Cult Conversion Secrets And What They Can Teach Us

cults

Started in 1954 by Sun Myung Moon and sometimes referred to as a cult, the unification church has expanded throughout the world amassing huge wealth along the way. The church has been accused of using brainwashing techniques and it’s these controversial techniques, specifically related to recruitment, that I wanted to write about today (see the bottom of this blog for a link to a detailed study into unification church recruitment methods).

But We’re Investors, Why Should We Care About Psychological Manipulation?

We need to care because others are trying to manipulate us with these techniques all the time (cults are an extreme example). Understanding psychological manipulation techniques can help us avoid making foolish mistakes in every area of life, not just in investing or business.

According to Charlie Munger (billionaire vice chairman of Berkshire Hathaway), the really extreme results occur when several psychological manipulation techniques are combined.

He Calls This The ‘Lollapalooza’ Effect…

Take Tupperware parties for example. Play money is given to participants for them to spend on giveaway items = reciprocation (technique 1). Participants are encouraged to share how they use products they have already purchased = commitment (technique 2). Guests watch each other buying as the party progresses = social proof (technique 3). You have been invited to the party by someone you know and like thereby making it much harder for you not to transact = liking (technique 4). Combining these techniques in the right way has resulted in many billions of dollars of revenues.

In the famous Milgram experiment, subjects were told by a lab coated supervisor to shock a stranger (played by an actor who was in on the experiment) for every incorrect answer = authority (technique 1). The shocks progressively got stronger = contrast (technique 2). The experimenter gave a false reason why the subject had to continue giving shocks = reason respecting tendency (technique 3). Having already delivered smaller shocks, the participants found it harder to stop commitment and consistency (technique 4). The awesome and shocking result of the study, was that many participants wound up doling out lethal shocks as a consequence of being manipulated by these techniques.

How Do We Relate This Back To Investment? 

Well, I have posted only two examples of many we could think of, showing how the brains of ordinarily smart sane people can be turned into mush if manipulated in the right way. In the investment world when a market is rapidly rising, for example bitcoin, then various forces combine that can lead otherwise sane people to place their hard earned capital at risk of permanent loss:

  • Envy jealousy – a friend or colleague made easy money so why shouldn’t we?
  • Liking tendency – often investments are put forward by perfectly nice likeable people who we have a hard time saying no to.
  • Deprival super reaction – the fear of missing out.
  • Social proof – lots of other people are doing it so we should too.
  • Lure of easy riches – why work long hard hours to get financially independent if an easier way seems possible?
  • Doubt avoidance tendency – the tendency to reach a decision quickly without thinking about it too much. Combines with inconsistency avoidance which is the tendency not to change ones mind once it has been made.
  • Reciprocation – having made a little money due to a rising market,  a feedback loop effect kicks in leading one to keep going.
  • Overoptimism tendency – believing the odds of continued success are much better than they really are.

So the key lesson here is to understand how powerful these techniques are and we are all vulnerable to their effects. To get ahead and avoid being manipulated by others, we must understand the limitations of our mental machinery.

Parmdeep Vadesha

P.S. If you want to learn more about how the Unification Church recruits members read the following study.

Are property flippers about to crash the property market?

ITS OFFICIAL- Flipping Property For Profit Is Back!

According to Countrywide, the estate agency, the number of speculators flipping property has reached it’s highest level in a decade.

I wanted to investigate this a bit further so I got hold of the land registry price paid data for the UK since 1995. I then isolated all the transactions for my County (Leicestershire) and discovered some interesting trends.

Before I go into the analysis, you may be thinking…

Why bother??

Because it’s really important to know the total picture since the average investor will always make the average amount of profit. When the average is high, it is easier to turn a profit, and when it is not, it is harder.  When the average is low, we need to be more wary (the same thinking apples to gambling which obviously always results in a negative average outcome for players yet lots of people still play and lose their money because they don’t understand the odds – don’t fall for the same mistake in property).

During the 2008 crisis, some mortgage lenders got burnt lending on investment properties. A number of changes came about which are still in place today, for example lenders generally will not lend on properties bought and sold within 6 months. Developers must declare all incentives given to buyers, finders fees paid and the existence of any parties in between buyer and seller such as investment companies.

A 3% stamp duty surcharge is also in place for those who own >1 property, which many flippers and landlords will fall into. Mortgage lending is more strict now too.

So with all of that in place, you would think flipping would have largely gone away, right? 

Take a look at this chart which shows a resurgence in property trading, close to the levels last seen in 2007:

Much of the property trading is occurring because properties are relatively expensive compared to yields and prices are still going up in some areas, so it makes more sense to extract the value than to hold. Low interest rates also are a factor – why sit on savings in the bank when they can be put to work in a relatively low risk leveraged property trade?

Lending is plentiful and short term commercial lenders are able to charge high fees due to high demand (the shares of Shawbrook have more than doubled in the last 12 months). These and other factors mean trading will continue as long as the market remains buoyant.

As mentioned before, some of the restrictions on lending today are due to new build flippers in the previous boom. Here we can see that new builds represented almost 30% of all properties flipped at the previous peak:

Nowadays, new builds represent only a small portion of flipped properties, perhaps due to the much restricted lending environment so that is not so much of a worry this time around.

Let’s now turn to profit per flip. It’s a crude calculation based on the difference between price paid, and price sold and does not include the cost of refurbishment. Those costs would even out over lots of transactions, so we get a decent, but not perfect picture as presented below:

This is really interesting because we can see that the best profit margins are made just before property prices take off (late 90’s to 2002 and 2012-2013). Margins also tend to drop when property prices increase, perhaps due to the entry of unsophisticated investors, making sensible purchases harder. Everyone has to accept thinner margins if they want to continue doing deals.

We are now in negative (average) margin territory, so if you are thinking of flipping, be sure to get a really good deal. I do not think property flippers will cause a crash or anything like it, but I do think it is a mistake doing a deal today where there is an expectation that prices will keep going up.

As always, drop me a line about this post with any thoughts or drop by and see us at our office in Leicester. It’s always nice to share ideas and talk about investing.

Parmdeep Vadesha

 

 

 

 

Under 40? Invest £4k per year in a LISA and wind up with up to £1m at 60.

From April 6th 2017, a tax efficient savings account will be available for anyone between the ages of 18 to 40. I fall into this age bracket so I decided to put together a basic spreadsheet to figure out whether LISA’s are worth looking into – you can  look at my spreadsheet  below if you like (there is a download link below the spreadsheet).

You can find a good summary of LISA’s here at moneysavingexpert.com so I will not explain them in detail. The wrinkle I have added is a very simple strategy of investing in a low cost investment vehicle. I did the analysis using a stocks and shares LISA not a cash LISA, which in real terms given current interest rates would wind up costing you money (since inflation > interest earned on cash).

This is the investment vehicle I have used in my calculations. I have assumed a long term return of 6.5% per annum which includes dividend reinvestment. It is designed to replicate the performance of the FTSE 100 index and charges only 0.09% in fees (over time this fee can make a substantial difference to your overall return).  For example, an 18 year old paying in £4,000 per year until age 60 would be £359,314 worse off paying 1.5% in fees rather than 0.09% – amazing but true (see for yourself using the calculator and read this book – you will understand why money managers get a much better result than their clients).

Compared to pensions, LISA’s have their pro’s and con’s and I will leave it to you to figure out which you should invest your money in (if you are not sure get some advice from a properly qualified professional – but be mindful of fees!) Also bear in mind, the 25% government bonus could be reduced at any time.

I just wanted to illustrate a simple, tax efficient and low effort way for anyone starting out to invest for the long term without taking excessive risk.

Parmdeep Vadesha

Download link: https://docs.google.com/spreadsheets/d/1nI36S4y1jSsWa5w0-K_f3oiwH-dVI1dXf90KAEi5FYU/edit#gid=967393783