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Figures don't lie, but liars sure to figure - and filter, and slant, and just about anything else you can think of.

Someone sent me a link to this article in the Wall Street Journal of all places. It purports to analyze foreclosure data and comes up with a radically different answer than anyone else because of how they manipulate - and in my opinion, mischaracterize - the data.

All too often I get emails like this one

Greetings Dan,

My name is DELETED, I work for a company named DELETED based DELETED. We help businesses with a variety of online marketing functions. Thank you for taking the time to read this email.

I came across your blog and thought that it would be complimentary to one of our client sites within the mortgage and real estate sector. I wanted to inquire to see if you would be open to linking to my client, who is a well known entity within the mortgage and real estate industry.

We are looking to sponsor a blog post on your site that would concern something related to the mortgage industry and be informative in nature. We would be happy to provide monetary compensation, as well as unique mortgage/real estate content that you can use on your website. Or, if you prefer, you can write the post.

We do require that a link to our client be contained within the text of the post. The link would not be explicit, but rather an on-topic term embedded within the text that would link to our client's website. Again, the content would be provided by either you or myself as I have an extensive background in the mortgage sector.

If it's not obvious to you by now, I don't do these kind of posts, but many website owners see absolutely nothing wrong with it. I accept advertising - I just don't permit it to be perceived as anything but paid advertising, Other websites see no problem with accepting advertising disguised as analysis. Guess which approach provides more revenue, both to the advertiser and the medium they're paying.

"Shilling" as it is called, has roots going back at least a century, to hucksters who would pay someone to slip into the crowd and help them generate sales by pretending to be an ordinary member of that crowd. Given the nature of humanity, it probably goes back to Og the Caveman paying Ug the Caveman three dead rabbits to pretend that Og's hunting spears really would do a better job of killing everything from saber-tooth tigers to the tribal bully. It works better - and Ug gets more money - if Ug is known as a mighty hunter or a maker of hunting spears in his own right.

It is not, however, disinterested analysis. It is a sales pitch disguised as disinterested analysis. It dismays me that people don't understand that the internet has no filters on this practice, indeed, no quality controls of any sort more advanced than the owner of a particular website chooses to install. Every so often, I get a series of reminders that many people aren't nearly as skeptical as they should be.

A very few websites are like Consumer Reports, and accept no advertising of any kind, even paying full retail price for all the products they test. You can tell them (or at least it might be one of them) because it costs money to get their full unexpurgated reports. Others are at the other end of the spectrum, and will sell anything for a price while pretending to be disinterested analysts. I try to be more towards the Consumer Reports end of the spectrum - I accept but don't pursue advertising, I do not permit it to be perceived as anything other than advertising (and therefore, I don't get much of it), and any personal motivations I may have to shade the results of my analysis are right out there where everyone can see them. I also try to put numbers out where you can grab a calculator or spreadsheet and determine if I'm telling the truth and making valid calculations for yourself. It is for the reader to decide how successful and credible I am at my goal, which is educating consumers to the point where they can make intelligent well reasoned choices grounded in fact, while in the process generating enough personal clients who like the way I think to feed myself and my family at my chosen profession.

A shill has nothing in common with Consumer Reports, and nothing in common with my goals, beyond the desire to successfully make a living. Even Consumer Reports staff have a goal of feeding their families, although Consumer Reports is itself non-profit. If nobody was willing to pay for their tests, however, they couldn't keep their doors open very long. If nobody is willing to pay for my expertise and analysis, I have to find something else to do. What the internet shill is selling, however, is eyeballs and the illusion of credibility, not disinterested analysis.

I should also mention that whereas Consumer Reports' expertise is broad, it is not deep. I think they really do the best they are equipped for, but I have read the best they have to offer on the subject of real estate and mortgages. I read it it before I bought my first property, and recently went back when trimming my library (and as far as I can tell, they haven't improved their offerings on the subject since my first reading). The best I can say about it now is the same as then: occasionally mildly informative. If I had relied upon that rather than being able to fall back on a fair body of knowledge I already had, I would likely have done significantly less well than I did, which still had significant shortcomings. When it comes to real estate and loans, they just don't have the time or ability to educate themselves about the minimum necessary range of subjects to the necessary depth. These concepts of limits of knowledge apply to me, and to every other website and author out there. Sometimes we're just out of our depth or beyond our competence - and we may not always realize it. This is one reason why I don't write short articles, especially not when I'm straying outside the core subjects where I believe I've built some expertise and credibility of knowledge to an informed observer - I believe it's incumbent upon me to put the full argument out there, including assumptions, background, etcetera - so the reader can make an informed judgement as to whether or not I've got a real point. The reader can still kneejerk, but they're harming only themselves if the argument is valid. They can also argue the other way or some alternative viewpoint - that's the whole point of enabling comments, which I don't censor except for profanity and obvious spam - although I should note that you only have the evidence of what comments I have allowed, supported by my word for that.

And that's precisely my point - you have only the word of the author of any particular article you may find anywhere on the internet. It may be good, it may not. I try damned hard to make my analysis accurate and truthful and admit its assumptions, limitations, and exceptions. Sometimes I even discuss counter-arguments when I can or believe they are particularly important. But with the best intentions in the world, I can make mistakes. It is you the reader who have to make the final determination, in your own mind, as to how reliable what I say is and how useful it is to you. That takes evaluating evidence, and cross-checking with other sources and testing any points of disagreement with known facts to determine how well I have done and which of us is correct - if any of us is. If you were only buying a toaster, I doubt it would be worth the effort. But when you're talking about real-estate, mortgage, or the amounts involved in any kind of serious financial planning, the effort is damned well worth the payoff.

Caveat Emptor

Article updated here

I got an email asking me about whether purchase money loans were risk free, as in the buyer could walk away without consequence. Well, it's not the case: There are consequences to credit, tax consequences, and consequences to future financial ability.



Now this was a real estate agent, but it could have been any other kind of financial advisor, or anybody at all. I've seen members of just about every financially related profession who were completely ignorant of one of the most fundamental facts of investment: There is no such thing as a risk free investment.



There are all kinds of risk: investment risk and currency risk on one side, inflation risk and reinvestment risk on the other. There is even solvency risk (the risk that the entity that owes you the money will be able to pay) and guarantee risk (the risk of the entity standing behind an investment that is guaranteed being unable to pay). Real Estate has liquidity risk, which most investments do not have to nearly the same degree. There are more sorts of risk than I can really go into here, but there is no such thing as a risk free investment. Each possible investment has varying levels of different kinds of risk, but there is always risk, even in government insured investments. Successful investing is managing the level of risks versus the rewards. You may be able to load the dice, but you always have to roll them, and no matter how well you load them, they will come up snake eyes sometimes. There are risks in government bonds, government insured bank accounts, insurance - everything, including keeping your money in a mattress. Whether or not you understand them, risks are present. There is no such thing as a place to keep your money that is free of risk - not even in your mattress (which has inflation risk, theft risk, and destruction risk)



Investment profit is a reward for overcoming risk. If it were automatic that you make money every time you make an investment, more people would do it more often. Of course, if that were the case, the rewards would also be much less. Supply and demand: If demand remains constant, and the supply increases, then the reward you have to offer them as an inducement becomes much less. The fact that there is a downside is one of the reasons the upside is as high as it is. If Aunt Edna could risk her pension money and be certain of getting it back with a profit, what reason is there not to do it? So she would. So would a lot of other people.



But there is the risk of effectively losing some or all of your principal. Fear of risk, particularly risks they do not understand or cannot control, keeps a lot of people on the sidelines, which means there is more reward for the rest of us and thank you very much. But on a regular basis, some clown tries to pretend that there is no risk so they can lure unsuspecting thralls of fear (many of whom have money) into making some investment they would not otherwise make.



Forgive me if I get angry for a minute: You have no business anywhere near a profession that has responsibility for other people's money if you don't understand that there is no such thing as a risk free investment. Furthermore, you have no business anywhere near a profession that has responsibility for other people's money if you are willing to say that there is such a thing as a risk free investment. Get out now before you go to prison. For that matter, have the courts appoint a legal guardian for you, because you are clearly not a responsible adult. Nor am I talking solely about financial advisers. Accountants, insurance agents, real estate agents, loan officers, lawyers, and any number of other occupations are part of this. Dishonest lazy selfish cheating alleged professionals use the "no risk" come on somewhere in the country every day, and every day it results in people losing large amounts of money or worse. If you cannot "sell" someone on the benefits of your chosen investment even with a frank discussion of the risks, then you should be barred from the industry for life. Life is risk. You win some, you lose some, and sometimes the Fickle Finger of Fate ends your game permanently for no good reason. But if someone wants to avoid a certain kind of risk, nobody should be talking them into on the basis that there is no risk. Explain how the risk works, yes. Address any irrational fears, yes. Explain precisely how you intend to "load the dice" in your favor. But claiming the risk doesn't exist because you get paid if they believe you is criminally irresponsible in every case. I can point to real estate agents and loan officers who have dates with a prosecutor coming up, and more who should have dates with a prosecutor scheduled, because they made this claim.



If anyone ever claims that "there is no risk" in some investment, walk away. Quickly. Actually, you should probably run. Because there's a con game going on, and you don't want to be one of the ones left without a chair when the music stops. Better not to get in in the first place, but get out immediately if you're already in. The ones who get greedy while thinking, "Just a little longer, just a little more" are the ones most likely to get burned.



Caveat Emptor

I am profoundly lucky in that I read "I Will Fear No Evil" in high school. Not an assignment, I just like to read, and Robert A. Heinlein has always been one of my favorite authors.



A very few pages into the book, he has one of his characters toss off two fantastically good pieces of advice in quick succession, viewed from the point of view of thirty years later and multiple licenses in financial planning. He has one character, a lawyer no less, deal effectively and beyond challenge with two financial problems in quick succession. The first had to do with a very ill old gentleman with a will of longstanding effect, who doesn't want the existing provisions upset, as often happens to people who die with a new will. This extremely wealthy man has decided he wants to leave his secretary a million dollars.



The solution? A single-pay policy of life insurance. Problem solved. But once he's out of the room, the secretary protests, saying she'd just waste the money, or even get in trouble with it. She wants it given to charity.



Solution? Write it so she got an income off of it every week - essentially turn the lump sum into an income generating asset, with the additional advantage of a donation to charity when she shuffles off the mortal coil. She tells the lawyer she would never have thought of that solution.



His answer? "That's because most people think of money as something to pay the rent. They don't think of money in terms of what it can do."



Okay, I always was a math geek, but this concept was something I understood immediately, and it made a huge difference in the way I thought about money forever afterwards. Money wasn't just something to buy stuff with. Money could do things. Money could make more money. Money was potential, potential that got bigger all on its own if you only let it.



Now from a much later viewpoint, I see the flaws in Mr. Heinlein's plan. If you don't want your estate plan messed with, a living trust beats a will on every point. Furthermore, the interest rate imputed in the return of the life insurance proceeds was only a simple compounding at less than four percent - I can almost certainly do that much above inflation if I invest reasonably. Nonetheless, Mr. Heinlein grasped some very powerful concepts very well, and he was able to show the application to a teenager of no particular qualification. This is better than the vast majority of supposedly more sophisticated writers of serious "litracha" can usually do, and he did in almost in passing - no preaching, no granstanding, just one heck of an effective example, twice in the space of a hundred words or so that were completely aside of the main plot.



These days, I still love reading fiction where the writers show they really understand economics and finance. They're hard to find. I happened to be volunteering as an event coordinator at a con a couple years ago, and ended up assigned to a reading with an author who made a mistake so elementary it showed that he had done no research because it impacted a benefit that literally everyone gets - he just didn't know about it. It really was critical to the plot, and if he had made one phone call when writing the story, any professional he called would have corrected the error. I very tactfully (for me, anyway) informed him of this gap, and I recently ran across the story in print. He hadn't fixed the error. I'm not planning on buying any more of his stuff. Another highly hyped novel said that the author understood economics and finance. What the author understood was that illegal drugs were a highly profitable trade if there's no real possibility of getting caught. Well, duh. He blew it, otherwise, not even considering the constraints of the problem he had set up. Despite the fact that I really enjoyed most of his writing, I may not buy the sequel just because what he missed was so painfully obvious to me that it really destroyed the rest of the story. As long time friends have heard me say many times, "I'm willing to suspend disbelief, but not hang it by the neck until dead!" This stuff is more constant than even the laws of physics, unless you postulate that you're dealing with a non-human psychology, and even then they're still there. Don't even get me started on the stuff supposedly written for everyday, mundane situations.



Still, some do get it right. S.M. Stirling in his Island In the Sea of Time stories, and to a lesser extent in Conquistador. Poul Anderson must have gone back through merchant records in the early Age of Sail, or known someone who did, for some of his Polesotechnic League stories, because he more than once cites some of the same sort of brutally coldblooded logic that was present then. Many of his other stories bear this same kind of mark. I was pleasantly surprised about a year ago by a side plot in a stand-alone novel from Michael P. Kube-McDowell - although he always seems to do solid research.



Got some suggestions? I'd love to hear about more such authors, who manage to teach, or at least stay in touch with economic realities while they entertain. Those authors who do a good job of this perform a real public service, while those who ignore it so that they can tell their story unencumbered by mere facts often earn their work a ceremonial throwing - twice across the room.



Caveat Emptor.