Friday, October 30, 2015

Tony Robbins Last Word

At last I have finished reading all 600 + pages of Tony Robbin’s book, Money: Master the Game, and returned it to the library. If you want a solid basic education in the discipline of investment, go down to your local library and check it out. If you can deal with the motivational speeches, some admittedly well deserved self congratulation on a life well lived by the author, and his personal relationship with the investment firm that he endorses, go out and buy a copy for your bookshelf. You won’t regret following the advice offered by the money masters Tony Robbins selected to model as he went about researching the problems faced by the average American.

This brings up another question. Who were those money masters he interviewed while writing this book? Tony Robbins has included short excerpts from the actual conversations he had with these men and women, many of them lasted several hours. I guess being the personal coach to the wealthy, famous, and powerful gives one a certain entrée denied to us ordinary mortals.

Here is the list,

Carl Icahn
David Swensen
John C. Bogle
Warren Buffett
Paul Tudor Jones
Ray Dalio
Mary Callahan Erdoes
T. Boone Pickens
Kyle Bass
Marc Faber
Charles Schwab
Sir John Templeton

I can’t imagine that I could put together a better list of twelve names who could answer my investment questions.

One of the rituals I practice in retirement is the morning coffee lecture. Before I eat breakfast or go for a walk, I make a cup of coffee and select an educational or inspirational video to watch in preparation for the day. The wealth of knowledge and wisdom available on Youtube and other sources is absolutely unbelievable. I am currently using Tony Robbins’s list as a source for my continuing education.

I started with Ray Dalio because I didn’t know he existed until I read this book. Dalio, manager of the world’s largest hedge fund, comes across as a calm dispassionate Zen master, viewing the rise and fall of economic waves with perfect equanimity. He uses the term, “cause and effect,” over and over without anger or remorse. After watching two of his lectures, I am impressed with the clarity and simplicity of his presentation of very complex issues such as credit cycles underlying the economy that last for as long as a hundred years.

Just like the printing press, radio, television, and the cassette tape player that came before, one author predicted that the Internet would make smart people smarter and dumb people dumber. Model Tony Robbins’s behavior! Use everything at your disposal to learn how to make better decisions. Then take that “massive action” so often recommended by the author. Who knows where you will finally discover your limits?

Tuesday, October 27, 2015

More From Tony Robbins

I can’t remember having had such a difficult time finishing a book that I really liked, but Money: Master the Game by Tony Robbins is wearing me out. There is just too much fluff and not enough stuff to justify over 600 pages. Note: I have finally reached page 524. The end is near. Still, I recommend this book as an excellent primer for the novice investor in search of financial freedom. Tony has done his homework. I understand that he is a motivational speaker attempting to lead his readers into, “Taking massive action,” that will change their lives, but 350 pages would have been overkill.

I really would like to attend one of his live events some day. Although, if I am offered the opportunity to do some fire walking, I think I will pass. I bet his shows really are unforgettable, but it just doesn’t work for me on the printed page.

After spending over 300 pages on the gospel according to John C Bogle (an age appropriate mix of low cost index funds) Robbins spends some time looking at other options that might be suitable for his readers after they have passed something on the order of the $2 million dollar mark. He also presents the obligatory model portfolios. One is the well known “Yale” portfolio developed by David Swensen, the stunningly successful Chief Investment Officer of Yale University. This portfolio has been covered in many places including this blog, but for those of you who haven’t seen it, here it is again.

20% Wilshire 5000 Total Market TR (total return) USD (US dollars)
20% MSCI ACWI Ex USA GR USD (Morgan Stanley Capital International All Country World Index)
15% Barclays US Long Credit TR USD
15% Barclays US Treasury US TIPS TR USD
10% MSCI Emerging Markets PR USD

The other model portfolio present in this book was developed by Ray Dalio, manager of the world’s largest hedge fund. I haven’t seen this information presented anywhere else. It is remarkable for its simplicity, yet it back tests in all investment climates back to before the Great Depression.

30% Stocks (S&P Index and other Indices)
15% Intermediate Term US Treasury Bonds (seven to ten year maturity)
40% Long Term US Treasury Bonds (twenty to twenty five year maturity)
7.5% Gold
7.5% Commodities

Dalio believes that if an investor is diligent in maintaining this balance, he has truly developed a portfolio for all seasons. Yes. He does put his money where his mouth is.

I enjoy reading about model portfolios. Although my portfolio, while appropriate for my age and circumstances, (I hope) just kind of grew as I saved and learned more about investing. I have consciously taken actions to rebalance it from time to time, usually when I get nervous. I also have learned I don’t need to rebalance it every time I get nervous. I am a little worried that the readers of this book might get carried away with Robbins’s extraordinary enthusiasm for everything he mentions. Don’t believe in silver bullets. They don’t exist. No one can predict the future. Still, both those model portfolios are pretty interesting and have proven their worth IN THE PAST.

As always, “Let’s be careful out there.”

Tuesday, October 20, 2015

The Rules and the Game

We are winding our way towards another insufferable presidential election cycle. Financial regulation is always one of the topics under discussion. Expect to hear a lot of simplistic nonsense from our candidates. However, there will be another crisis sometime in the future, perhaps the equal of the slow motion train wreck that started with the housing bubble and subprime crisis in 2006 and ended in the crash of 2008-2009. Then Congress will pass some sort of financial reform package to avoid the mistakes of the past. Inevitably the new law will contain the seeds of the next crisis.

We, the American people, ultimately elect the committees that make the rules. Then the market plays the game. Sometimes the outcome is unexpected and undesirable. It isn’t the market’s fault.

It didn’t make the rules.

Consider the National Football League. Without a rules committee overseeing professional football, my favorite game would quickly turn into a blood sport that would be promptly outlawed. The owners want continued and increasing profits. The players want a game that is profitable and reasonably safe. The fans want a game that is fun to watch. To achieve these ends, the competition committee, a blue ribbon panel of respected managers and coaches are constantly watching the games and tweaking the rules. They know the fans want to see touchdowns, particularly passing touchdowns, but not a game without defense, like professional basketball. The fans and the owners don’t want to see their favorite players recovering from injuries during the season. Every time a rule is modified it changes the game, sometimes in unexpected ways.

Human ingenuity is quite remarkable.

“Why both Clinton and Sanders are Wrong About How to Fix Wall Street,” an article written by David Dayen, explores some options that could lead to a simpler, less coupled financial system starting with the reinstatement of the Glass Stegall law that put a firewall between investment banking and commercial banking. Many believe that the repeal of this law contributed to the liquidity crisis of 2008 that almost brought down the world’s banking system. The author considers this a good idea, but certainly not a fix to an enormously complex and interrelated problem. He prefers ideas found in a book entitled Other People’s Money written by John Kay a professor at the London School of Economics that borrows concepts from systems engineering.

Consider the electo-mechanical switch that controlled your old wall phone. Banks of these switches, one for each phone number, were once housed in little brick windowless buildings located in every town and neighborhood throughout our land. By the early 1990s these switches had been replaced by complex computer systems that could simultaneously control tens of millions of phones all over the country. The new system was faster, more reliable, and less expensive to operate. However, when it failed, it failed spectacularly. One of these “computer switches” failed, wiping out all long distance service in the Eastern United States for about twelve hours. If one electro-mechanical switch fails only one phone is affected.

Computer trading has been a godsend for the average investor, lowering the cost of buying and selling stocks from over $100 per transaction to just a few dollars per transaction. It has also created a monster, high frequency trading, a parasitical practice that buys and sells shares on minuscule movements allowing the computer program to skim tiny amounts, sometimes less than a penny a share off the profits of “real buyers and sellers” by holding those shares for only a few seconds.

In the most recent housing crisis, the Government pressured the banks to make loans to low income households that could not reasonably be expected to ever be repaid. The Government also provided funding and guarantees to encourage this activity. The banks bundled up these loans into “synthetic” packages that included a certain number of mortgages that could be best described as toxic waste. The Government controls the number of rating agencies tasked with grading these kinds of securities. These companies were charging banks higher rates to receive higher ratings on their securities, essentially a bribe. These “bonds” were then sold to unsuspecting customers who actually believed they were buying a AAA security. It gets worse. Insurance companies were selling policies on European bonds to people who didn’t own the underlying securities. Imagine if some stranger could buy an insurance policy on your life? The insurance companies were even selling insurance policies on these insurance policies, ad infinitum.

When the whole mess came unraveled, the bankruptcy courts couldn’t determine who owed what to whom. In many foreclosures, it wasn’t at all clear who owned the mortgage. Basically, while staring into the maw of abyss, the world’s central banks started printing money to buy up all this toxic waste and inject liquidity back into the system. The taxpayer and his grandchildren’s children are ultimately on the hook for their actions.

The “too big to fail” banks were saved by the taxpayer. The poor lost their homes. Their credit ratings now reflect these foreclosures. It is unlikely they will ever be able to buy another home. For the first time ever, large investment houses bought up large numbers of single family homes for rental properties. In some netherworld of the damned reserved for famous film villains, Henry Potter is smiling.

What if “too big to fail” banks were broken up into their component pieces, allowing them to continue doing business as separate, unconnected financial entities? What if local banks were expected to hold the mortgages they write for the entire term of the loan instead of packaging and selling them as secondary financial products? What if these banks could only buy insurance on mortgages they actually hold? What if our tax code was simplified? What if we removed perverse incentives from our corporate tax code that rewards bad behavior? Excreta. Excreta.

All these topics should be discussed by mathematicians, game theory experts, system analysts, economic professors, and the men and women who actually play the game. Simplistic sound bites offered by manipulative politicians preaching blood and soil to energize their base isn’t enough to address these very important issues.

Remember, the rules will determine how the game is to be played.

Friday, October 16, 2015

The Money Game and Tony Robbins

Yes. “They” are out to get you. If you play their game by their rules, you will lose. They are looking for docile debt slaves who are willing to be trapped in a never ending cycle of, “buying what you don’t need, with money you don’t have, to impress people you don’t like.” “They” are looking for deaf, dumb, and blind tax donkeys who don’t understand they are giving away most of their life to a combination of national, state, and local governments and the apparatchiks and members of the nomenklatura who actually benefit from their loss.

How bad is it? Enquiring minds want to know.

54.4% of the average American’s total earnings over the course of a lifetime go to taxes of all sorts.

17.25% of the average American’s total earnings over the course of a lifetime go pay interest on personal debt.

That leaves you with 28.5% of your hard earned money to pay your bills, buy a few nice luxuries, and retire with dignity.

Those are average numbers. I expect the poor pay more in interest and less in taxes. So, how to escape the trap?

I am currently reading Money: Master the Game by Tony Robbins, the motivational speaker famous for his boxed courses sold by TV infomercial and his unfortunate fascination with fire walking. As a mechanical engineer I understand that fire walking has nothing to do with a mental state and everything to do with the proper preparation of the bed of red hot coals. A sufficiently thick layer of ash has a very low coefficient of heat transfer. Anyone foolish enough to engage in such nonsense can safely walk across such a properly prepared bed of coals. It proves nothing. If I were to lay an iron grate across the same bed of coals, anyone, no matter how spiritually advanced, would suffer serious burns. Iron has a very high coefficient of heat transfer.

Having covered the obvious criticism from the knowledgeable reader, let’s continue with the story. Tony Robbins has built a $500 million net worth by combining classic old school motivational speaking techniques learned from his mentor, Jim Rohn, with his deep understanding of Neuro-Linguistic Programming (NLP), a psychological method developed from the work of Milton Erickson, Virginia Satir, and others.

Obviously, his methods work.

Tony Robbins set out to discover a more or less idiot proof method for the “little guy” to get a share of the money available to those who choose to invest in the stock market. As a student of NLP, Tony Robbins believes in the power of modeling, what is termed “best practices” in management studies. Using his contacts with the rich and famous, Robbins set out to learn what they know and practice, then condense their knowledge into a set of techniques that could be practiced by an average American. After having read almost 300 pages of a 600 page tome, I can condense what he has to say into a few words.

Buy an age appropriate mix of low cost index funds in small incremental amounts over the course of a lifetime and retire rich. Start small. Start today.

The rest of it is long emotional passages meant to capture your attention and motivate you to take actions that will radically alter your life. This method works on his Youtube videos. I bet they really work at his live events. I would kind of like to participate in one those conferences some day. However when reading the book, I keep finding myself wishing he would get to the point.

If you know nothing about investments, want to change your life, and you respond well to this writing style, it appears that Money: Master the Game will be a very good first book for the beginner contemplating his initial steps into the world of investments. When I first started on this journey to financial freedom, I would have loved to get my hands on this book.

Tuesday, October 6, 2015

Two Hundred Year Floods and the Mercedes Maybach

The year is 1950. You are a county commissioner living in a growing suburban area. Your citizens are going to need more water, a lot more water, in the coming years. A plan is proposed to float a bond issue to fund a new reservoir to meet the demand generated by projected population growth for maybe the next twenty years. You have a lot of decisions to make. Being a prudent man, you consult with a professor of civil engineering from a nearby university. The engineer using the best available methods tells you that a properly constructed earthen dam will meet your requirements at a cost of $3 million. When you ask him if the dam will be safe, he might give you this answer, “This dam will have a 98.6% chance of surviving a once in a century flood.” You might ask him if something safer could be built. He might tell you that a reinforced concrete dam would be safer, but would cost $30 million to build.

Since your total budget for the project is capped at $15 million, your decision has already been made for you.

Sixty five years later, a once in 200 year flood hit the Midlands of South Carolina. Several small dams suffered varying types of failure, adding to the region’s difficulties. It will take the state some time to recover from this disaster. Your prayers and assistance for the victims is appreciated.

Risk evaluation is an important skill not only in selecting investments, but for living in this material world. People make statements like, “A once in a hundred year event,” all the time. What does it really mean if your town suffered a once in a thirty year flood twice in one year as happened in Maryland not so many years ago.

In The Plight of the Fortunetellers by Riccardo Rebonato, the author analyzes why the quants, some of the brightest mathematicians on the planet armed with the largest computers money could buy failed to properly evaluate risk during the real estate crash of 2006 and the subsequent stock market crash of 2008. In short, they were applying statistical methods that while mathematically correct were treating all available data, say 200 years worth, as equally valuable then using that data to predict events that might only happen once in 1,000 years. Such an approach is deeply flawed. While we can make such statements about events like flipping a fair coin with a limited data set, the stock market is not as predictable, since it is driven by human greed and fear more than by rational behavior.

Not only do we live in a world that contains an element of randomness, it is also at times a very nonlinear world. Very small differences in initial conditions, such as the exact date you choose to buy a particular stock, can produce radically different results over an extended period of time. Modern portfolio theory (MPT), the best investment tool available to the normal prudent investor, assumes that changes in the stock market can be described by a Gaussian distribution. The theory assumes that the probability of a share price moving more than 10 or 20 times the average daily move in a particular day is diminishing small. Even excluding events like the declaration of war or fraudulent activities such as insider trading, Benoit Mandelbrot has demonstrated that the market is a much more dangerous place than can be predicted by MPT. The truth is we can expect a significant stock market crash about once every ten years, more often than can be explained by MPT. The bottom line is that the market can and does move as much in a matter or minutes or even seconds as one would expect in years.

Such decisions are not limited to engineers, politicians, and investors. We all make such decisions all the time. All of us wish to drive around in a safe car. However, there is that pesky question, “How safe at what cost?” Most years, the safest production car in the world will be the flagship of the Mercedes Benz line. This year that would be the Maybach, a car that can be had for around $200,000 depending on the options selected. Yet most of us drive around in cars that cost $28,000 or less when new. They aren’t as safe as a Mercedes, but we judge them as “safe enough.”

Predicting the future is at best a risky proposition, but it is something that must be done both implicitly when we open our garage door and drive our Toyota Corolla out into rush hour traffic and explicitly when choose to invest in a particular mix of low cost index funds. Most mornings, most of us make it to work without incident. Just as we know that market crashes occur from time to time, we also know that Jeremy Siegel has demonstrated that investing in American equities has produced a remarkably steady return of about 7% after inflation and taxes over any sufficiently long period of time.

Now, Lets be careful out there.