creditors are likely to report your failed payments and that report goes into your credit file. This puts a nasty black mark on your credit report and anyone you do business with in the future will see you are marked as someone who doesn’t pay their bills and meet their obligations. Having a blackened credit file can affect you now and into the future, in situations you may not even have imagined; for example, what if you get married and want to buy a new home with your new spouse but have a bad credit rating, or what if your children need you to be a guarantor on their home loan in the future?

These weak ways to pay off your debt are simply short term solutions to bigger problems and taking any of these paths will create more issues in the long term than it solves. Instead, talk to a financial advisor or accountant, who can help you find a strong solution that can go the distance.

Photo: Andres Rueda

Last year, I looked at the list of Forbes richest people and concluded a few things. A lot of billionaires lost huge percentages of their fortunes (up to 90%). Many of these people are very wealthy, but a large portion of their wealth is tied up in less liquid assets. For example, if Bill Gates all of a sudden sold all his Microsoft stock, there wouldn’t be enough buyers for the demand. Oversupply of shares with no change in demand will result in a drop of value so much he’d be half wiped out. Same goes for Warren Buffett. The guys that started Google are slowly selling off a few share here and there, because any big move would be deemed as insider trading or have a similar effect as Gates.

But for 2010, we’re throwing out all these crappy summaries and instead getting a little dirtier.

One of my very first posts on Weakonomics (March of 2008; to give you an idea of how long ago that was, unemployment was 5.1%) was about the guy who is now the richest man in the world. Was I foreshadowing? No. His name is Carlos Slim and he’s juggled the richest man in the world title with Buffett and Gates for the last few years. Slim is a telecom mobile in Mexico. That’s right, the richest man in the world is Mexican. Not American, Mexican. And to make matters worse, aside from Gates and Buffett, there’s only one other guy in the top 10 from the US. A total of 4 hail from emerging economies: Mexico, India X2, and Brazil. If there’s ever been a sign of dwindling US economic influence it’s this list.

There are other trends too. Most of the billionaires are old. Of the top 25, only one is below the age of 52, and that’s one of the guys that started Google. He’s 36. What had you accomplished by 26? Probably not amassed $17.5 billion in wealth. This is the perfect tribute to how important Google has become to the economy. The two guys that started Google are together worth $35 billion. Powers combined that puts that at the 4th wealthiest. Google is THAT big. The younglings don’t stop there either. Some of you will have heard of this next guy, most of you won’t. Mark Zuckerberg is the founder of Facebook (I know you’ve heard of that). Mark is 25. Yeah, the guy behind Facebook is TWENTY-FIVE. He’s worth $4 billion.

Facebook has plans to go beyond just their own website. They intend to basically become the internet for certain users. Zuckerberg could sell his stake in the company and retire as the wealthiest 20 something ever. But this guy has ambition. Because Facebook isn’t a publicly held company, its value can’t be certain, but estimates are around $10-$15 billion. The company will go public in the next few years, that’s a fact. But Zucker’s ambition is about legacy. Facebook has the potential to be larger than Google. Zuckerberg could very easily become the first person to break $100 billion and stay there (Gates was first, but it was brief). This is in large part due to the fact that again most of the billionaires are old and the rate their wealth is growing has slowed.

Here’s another interesting note. Aside from Buffett, you have to get to #35 on the list before you find an American that made his billions from finance. If you want to be a billionaire, your best chance to do it is by starting a company. You likely won’t get there investing, and you sure as hell won’t get there by being just a simple fat-cat CEO. They are simpletons in this crowd.

One last observation before my biggest revelation. Let’s go back to Carlos Slim-Shady. His net worth is exactly $500 million more than Gates’. This number is so close that a small change in the peso/dollar exchange rate will change it. Furthermore, like most of the big guys, their wealth is no longer tied up in just the companies that made them. They’ve diversified and invest in tons of things impossible to track. In other words, I’m convinced Forbes, a struggling magazine and dying media brand, “allowed” Slim’s “estimated” net worth to just edge out Gates for the media attention. It worked, bastards.

Finally, I saw in a news story yesterday where I guy interviewed said that after $500 million these people don’t see much of a change in lifestyle. This means that one you crest a half billion then there aren’t many more things that are incrementally more expensive. Said in another way, Bill Gates can’t really live much better than Oprah (worth about $2 billion). I see a business opportunity here. I’ve already got a list of potential clients thanks to Forbes, I just need to figure out how to charge outrageous amounts of money for stuff that still has a perceived value. To date, only one group has figured it out, yachts. There has to be something else, something.