Tuesday, September 27, 2016

A Different Way to Think

Recently I was listening to a Brian Tracy video on methods to increase your income through focusing your personal efforts on what is important to the bottom line and delegating or outsourcing those activities that don’t generate income. Along the way Tracy went off on a unrelated rabbit trail that I found quite interesting. Brian Tracy actually knows Thomas Stanley and William Danko, the authors of the landmark study, The Millionaire Next Door. While talking with one of them, I believe it was Danko, Tracy learned that Danko overheard a conversation between several millionaires involved in his study. They were saying things like, “I have two.” Or, “I have four.” Puzzled Danko asked them to explain what they were discussing. The answer, the number of years they could support their current lifestyle without any additional income or capital gains.

Believe it or not, there are personal finance authors that encourage their readers not to have an emergency fund. I noticed one of these dreadful recommendations came from a website supported by (you guessed it) the banking industry. “Go ahead little girl, put that surprise auto repair on your credit card. It will not harm you.”

It turns out that Stanley and Danko’s self made millionaires don’t think like that. Instead of having the usually recommended three to eight months in an emergency fund, these individuals are thinking in terms of years. Of course, the classic emergency fund is money held in an insured near cash instrument like a savings account or money market fund. I am not suggesting that you put years of expense money in something that pays nearly nothing, but consider that various model portfolios suggest that retired folk keep as much as 10%-15% of their net worth in safe, near cash accounts.

Danko and Stanley discovered that financial freedom is a high priority to the men and women who actually achieve financial freedom. Their decisions are frequently made with the goal of freeing up cash for investment opportunities. Even though they could easily pay cash for new cars, they tend to buy relatively high priced late model used cars, taking advantage of the fact that a car’s value tends to depreciate about 19% in the first two years of ownership. Then they keep them for an average of ten years. This practice, alone, has the potential of freeing up significant amounts of money over the course of a forty year career while the allowing those millionaires next door to drive around in some pretty nice automobiles.

I consider The Millionaire Next Door a must read for anyone who wants to become financially literate. The subjects of their study are not remarkable people with unusual skill sets. They are your neighbors. They just don’t think about money the same way the average American thinks about money. Because their thoughts are different, their actions are different. Because their actions are different, they get different results. Because they get different results they end up living a different kind of life, one that includes financial freedom.

Go thou and do likewise.

Friday, September 16, 2016

Never Believe a Fact

Never Believe a Fact.
“When making investment decisions, or when reading news reports on the economy, never believe the facts. Trust no one. Always dig into the numbers until you understand how they were created and what they actually mean. The truth is out there, but so are a lot of lies and balderdash.”

I threw this little teaser up on my Facebook page hoping to start a conversation. It only received one comment and a couple of likes, not one of my more successful posts. However, the solitary comment gave me something to think about, as the statement is simultaneously true and false.

“I doubt the average person has the time or the know-how to dig into it to the degree required.”

Financial “facts” are seldom what they seem on the surface. Take U-3 Unemployment, the statistic reported on the nightly news. It really isn’t a measure of anything but U-3 unemployment. This number excludes anyone who is counted “as not in the workforce.” “Discouraged workers,” who are not actively seeking employment according to the government’s definition are not counted in calculating U-3 unemployment. That excludes over 94,000,000 unemployed Americans out the 243,000,000 that fit the definition of working age adults from the denominator of the unemployment rate. U-3 also counts someone working 3 hours a month selling used furniture on Ebay as “employed,” same as someone working 50 hours a week in a factory. Also there is no mechanism in the calculation of U-3 to prevent accidental double counting of an individual with more than one part time job. To add injury to insult, this number is adjusted on a seasonal basis. This means the statistician making the calculation just changes the result to a number his intuition and experience believes to be a little closer to the truth.

If U-3 is heading down that is good thing unless the number of discouraged workers is increasing faster than the number of jobs. Likewise U-3 headed up is a bad thing unless an increase in the number of unfilled positions is causing more Americans to meet the criteria for actively seeking employment.

There is no accurate measure of unemployment. U-6 is more realistic than U-3, as it accounts for both discouraged workers and part time employees seeking full time positions, but is seldom reported outside of the financial press.

There is no malicious intent in the reporting of these numbers. No grand conspiracy is attempting to hide the truth. The number is even “corrected” months after it is first reported to include more data collected and tabulated after the fact. The Department of Labor statisticians are playing the game by the rules they have been given by our elected officials. As best as I can remember, the last time the definition of U-3 was changed was during the Clinton administration, so what you see in the news isn’t some kind of three shell con-game. However, it isn’t a number that is worth very much.

Trying to find your way in an investment world that includes commission salesmen, who are incentivized by their employer to sell their most profitable products to you, and out-right crooks like Ponzi scheme artist Bernie Madoff is even harder than dealing with an accurate reporting of useless information by government bureaucrats.

Although the average person will never have access to the same information as a billionaire full time investor, the Internet has certainly leveled the playing field. Just opening a brokerage account with a few hundred dollars will give you free access to professionally prepared reports written by experts who do not have a position in the market that would result in a conflict of interest. Websites containing a world of investment information such as the Motley Fool and Seeking Alpha are available to anyone with access to a computer, even if they don’t have a checking account. Visiting Macro-Economic websites, both liberal such as The Big Picture or Calculated Risk or conservative such as those run by David Stockman or Mish Shedlock will teach you what trends are important, how they are calculated, and what the graphs actually mean. It is amazing to me how much information can be obtained with an hour or two spent on line every day.

In the end, it doesn’t matter if you don’t have the time or inclination to dig into mysteries such as the reporting of the American unemployment rate. I have seen relatively uneducated, unsophisticated men and women achieve financial freedom by following a few simple rules.

1) Stay out of debt.
2) Spend less than you earn.
3) Invest what you save in something you understand.

If you can explain what you are doing with your money to a junior high school student, chances are you won’t get into a lot of trouble. If you don’t thoroughly understand an investment, follow my advice, run away.

Remember, you can’t predict the future. No one can. That doesn’t mean you can’t find a path to a better life.

And please, Let’s be careful out there!

Saturday, September 10, 2016

The Number 1 Secret of Money

There are times I don’t want to write a particular article that won’t let me alone until it is written. This is one of those times. I recently read a news article linked from Ramit Sethi’s I Will Teach You to be Rich blog site that packages the simple truth that as been annoying me for the last week or two for the Millennial Generation. A young couple retired at age 30 with more than a million dollars in investments. Their big secret?

If you want to be rich, If you want to find financial freedom, if you want to escape debt, if you just want more money than you currently have, there is only one way up and out of your current condition.

It is true for a twenty year old high school dropout earning $9.00 an hour.
It is true for a billionaire hedge fund manager.


They found financial freedom at a very early age and people hate them for doing it.

Wealthy Thirty Somethings Doling Out Financial Advice Breed Online Hate

No matter who you are, you can’t escape the money equation.

Money In = Money Stored + Money Spent

To make the Money Stored term of the equation large, this young couple worked their way through school rather than loading up on student loans. They earned degrees in a field that is actually hiring college graduates (generally speaking, that would be one of the STEM majors or something to do with computers). Then they lived like paupers on decent middle class salaries, putting every spare penny into their investment portfolio until they reached the level of financial freedom that allows them to live the life they want to live.

Important things are simple.
Simple things are hard.

The easiest way to start on the road to financial freedom is to make a promise to pay yourself first. Put a predetermined percentage of your take home pay in a specified account that is at least a little difficult to access. Do it with an automatic debit. Hey, chances are you pay at least some of your bills by auto-debit, why not provide the same service for yourself. Just about all the authors recommend placing 10% of any funds that cross your palm in a savings account or an investment portfolio depending on your particular situation. If you view 10% as an insurmountable mountain, start with 1% and increase it by 1% every time you get a raise or a change in your life, like paying off your credit cards, gives you a greater amount of free cash. In the last years before I retired, I was placing 14% of my pretax income into my version of a 401(k) and most months investing as much as 30% of my take home pay. Hey, it took me forty years to get there. It wasn’t easy. I made mistakes along the road of life, but I made it. You can too.

And while I am at it, let me remind you of the second big money secret, avoid debt like the plague.

From the Devil’s Dictionary by Ambrose Bierce

Debt, n. An ingenious substitute for the chain and whip of the slavedriver. Ambrose Bierce

Monday, September 5, 2016

Are Hallucinations Real?

Once an elderly woman asked me a serious question, “Are hallucinations real?” At that moment she was suffering from the earliest stages of dementia, electrolyte imbalances, and side effects from the numerous prescription drugs needed to keep her alive.

I told her, “I believe that your hallucinations are real to you.” Then to the best of my ability I explained how our perception of reality can be altered by chemical imbalances in our brains. I avoided the subject of dementia. I have learned that when people over 80 hear the word dementia, their imagination immediately transports them to a dirty unpleasant Medicaid lockdown ward where they are suffering the later stages of Alzheimer’s. It seems easier to start these conversations with the family doctor and the spouse than with the patient.

I have learned from my training in hypnotherapy that a perfectly healthy mind, unclouded by drugs or physical abnormalities can experience hallucinations that seem as real to the five senses or emotions as what we experience in the real world.

We can also suffer from self induced hallucinations or become deluded by believing the suggestions others. We all have our own metanarrative, the overarching story we tell ourselves about the world and our place in it. I have come to believe that most of this story exists in our subconscious, that part of our mind that allows us to make quick decisions without involving the time to engage the higher levels of our conscious mind in rational analysis. This is a survival mechanism. When our ancestor heard a noise in the bushes, she ran away instead of investigating to discover if it was a tiger or an antelope. She lived to pass her genes on to me. However, this rapid reaction mechanism can betray us, if we misapply it in a complex modern situation involving our interactions with the world.

When we are presented with facts, we don’t leave them alone. We have to create a story to fit these facts into our understanding of the universe, our metanarrative. If the facts don’t line up with our metanarative, we will typically ignore them or force fit them into our prejudices and preconceptions. We strive for internal consistency. Experiencing a disconnect between reality and our metanarrative results in a form of mental anguish termed cognitive dissonance. We tend to reduce our suffering by seeking explanations or excuses that will reinforce our existing belief system. This is why conservatives prefer FOX News and the Rush Limbaugh radio show, just as liberals prefer outlets like the Washington Post and NPR.

This tendency can be limiting or even self destructive. If an individual believes that he was unfairly fired because his employer didn’t like the way he looks, he may be correct if he is a corporate attorney who decided to get a purple Mohawk and a facial tattoo. However, if he worked for a carnival side show that plays at motorcycle rallies, he might have other problems beyond employer bias.

Because we like to feed our metanarrative, we typically find experiences and facts that reinforce our personal protective amour. One day, as I was out walking in the woods, I noticed a clump of large oddly shaped mushrooms growing by the side of the trail. I don’t know why, but for some reason this discovery excited me. I began to find different kinds of mushrooms growing all over the forest. The day before, I hadn’t noticed any mushrooms, but I am certain they were there. I just wasn’t looking for them. If you believe the world contains all sorts of opportunities, chances are you will find opportunities. If you believe the world contains all kinds of problems, chances are you will find problems. None of us have a metanarrative that is perfectly aligned with reality. Sometimes our metanarrative can help us survive and thrive, but on other occassions our metanarrative can limit our experience of life or even end it.

“In the abundance of water the fool is thirsty.”
Bob Marley

Sir John Templeton, considered one of the greatest investors in history, started on the road to becoming a billionaire during the depths of the Great Depression. With the little he had, augmented by some borrowed money, he bought 100 shares of every stock listed on the New York Stock Exchange that was selling for less than one dollar a share. When factory orders generated by World War II greatly increased the profitability of American industry, Templeton became one of the richest men in the world.

On occasion, as I interact with others in many different kinds of social settings, my mind returns to the old Indian story of the wish granting tree. I have learned wisdom literature that has been around for a couple of thousand years or more, generally has more than one level of application. This story is no exception.

Once upon a time, a man exhausted from a hard day on the road spotted a large tree in a nearby field. Thinking that this would be a good place to rest, he sat down under the tree. Speaking to himself, he said, “I am so thirsty, I wish I had something cool and refreshing to drink.”

Then a perfectly chilled goblet of his favorite white wine miraculously appeared at his feet.

Now, his appetite stimulated by the wine, the man then thought, “I am so hungry. I wish I had something good to eat.”

As before, a small table covered with covered dishes containing his favorite foods appeared out of nowhere.

After finishing his meal, the man sighed in contentment, “I am so tired. I wish I could take a nap on a comfortable bed.”

Suddenly he was lying on a large ornate bed covered with pillows that was fit for a king. In minutes he fell in to a deep restful sleep.

A few hours later, upon awaking, the man began to worry. He thought, “There is some kind of magic going on with this tree. Perhaps it contains a goblin that will jump out of the tree and eat me alive.”

Then a horrible goblin jumped out of the tree and ate him alive.