Walk Like an Egyptian

“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.”
Warren Buffett

You know the story. One night the Pharaoh of Egypt dreamed that he was standing by a river. He saw seven fine healthy cows climb out of the river. They were followed by seven ugly sick looking cows. The sick looking cows then ate the healthy animals, but they didn’t get any better. Then Pharaoh dreamed a second dream. Seven ears of perfect grain grew up out of the ground. They were followed by a plant with seven ears of grain that looked to be blighted by the desert winds. Then the bad ears of grain ate the good ears. Pretty weird, huh? This dream made no sense to either Pharaoh or his priests or his magicians.

However, his chief butler remembered a guy he met in prison, a Jew who could interpret dreams and predict the future. Most likely, the chief butler also remembered his promise to this Jew who told him he would live and return to Pharaoh’s favor. As the butler promised, he told Pharaoh about the man, Joseph, who claimed to be innocent of the rape charges that sent him to prison, the man who could see into the future.

Joseph was dragged out of prison, cleaned up a bit, and presented to Pharaoh. Interestingly, Joseph did not claim credit for his abilities but gave the glory to God, a little different than when he was that bratty little brother who told his siblings they would bow down before him. He then told Pharaoh the meaning of the dream. Egypt would have seven flush years followed by seven years of famine. Joseph also presented a solution. He encouraged Pharaoh to put aside 20% of the nation’s harvest for the coming years of famine.

Pharaoh knew a good thing when he heard it. He put Joseph in charge of the project, in fact he put Joseph in charge of the kingdom as his Chief Operating Office. Joseph managed to save and store so much grain, the Egyptian quit trying to keep track of it. The numbers were just too large. Then the predicted famine hit the Middle East. Since Egypt was the only country that had a grain supply, the entire world beat a path to Joseph’s door and he made his boss the richest man in the world.

What a concept! Save money during the good years so that it is available during the bad years. In America, we do just the opposite. During the 1970s, those wretched years of stagflation, Americans saved about 10% of their disposable incomes. As the economy boomed during the last half of the 1980s that rate began to drop and continued to drop until in 2005 the number went negative. The consumers of an entire nation were spending more than they were making, complete insanity. This was all being fueled by the real estate bubble. Boosted by favorable legislation and easy credit, the homeowner watched his house, his biggest expense, turn into his best investment. Flush with this new equity, the homeowner turned his new found store of wealth into an ATM by means of second mortgages and Home Equity Lines of Credit (HELOC). Then it was October 2008 and the skinny sickly cows of financial catastrophe gobbled up our fat healthy looking economy. Now the savings rate is climbing. It reached 5% in the second quarter but it is starting to slip again, probably as a result of the cash for clunkers program and the government bonus for first time home buyers. Generally, Americans are paying down their debts, saving for a rainy day, and learning that frugality is the new cool. No more are we saying, “Mastercard, I’m bored.” It is a little late, the fat cow is gone, but a little too late is much better than nothing.

What if Americans learned to save money when times were good? What if the government put aside a surplus for years of pain? What if corporations and even churches built a store of wealth during boom times. Think of the opportunities. Corporations could pick up valuable assets for pennies on the dollar. During times of distress, the Church could become the center of benevolence that God intended.

Let’s end with one more quote from Warren Buffett.

“You only find out who is swimming naked when the tide goes out.”

Note: I do not particularly recommend Robert Kiyosaki. However, the idea for this post came from his latest article on Yahoo Financial.