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1. The Fundamentals Don’t Seem to Matter

When looking at an investment, especially for long-term success potential, there are a number of fundamental factors to consider. These include everything from solid management to dividend payments to market share to place in the economy. However, when an investment is in bubble mode, few are looking at the fundamentals. And when you do look at the fundamentals, they don’t seem to support the price action.

If the foundation looks shaky, but the price keeps moving higher, it might be a good time to get out — before you get caught in the bubble’s burst. An investment with solid fundamentals may lose out during an economic downcycle, but the losses won’t be as huge as those seen by a bubble investment, and an investment on a solid foundation is more likely to recover in the long-term.

2. Price Shoots Higher in a Short Period of Time

One of the signs that an investment is in bubble mode is that its price shoots up in a relatively short period of time. Prices on residential real estate were rising rather quickly in a period of a few years, as compared to past gains in real estate. Another consideration is if prices increase by 50% in a year. The problem is that most investments just can’t realistically maintain that pace.

3. Good News about the Investment is Everywhere

When the mainstream media starts running stories about how this is the “next big thing”, and continually talks up how the investment continues to do well, without analyzing the fundamentals, …

My boss has asked me in my last two performance appraisals what I enjoy about my job and each time, I say that having this job will make me 10 times wealthier in my personal life. I don’t mean that I’m making a ridiculous salary. (Maybe someday…) I mean that looking at borrowers all day lets you see all kinds of slices of life — and hopefully learn from them.

In the short time I’ve been at my job, I’ve seen all kinds of borrower financial statements: conservative borrowers and leveraged borrowers; those who got rich by investing in real estate and those who inherited money. Those who work for their parents’ company and parents who work for their children. Here are some of the best lessons I’ve learned from working at a bank.

Don’t buy a house you can’t afford. Don’t buy two houses you can’t afford.

Don’t roll your eyes at me; I know everyone is saying that in this economy. But I’ve seen people who have stuck their necks out even in this economy, thinking they could afford that jumbo home because their income would certainly increase in the future. Or their kids need a place in the country to enjoy while they’re still young. Or they can sell when the market picks back up, make a profit, and get another nice place. It’s never a good idea!

Those who are surviving and thriving in the long term are those who stick to the old rule of a mortgage that is 2.5 times their income or less, and 15-20% down. And that second home in Arizona you bought because it was a short sale? If you can afford to hold onto it, then fine. If not, well, as we say in my department: Hope is not a strategy.

If you make $1 million a year, at least have something to show for it.

No, I don’t mean toys. Although they’re fun, and awesome, and make you look cool, I can tell you when someone lists $450K of furniture and autos on their financial statement, I see a big fat Zero. That is, depreciating assets don’t mean anything when it comes to …

The article on budgets was *great.* I’ve long felt guilty for not doing the whole formal budget thing, especially since I always liked and did well at math. (Like you, however, spreadsheets cause my eyes
to roll back in my head.)

But here’s a question/comment on one bit. You said: “First, this doesn´t work if you´re already spending more than you make. That type of behavior is not sustainable. If your credit card balance is going up each month, no amount of budgeting or planning matters until you´ve reached a point where that credit card bill goes down each month.”

We don’t have ANY credit cards, so that’s not a problem. To be honest, I doubt if any credit card company would give us the time of day. (I do want to get a secured card at some point, with the goal of rebuilding a bit of credit.)

But we’re currently at a stage that’s a variation of what you described. Since we can’t use a credit card, we often wind up playing a sort of “musical-bills” game with such things as our electric, water, gas, trash, phone and so on. By this I mean that we will either skip a month of paying one of them, or make a short payment on one or more. The next month, we try to catch those up, but sometimes then need to repeat the process with another bill going short.

Occasionally we get a small windfall: selling something, or a gift of cash for a birthday, or the like. This usually goes into making sure *everything* is 100% current… which is a wonderful feeling! But then comes a month (such as this one) where the power bill is extra-high, or gasoline prices spike just as I need to make several trips into the city for doctors’ visits. When that happens, all too often the following month begins the cycle once again.

Beyond the standard advice on cutting back as much as possible, or earning more, do you have any particular suggestions to help get us off the merry-go-round? I know the best solution is to have more coming in, and I am hoping (now that my medical issues are being dealt with properly!) I can get back to writing and actually SELL something again. But meanwhile, treading water has gotten rather old.

Many people find themselves at this “treading water” stage and are unsure how to get past it. Basically, it amounts to spending almost exactly what you …