Posts Tagged ‘Wealth and Investing’

Are You Dumb Enough To Be Rich?


So you got your MBA from Harvard, saved $20k from your last job and have 5000 friends on MySpace. But are you dumb enough to be rich? That’s what analysts of correlations between brains and bucks have concluded. You don’t have to be smart be become wealthy, and as a matter of fact, brains may even stifle your potential.

You see, wealth requires high-performance and rapid-execution. You can’t get stuck on details when there is someone far more qualified for that job.

As an entrepreneur, you must take on the task of creating everything from scratch and that requires leadership and more strategic long-term big-picture thinking. Leave all the nitty-gritty systematizing and organizing to management and for heaven’s sake – get a professional designer to do your website.

Wealth requires Four distinct elements: Motivation, Skill, Knowledge and Focus. Let’s define each one.

Motivation: The Desire To Be

From when that great idea pops into your head, until you start to do something about it, you’re in the motivation stage. An optimistic point of view that convinces you that you have the next multi-million dollar idea. The problem is that in order to turn great ideas into profitable business, you’ll need more than just a desire to create a great product or service.

Skill: Expertise vs. Scalability

The problem with Professions (besides for requiring an immense amount of both time and capital) is that they require a technical expertise that is designated to the person who is skilled. How many surgeries can a surgeon perform a day? Each one requires his physical presence, full attention and time occupation. McDonald’s on the other hand spews out millions of Big Macs each day with a work-force of teenage students. Scalability is the ability to run at full capacity whether its for 1 or 100, offering the same product or service, with the same results, every time without fail.

In business, the hierarchy works like so: Shareholders elect Executives who hire Directors, who find Managers, to teach Supervisors how to oversee Operators.

If the machines run on they’re own, all you need is a tech-savvy operator to make sure everything runs smoothly. But while technicians may be very smart, learning the service manual backwards and forwards, knowing where every nut and bold belongs – no one ever became wealthy on minimum wage.

Knowledge: Chris Langan vs Henry Ford

In the war of brains vs. bucks, you’d think Chris Langan had it all. You may have heard of Chris, as he was featured in Malcolm Gladwell’s best-seller “Outliers”. However, even though Chris boasts an IQ estimated at 210 (Einstein was 160, and Darwin a mere 120) he nevertheless makes an honest living working in bars. No mansions, no rolls-royce, no big shareholder meetings. Genius in other words has failed. (For those familiar with the collapse of LTCM this would not be the first time.

Enter Henry Ford. Someone once walked into Ford’s office and presented him with a complex math problem they knew he couldn’t solve since Ford lacked schooling. “I do not know the answer”, he replied “but I can definitely find someone who does”. He may have not had an IQ anywhere near 200, yet he practically invented the assembly line concept and industrialized the automobile. They said the Model-T was impossible. Langan would agree. Ford would laugh them out of the room.

It’s not that wealthy people aren’t intelligent. It’s just that they focus not on academic genius, but on practical intelligence. Focusing not on predetermined rules, but on what works and what doesn’t. For them business is not science, but art.

Focus: Thinking like a Laser

Ask anyone successful – Bill Gates, Warren Buffett, Peter Drucker, Michael Gerber – “What is the most important trait in business?”. They would answer: Focus. Or as Chet Holmes refers to it “pig-headed discipline”. I had many friends, who I was convinced, would be millionaires before they turned 30. They had diverse interests and skills across a broad spectrum, had storehouses of energy, could hold a complicated theological discussion with any philosopher, even take apart a fridge and put it back together again. Some were even running small businesses in their teens. To “execute” efficiently and effectively requires intense discipline and discipline requires laser-like concentration.


  • How to improve your motivation: Read into the lives of the successful. Examine how their thoughts compelled them to do anything from controlling their destiny to changing the world. Focus on gratitude, on everything positive in your life. Relay your dreams repetitively to yourself to confirm your subconscious beliefs. Genuinely desire to create value for the rest of the world.
  • How to improve your skills: Enhance your strengths, don’t fix your weaknesses. Learn to deal with people, organize and systematize. I recommend devouring the works of coaches such as Michael Gerber, Chet Holmes, Warren Bennis and Robert Kiyosaki. Get familiar with concepts of Cash Flow, Entrepreneurship, Scalability, Delegation, Optimization and Management.
  • How to improve your business IQ: See the article “5 Books Every Entrepreneur Must Read“.
  • How to improve your focus: Set goals and set out to achieve them. We often lose sight and therefor direction. It doesn’t come easy and it requires practice and conscious application. Make a list of all the things you want to accomplish over the next 12 months. Just this document alone will propel you to bigger and greater things!

Winning the Lottery


What would you do if you won the lottery? As many of my readers know, I’m not too fond of the lottery idea. Some call it gambling, Warren Buffett and others refer to it as a “tax on the poor”.

There are two problems you face winning the lottery:

How you win. We know the odds are tremendously out of your favor. If you are going to buy a ticket know that you are practically throwing that money away. Do it for fun – like whenever the winning are above $100 million.

I once got an idea of what type of odds we’re playing with here. I was shown a closed cylinder that rolls on a spool. It contained over 1 million tiny beads of different colors. 9/10 were red, 1/10 were white, 1/100 yellow, 1/1000 green, 1/10,000 blue, 1/100,000 purple and 1 in all million was black. I stood there spinning this thing for over 20 minutes. Needless to say my only surprise was finding a few blues.

The odds of winning a lottery are about 27x that and you must pay $1 for every bead you pick up! Not to mention that you have to split the jackpot with anyone else who luckily happened to pick the same lucky numbers you did. Oh and don’t forget taxes (28%) and the payout-ratio (lump-sum or annual payments).

That you win. The second problem with lotteries in inherent. People who understand money don’t buy tickets, and those who buy tickets don’t understand money.

The first thing most people do when they win is spend. They buy a new house, car, boat, whatever with, and here’s the kicker: no-money-down easy-low-monthly payments. (Gets the suckers every time). Before you know it the once grand plan of a work-free and beach-resort-retirement crumbles in a pile of doodads and interest payments.

Ok so what if you do win?
I thought about it before, mostly for fun. Here are my thoughts:

  • Wait! You usually have a few months to claim your prize. This way you avoid all the hoopla and media attention, especially if it’s a big win. Most winners take anywhere from four days to two weeks before turning in their winning ticket. You just better be the type who knows how to keep a good secret! When you do withdraw…
  • Take the Lump Sum. You usually have two options: Get the amount over 30 years or in one payment for a lower settlement. You’ll then have the opportunity to invest the proceeds to earn more than you could with the guaranteed return from the annuity payments. Before handing in your ticket, consult a good accountant to assess your best options tax-wise.
  • Arrange for a special account at the bank. You can’t just deposit millions into your plain ol’ checking account. And they don’t really give you a paper check with a lot of zeroes (that’s just for the picture). They give you the money by a wire transfer to your pre-arranged special account. Don’t invest it. Not yet. $10,000 is not like $10,000,000. The same strategies apply but the tactics are drastically different. What was once buying a few shares in a penny stock is now a full-on buyout.
  • Create a middle man. Many people suggest you change your phone number as everyone’s going to want to reach out and touch you. I simply suggest you hand your phone over to an assistant and let them screen your calls. But don’t worry to much about that because you’re ready to…
  • Go on vacation! That’s right. What the first thing people do when they win big? They spend… relative to their current lifestyle and incomes hoping that the money will suddenly make their life better. A vacation alters two things: A) It removes you from your familiar surroundings thus distracting you from your relative interests. B) It provides you with the leisure and time to…
  • Ponder your life. Ok, so you’re staying in a 5-star resort on a Beach in Monte Carlo sipping your favorite tropical ornament and hanging with the high rollers. Do you feel any more fulfilling? Is your life any happier? What do you really want? Do you like your job for reasons other than money? This is your time to plan your new life and enjoy some of it while you’re still young.
  • Find a your new best friends. An accountant, financial adviser and lawyer.And they shouldn’t all be the same person. Just because you have your millions doesn’t mean you can do away with sound financial planning. Ask around. Referral is the best way. Ask people who they have used and been happy with.
  • Read voraciously. Welcome to the New Rich. But along with great opportunity comes responsibility. Even with your qualified team of professionals, you should have your own knowledge of what and how money works. Every great entrepreneur does the same things. The lottery will just get you there faster!

Just for fun, here’s one way to better your chances of winning:
Play less often but play the same number of tickets overall. 5 lines played monthly in one draw have a better chance than 1 line played weekly for 5 weeks.

The Credit Crisis Visualized


An entertaining and creative explanation of what led us into this debacle.

The Crisis of Credit Visualized – Part I (about 7:30)

The Crisis of Credit Visualized – Part II
(about 3:45)

Glad you enjoyed!

On Stock Values

Some Stock Advice from Dan Ferris, editor of Extreme Value

I don’t expect investors will make much money in stocks on the long side from current price levels. Dividend cuts, weak earnings, and unattractive valuations are telling you to be careful. Most long term returns in stocks have come in from dividends, not capital gains (because arbitrageurs and institutions make it too hard for the majority of investors). On the dividend side, Procter & Gamble has raised its dividend every year for 53 years. ExxonMobil has done so every year for 27 years. Most stocks are just too expensive compared to earnings. The S&P 500 is trading around 16x earnings. And with banks failing, 10% unemployment, and the middle innings of a once-a-century meltdown. With housing and debt in charge of the economy now, this means a worse outlook for earnings and stocks. In the 1970s valuations sank for a decade through the Great Inflation.

Year P/E
1974 7.3
1975 11.7
1976 11.0
1977 8.8
1978 8.3
1979 7.4
1980 9.1
1981 8.1
1982 10.2
1983 12.4
1984 9.9
Average P/E 9.5

Based on historical standards, the ultimate bottom could be another 39% below the March 2009 low of 667 (12x S&P 500 earnings estimate).

For more information on P/E ratios see:
Investopedia – The P/E Ratio – Understanding Price to Earnings Ratio
Sentiment of Success – What is the Price To Earnings Ratio

On Money


“Money is the most important thing in life, but the least valuable”

Ponder that.

The Real Bubbles



“It is the measure of wealth itself [the Dollar] that is overvalued, not the goods that it represents”



I’m beginning to understand what is going on. I hope this article will shed some light on a variety of issues, some of which have been fairly complicated for the common investor to digest.

I will begin with a paragraph of adages and mantras being proclaimed on Wall Street, followed by a thorough analysis of why they are either baseless or misconceived. For the sake of simplicity I won’t use references but they are all available.

Mr. Market says

“The Commodities Bubble has begin to blow over, with everything from gold to oil to potash collapsing from their artificially inflated prices to mediate norms. Much of these gains have been driven by speculator demand, from hedge funds and the like, as well as consumer demand, including China, India and Russia.

“Investors have bought in every premium into these contracts and optimism is high. Furthermore, commodities have been a very poor investment relative to stocks and bonds. Even gold has underperformed inflation. As equities recoup its gains and inflows of capital return, pushing inflation down with it, commodities will be a relic of the past.

“Recessions are times of diminishing consumer demand and this will further help in reducing prices. With much of the investing community already discounting shares due to recession we can expect a bottom in the stock market with a rally beginning just as the economy is officially in recession. Financials and Homebuilders are set to gain the most as they have been beaten down severely, looking awefully cheap from a value prospective.

“The Dollar is set to rally as stark pessimism has oversold it. Recession will strengthen the currency. This will bring in investment flow previously allocated to Euro, Yen and Gold.”

The Problems With Mr. Market and the rest of the Wall Street gang (CNBC)

1. Wrong Biases
Wall Street as we know it is not a the Mutual Fund Industry, a group Hedge Funds or even large network of multi-national corporations. It is simply the media’s opinion of the former. There are few companies that end up becoming large corporations and even fewer speculators-wanna-be-billionaire-investors who actually live up to their own aspirations.

This is due to its ill-conceived sentiment, nothing more. It has all the facts (most do at least) yet the small investor constantly fails to make the integral judgments necessary to fulfill his lifelong ambition of success, or even of financial independence. They run after Enrons, Devalued Russian Rubles and dot coms believing beyond any doubt that they have it made for themselves and they have indeed “beat the street“.

However, the only way to real gains is to bet against the crowd, to look where no one else is looking, or even better, to see past the unsound biases that have plagued investors since the Mississippi Scheme in the early 18th century.

2. Confusing Short and Long Term
This is probably the most extreme variable, one which offers the most profits to he who can see past its vile inadequacies. Many (not all) of the arguements presented in favor of the Dow 36,000 were in one way or another grounded fundamentally. The problem with the gushes of cash inflow was they were based on an economic phenomenon that was years into the future, results that we are only beginning to see today – and interestingly enough by quite a different group of influences. While investors were placing bets on Yahoo and Juno, Google wasn’t yet a public company.

3. Forgetting Premium and Discount
In addition, shares were discounted many times over yet speculators failed to realize it. Any price was a great price because in the mind of these irrational gamblers the gains were infinite it seemed. It was hard for investors themselves to understand that they were betting that the company of purchase was one of sound safety that would last, and therewith deliver on its earnings 100-1000 times over, without any interruption whatsoever.

4. Wall Street too has Seasons
There are financial equinoxes, waxing and waning over decades. Warren Buffett himself cautioned Saturday not to expect big gains from the stock market in future years. Indeed, there are periods when year after year people move from the New York Stock Exchange to the commodity pits of the Midwest in search of better returns.

5. In The Dollar We Trust
A currency is present only to act as a constant method of exchange between goods. Yet the U.S. currency is nothing of the sort. It has become a staple of growth and a signal of everlasting creditability. Unfortunately for many this will not last. Contrary to many pundits the present rally in the Dollar, however great it may seem, is a mere decoy and will be short-lived.

Even Treasury Secretary Paulson has advocated that a weak dollar is in America’s best interest. While this may or may not be a positive development, one thing may be guaranteed by any student of financial history dating back to Cicero in ancient Rome: every fiat currency has failed, frequently bringing its empire down with it.

6. Action and Consequence
Finally it pays dearly for the prudent investor, who has the sole initiative to first protect and only then appreciate his capital, to understand the elements of check and balance. Every action that does not act as a stimulus for long term growth but merely for short term gain will inevitably be met by an equal and opposite loss. Failing to understand this will, for the ignorant, deplete capital faster than you can say “Bear Sterns”.

Commodities will not blow over.
Long term investors understand the need for correction and rest. Things that go straight up are indeed called bubbles and we are not there yet. Like fire feeding off oxygen and fuel, so too do bubbles feed off of extreme optimism and public involvement, both of which can’t disappear over a few weeks. The perceptive analyst will look around and tell with utmost certainty there is no sign of a any euphoria. If anything the investor relies on solid fundamentals, all of which are intact, and buys when the crowds are telling him to be cautious. If he didn’t sell he is sorry but it is insignificant because a bottom is close at hand.

Has all the oil inventories been replenished with years of supply? Have investors the fear that would send each preferring a Krugerrand over a wad of hundreds? Are the cheerleaders over at CNBC telling you to buy Krugerrands and load up on more shares of Nemont Mining?

Market Norms
I have read through many books on markets, investment and financial history yet I have never seen evidence of such a thing. Everything has an intrinsic value and it either sells at a premium to that value or a discount. Professional Traders look for market “norms” in the sense that they seek a short term variable and attempt to trade within that range yet they abandon all affiliation when this trend is broken, that which all may be confident that it will.

The Real Bubble
With pundits of financially-based markets they seem to make two awfully wrong assumptions. Firstly, that the a Commodity Bubble exists in Dollar denominated form and secondly that it has been inflated by artificial and speculative demand.

The first misconception is one that one would almost fail to consider to begin with. After all, the U.S. Dollar has been on the center stage of international trade since the Bretton Woods Agreement shortly after the Great Depression in 1941. Yet since 1913 its intrinsic value relative to goods and services has fallen by over 93%. The fact that there is still any goodwill left to the Dollar at all resembles a Bubble of sorts. It is the measure of wealth itself that is overvalued, not the goods that it represents.

Thus, it is not the goods and services that rise but the Dollars that fall; their inability to maintain their value. Nevertheless instead of markets taking their natural course and correcting itself, the Government is artificially inflating the money supply whilst protecting the very economy that its currency stands for. This devaluing of the Dollar to be able to finance its debts is in no way different than if Enron was given the very ability to print its own currency to continue its business operations or pay out to its shareholders.

This explains the underlying developements we have seen in physical goods, not too different from what we experienced in the 1970s, with a dangerous undersupply of commodities, runaway deficits and financial derivatives of enormous proportions.

I ask of the conscious minded economist, “With over $500 trillion in financial promises, which now seems to be Dollar-backed and secured by the Federal Government, what meager value may be given to the price for real goods, that which feeds and sustains mankind? Furthermore, if demand for goods the world over is rising is it not reasonable to assume that prices rise with it, if not to curb demand, then to act as an incentive for the farmer to increase production? Finally, what would have offset the interest for the speculator to profit from these gains if the fundamental demand continues unabated?”

To quote Charlie Munger “We have convulsions now that make Enron look like a tea party.”

Critical Optimism
Does the financial community really believe that there is excess optimism in commodities? That gold bullion are selling off shelves? That people left and right are participating in buying goods that will benefit from real demand? On the contrary, I see that many have found an opportunity to sell the only gold that they may have in their possessions to take advantage of higher market. This denotes good business sense of buying low and selling high, but certainly not in the realm of exuberance that we have seen in previous meltdowns.

Physical vs. Fiscal
Commodities and Equities. Gold and The Dow. It is a subject that many seem to overlook from a generation-term prospective (considering that Buffett’s long term is 10 years). It is the flaw you will see in every commodity-bearish argument: “Commodities just don’t cut it relative to equities”.

But let us look at the origins for monetary protocol: Traders bartered goods in the marketplace. With many various items coming from numerous townships it was necessary to create a measure of value, a pivot whereby difference between supply and demand may mediate; a method by which payment may be expandable without the physical presence of currency.

Thus began the credit cycle. Producer sold to seller, who bartered with traders, who retailed to the marketplace, who took home their foods from their labor and fed their families.

This “Credit”, unlike the commodity-based currencies of old, had but one restriction: the tolerance of the lender. As long as the lender would risk would the industry borrow. It is of no coincidence that this cycle of credit take years to build and then years to crumble.

The “historical trend”, if we may call it, offers fairly simple advice to the novice merchant who wishes to conserve and grow his capital:

When in times of expansion… lend, invest and do business. In times of contraction and uncertainty… Pay debts, take inventory and accumulate capital.

Recessions of Supply and Demand
It is interesting how mainstream economists will focus on something specific in great detail and fanfare and at the same time fail to see its direct opposite exposure. For instance, it is assumed that a recession diminishes demand for goods and therefore lowers prices overall, not only in the U.S. but also in China. Consequently however, a loss of demand will hurt producers who may decrease production. This will have the opposite effect and raise prices.

Furthermore, it is assumed that as we move into recession, investors have already discounted all the possible losses and write downs. At first glance this possibility seems preposterous. How can a market, however “efficient” it may be, properly and throroughly account for the very speculations that everyone from the companies to the Federal Reserve can only guess at? Besides, it’s quite humorous that Wall Street can call the middle of a recession when they can’t even call the beginning, let alone its happenstance altogether.

It goes without saying that the same case may be made for commodities, in the sense that recessionary results have already been discounted and accounted for, or that they even sell at a discount relative to post-recessionary time-tables.

Capitalism that would make Marx smile?
Capitalism works. And for he who says it doesn’t should look no further than every innovation and technological advancement since the Middle Ages. Nevertheless, it is a process and it may not be looked at point blank. There are times when the advantages of Capitalism may overextend its true worth, while there may be times that it will seem to underestimate it (much like your average share price).

For the last 28 years we have lived in a credit expansion. Yes, there have been pitfalls – the Crash of 87, LTCM, the DotCom collapse – yet we have rolled on. The world has undergone quite a change in that time and has made people sentimentally and physically wealthier than ever before. Liquidity was fluid, credit was available for anyone who needed it, lending was commercialized and industrialized allowing the investor in China to buy equity in a startup in Australia. What the lender would risk would the industry borrow.

Yet now the payments are due, and the funds we have borrowed to finance this wonderful world we have built for ourselves must be paid in full. We are not veering off a path of success, not failing at our ambitions, we are merely paying for what we have taken.

Our past actions have now brought about the future results. For years we benefited when investors fled from commodities to purchase equities and financial paper, suppressing prices through shorting, or “selling forward”, neglecting the farmers and producers. Now we must compensate those to increase supply in order to feed a larger, hungrier, wealthier, more innovated world.

So Who’s The Fittest?

“What a fool does in the end, the wise do in the beginning” (Spanish Proverb)

Whether or not we conform to the Evolutionary theories of Charles Darwin, there is most certainly an element of truth behind the prospect that there is indeed a “survival of the fittest”. He who flaunts his wealth, is released from it. He who mistreats his body, withers. He who disrespects other men, is himself reputed.

We see this in our world from every perspective possible. China remains to its thousands year old traditions, as it is, by a philosophy inherently averse to war. Presidents, world leaders, CEOs and Activists usually maintain the stamina throughout even the most challenging times since it was that inbred zeal that got them there in the first place. Many of the happenstances of our history are due not to mere chance but to the wiring of our very fiber.

Hitler failed not because the West defeated him in military strategy or intelligence, but because all hope was forfeited from the beginning; he couldn’t control his own faculties, how would he a nation, how would he the world?

In the makeup of Capitalism as we know it, the earliest laissez-faire economists realized that monies are safest in the private hands, and handiest in the possession of those who understand its value most. Wal-Mart together with its proprietors, the Waltons, is one of the wealthiest economies on the planet, yet at the same time it ranks as the second largest charitable institution on the planet.

Small Money and Smart Money
What has all this to do with practice investment application? Yesterday I was chatting with a friend of mine. She mentioned how she had recently pawned in her gold. “Why?” I asked. She said she wasn’t exactly sure, only that gold had run up quite some bit over the last few years and she decided to profit from it. “Do you reckon it could go any higher?” I asked with a smirk. “It’s already fallen!” she replied.

We may call the above example the Small Money. These are the people, most of society actually, who just go about their daily business and they act, well, pretty much because they are not quite sure.

Then there is what we may call the Smart Money (this does not necessarily Big Money). For examples of such we must look to large institutions that carry a sound sense of financial responsibility; Governments that provide the world with resources and labor, Funds that manage the wealth of many of the affluent with full regard to risk and reward (major ETFs and Mutual Funds may be included in this group), as well as value-conscious long-term investors.

While the Small Money (and so they shall remain) are selling – Real Estate and hard assets – the Smart Money is buying. We see this day after day as the mortgage predicament continues to unravel, but nowhere in economics does it have any mention of leaving bargains on the table.

Where I live there was a “W 55” building that was set to be completed. Unfortunately, the building went under as property values and lending fell. At auction each penthouse sold for $150,000 down from the 300s. 50 cents on the dollar!

Long Term Investors
So what are the long-term investors doing now? They are Buying. Many now see the perfect opportunity to get in on an ongoing commodity boom – read ‘Boom’ not ‘Bubble’. Gold and silver are down 12% and 20% off their highs, respectively. Where many see ‘correction’ others see ‘opportunity’.

Go out to any coin dealer and try to buy more than 50 ounces of silver. Firstly, you moat probably won’t find it. If you do it will probably be in small denominations with pictures of Brett Farve or the Twin Towers on them. The piles of metal from the mints seems rather depleted.

Secondly, you’ll face a hefty premium. It’s almost as if the real over-the-counter market has become completely estranged towards the paper market and fails to believe it. Go on eBay and try to buy silver. You’ll face premiums (outright or in the form of shipping) of $2-$10 per ounce! In a sense, the actual silver market hasn’t fallen much at all.

Many pundits of the industry stated that as prices rise, supply of scrap silver will flood the market. One thing for sure, it ain’t floodin’ it. If it is coming online, it’s coming too slow relative to demand. Regardless, it seems that higher prices are secured sooner than later.

Did someone say Rice? Let’s not even go there.

Funds and Institutions
What about the big funds? Buying. The iShares Silver Trust (SLV) has actually been accumulating physical silver as prices have fallen. This is probably in line with relative demand by the funds investors (I’m one myself).

Big Governments? Also Buying. It is said that the Central Bank of Russia has been adding to its capital gold reserves and for all we know China and others may be following suit.

“After all is said and done, more is said than done” as Aesop said and the markets seem to reflect that. Those who have bought are destined to be wealthy and those who have sold are destined to buy again.

Oh, and the essential difference between a ‘Boom’ and a ‘Bubble’ is that a boom is when everyone is trying to buy something which no one else owns but everyone else wants, while a bubble is when everyone wants to eventually sell that which everyone has and practically nobody needs.


Some Thoughts on Wealth

I was recently listening to Kiyosaki’s audio course entitled “Think Rich”. There were many fascinating aspects, some that were new to me and many which were not. (Many of his ideas reflect those written about by Henry Ford, Napoleon Hill and Richard Clason). I agree much of his work (and disagree with some – such as his definition of luck), so here are some of the ideas that stuck out.

“Money is an merely an idea that can make you rich or poor”.

In this sense money has no validity as a source for wealth unless channeled properly. Many people make money doing their job but few have the intelligence to maintain that wealth and increase it over time.

“Think of wealth as a time frame. If spend $1000 a month and have $10,000 in the bank: You have 10 months worth of money”.

I found this fascinating in the sense that it applies to businesses too. If a business has $1M today that it doesn’t have to spend till next year, that’s significant.

“If you are going into the Real Estate market don’t buy until you’ve seen 100 houses”.

He bases this on the Law of Averages. The more homes you look at the better your chances of finding a bargain.

Q: Why are Brokers called Brokers?
A: Because most Brokers are Broker than you!

“Failure is a verb, not a noun. The fact that 9 out of 10 businesses fail means that 1 of every 10 succeed.”

Again he uses the Law of Averages. He says how it took him only 3 tries before starting a successful business. In a sense he may be considered in the top 3rd percentile in regard to financial intelligence. The truth is most people don’t even bother to try.

“Investing is Saving in what goes UP in value”

You become wealthy by owning appreciating assets, not by holding liabilities. This is why no one ever made money by buying real estate. You make money through the spread of your cost to profit.

“You don’t invest in stocks. You invest in a plan”.
Stocks may go up and down but your financial goals and the strategies by which to reach them stay put.

“Invest in a plan. Know why you wish to become wealthy and the how will follow”.
This sounds much like Enron’s old adage “Ask why.”, but it reminds me of a good joke.

“A man, having trouble with his furnace, calls in a repairman. The Repairman takes a look, grabs a hammer, bangs the wall and the furnace is as good as new again. Receiving the bill the man cries, “50 bucks? I could have done it myself and saved half a union!”. The Repairman takes the paper back for a second, scribbles something, and hands it back. It reads “Bang of Hammer, $1. Knowing where to bang, $49”.

I came up with a few good ideas while listening but that’s for another time.

Until then… Buy appreciating assets. The keyword is “Appreciating”. Kiyosaki says too much of tomorrow’s financial dependence is relied upon the stock market. We say like Jim Rogers “The next thing… is Things”.


“Gold isn’t competitive with Stocks” says you?

(Click for Larger Image)

…”Take That Alex Green” says I.

It Doesn’t Matter

It’s the mantra that our generation has come to proclaim. We have it well and why shouldn’t we. We were born in the greatest country in the world, into the wealthiest economy of nations, living on soil on which no war has been fought upon in over 150 years. Bred into an era awash with liquidity, credit and good fortune that has infused not only our own but that of the entire world. A planet free of international conflict, depression and social pandemic for over 3 decades.

So when we hear of such things, when our children read of depressions in their text books, we come to ask why. Why do we learn of such devastating events that has no affiliation whatsoever with our day and age? Why do we continue to teach industry instead of finance? “It doesn’t matter” we tell them.

However, history would beg to differ. We learn of the ancient cities of Rome and Tyre to remind us that those times were also ruled by men. Men who are invincible and who could not fail. Men who believe they are wiser than nature and the course of events. They told themselves “This time is different” while they scoffed at the failure of the empires. “Veni, vidi, vici” Caesar said. Today, people tell themselves the same.

Here are three examples, brought to us by Bill Bonner, of the sentimental shift that has occurred over the past few decades

Crashes Don’t Matter
First, there was the Crash of ’87. Stocks fell hard. But then, they got right back up again, as though nothing ever happened. Then, people began to think that crashes were no trouble. Even if stocks fell, they’d soon be on an upswing again. Books began to appear such as “Stocks for the Long Run.” People began to believe you couldn’t go wrong in stocks, no matter how much you paid for them.

Terrorists Don’t Matter
Second, in 1989, the Berlin Wall was dismantled. Suddenly, we no longer had any enemy worthy of the name. We weren’t going to be exterminated in a nuclear war after all. From here on, it would be clear sailing.

Deficits Don’t Matter
Third, Ronald Reagan and the neo-cons transformed the Republican Party. “Deficits don’t matter,” said Dick Cheney. They don’t matter to the Democrats. And now they no longer matter to Republicans either. After the ’80s there was no longer any organized political party in favor of fiscal and monetary conservativism.

Oh, the system won’t collapse tomorrow, or the next day. On the contrary it may seem to become stronger. It may rise to new heights, we may find additional ways to turn a dollar into many.

But let us not “discount nirvana” as Greenspan warned. (He may of been wrong too many times but it doesn’t make his statements any less true).

On Gold

The very thing that makes gold a bad place for you money most of the time makes it an excellent place occasionally. It has no sales or profits, but its sales do not decline. It benefits from no technological enhancements, but it needs none. It produces no earnings… but it announces no earnings disappointments either. It holds no press conferences, but it tells no lies. It uses no leverage, but it doesn’t go bankrupt. You can’t buy it with No-Money-Down… but it doesn’t get foreclosed. It doesn’t go anywhere, but it doesn’t go away.

Seven Cures for a Lean Purse
The seven secrets to attaining and maintaining wealth from The Richest Man in Babylon.

1. Start thy purse to fattening – Save as much as you can
2. Control thy expenditures – Spend as little as you can
3. Make thy gold multiply – Compound your wealth investing
4. Guard thy treasure from loss – Buy what you know
5. Make of thy dwelling a profitable investment – Own your home
6. Insure a future income – Get a good job
7. Increase thy ability to earn – Work hard

What is Inflation?

After pondering the issue for sometime I was finally struck with the answer. It was during a conversation with a friend explaining him the ramifications of the financial system and where financial and physical assets play a role.

We will begin with the difference between commodities and money. We will then explain how they relate to each other.

The Difference Between Commodities and Money
Commodities are real things – they are actual wealth and are made of the stuff that we eat, build and travel with. Money by contrast derives itself from the physical asset and wealth represents, a credit for something real.

Over the course of a generation, the amount of credit will expand to accommodate business growth, borrowing for investment and for the sake of increasing the amount and efficiency of actual goods and services. This will then contract and will leave each own with his profit or loss.

The Credit Cycle
It is this ratio – goods to derived goods – that paint the economic picture of tomorrow. When the Dow is selling for an ounce of gold, one can be sure that the physical and fiscal assets have realigned. However, when the economy is flush with liquidity and the Dow is selling for 44 gold coins then the future, although it may contain more of an expansion, it is nonetheless bound for a retreat.

Inflation and Deflation
Now that we have these extremes, it is a simple matter of equalizing the ratios, an x-factor, that has yet to be either extended or narrowed. And there are two ways of this occurring.

The first is by raising the lower quotient (Commodities), this is what the investing public now refers to as “Inflation”. The second scenario is by a lowering of the higher quotient (Fiscal Assets).

Realize that the choice inherent to obtain the objective is a lesser of two evils. Either the holders of the physical will be happy and the holders of the financial assets unsettled (due to the fact that their goods now sell at a more expensive price). This is the “Inflation” we saw so vividly during the 1970s. The financial institutions aimed at increasing liquidity.

Or the holders of the financial assets will be, for lack of a better word “deflated” and the holders of physical assets content. This is “Deflation” by Keynesian definitions, that occurred during the debacle of the 1930s. Then the financial institutions allowed the liquidity to dry up itself.

Depression and Recession
Obviously the term Depression was provided for the latter, and the term Recession for the former since psychologically it is far more painful to lose $1000 than for your $1000 to be worth less, albeit with the same result – mediocrity of value.

In Summery
We now understand the difference between the common use of the terms “Inflation” and “Deflation” used to describe a nominal expansion and contraction of the money supply and the practical definition of those terms that relate primarily to the increasing spread between actual and monetary assets.

According to its common and generally defined term Inflation refers solely to an increase in prices. The reason this description is so vague, is because the goods with one wishes to refer to as a guide may be relatively important to one individual but at the same time irrelevant to another. The proper term of Inflation refers not to the monetary price of goods but rather, more importantly, the ability to buy more goods at a better value. For example, if $100 now buys you 100 apples instead of 90, this would be an inflation of the credit supply.

This categorize the opposite effect. The modern and widely used term Deflation refers to falling prices. While the proper and more appropriate term refers to falling valuations. – $100 buying you 90 apples instead of 100. This means that Inflation and Deflation in the modern sense refer only to prices which change daily as does the dollar, and is thus harder to grasp. The proper terms refers to value – the only reason money was created in the first place.

“The fools are those who know the price of everything and the value of nothing”

Here’s to Frugality

Last week I came across the only two words you need to know that will earn you your financial independence “Frugality and Industry”. They were quoted by Benjamin Franklin and then repeated and adhered to for generations thereafter. So here’s to Frugality…

Top 10 Ways to Start Living the Frugal Life

1. Create a Budget
There are no more suitable words to the wealthy than “Live within your means”. Simply put, if you can’t afford it don’t buy it anyway.

2. Clip coupons
Take the time to clip coupons for the grocery items that you buy regularly, and shave an easy 25 percent off of your weekly grocery bill.

3. Eat Out Less Often
Eating out is fun, but far more expensive than eating at home. Challenge yourself to eat at home more often—even if it’s just once more a month, and watch your bank account grow.

4. Switch to Online Bill Pay
Save yourself a stamp, and avoid late fees by paying your bills online. You can pay direct to your creditors, or set up automatic bill pay with your bank.

5. Befriend the library
Instead of buying books and movies, take a trip to your local library free of charge.

6. Cook with What You Have
Missing an ingredient that you need for a recipe? Instead of running to the store, challenge yourself to cook with what you have on hand.

7. Seek Freebies
Freebies are fun and budget-friendly. Look online for a wide-array of free offers, and enjoy a mailbox bursting with goodies.

8. Wash in Cold
Cut your electric bill substantially by washing your laundry in cold water. Your clothes will still come out clean, and your hot water heater won’t have to work nearly as hard.

9. Flip a Switch
Reduce your electric bill even further by turning off lights and other electronics when they aren’t in use. It may seem like a small thing, but you’re sure to see the difference on your next electric bill.

10. Cut Back on Extras
Do you really need caller ID and call waiting? How about the premium cable or satellite package that you subscribe to? Examine your list of monthly expenses, and determine what you can live without—short term or long term.

Any more Ideas?

Critically Speaking

From the Daily Reckoning we read…

Money makes the world go round. Which is why watching money is so entertaining. It is like watching the Three Stooges – it’s one absurd pratfall after another.

While Wall Street redistributes wealth from the novices to the pros – from ‘weak hands” to strong ones, as the pros themselves put it – corporate America does its own share of redistribution, taking it from the soft hands of retail investors and pensioners and putting it into the calloused paws of elite insiders.

But we remind readers that the shows change. Sometimes, it’s a gay farce that viewers want to tune in to. Other times, it is a sour tragedy. Sometimes, investors are perfectly happy to pay their hired hands millions; other times, they get stingy and hold back every cent in case they need it. Sometimes too, they rush to buy whatever Wall Street offers them. Other times, the poor stockbrokers wait by silent phones.

The difference lies in the quantity of money. When credit expands, people get a little free and easy with it. They spend and lend recklessly, sure that there will always be more of it. Inevitably, they get too much of a good thing. Soon, people can’t pay their bills…lenders get scared…consumers cut back…investors panic. Then, the whole spectacle changes. No more light-hearted tap-dancing. Instead, viewers want to see the proud protagonists punished. They want to see the powerful humbled and the rich roasted.

How will you know when the playbill changes? Watch the bond market. Bond yields have been rising. This makes it tougher for the housing market to recover and pokes a hole in the huge credit bubble. So far, it is just a tiny puncture. But the hissing sound is probably enough to discourage the Fed from raising rates. And if it grows louder, it could signal the end of the biggest show on earth.

Now you might say “Come now. Why the stark pessimism?”. We reply simply with the words of the man that so many have come to know, but so few seem to understand. “Be greedy when others are fearful, and fearful when others are greedy” Warren Buffett said. Like Ben Franklin before him he is known as the world’s greatest capitalist. To transfer money begs for no more than a degree in finance, but to create wealth requires a strong sense of “frugality and industry”.

So are we being too pessimistic or are we just thinking more critically, revising our biases and attempting to rationalize an unkempt reality? To find out for sure we catch up with Big Al…

The Book of Greenspan

Alan Greenspan, the former Fed chairman, was the world’s most powerful government leader from 1987 until 2006. He was paid a reported $8.5 million advance for his forthcoming book, The Age of Turbulence: Adventures in a New World – the second highest advance ever for a non-fiction book (Bill Clinton got $10 million).

Normally, one wouldn’t expect to pay such a handsome fee for a straight-laced economist and dry government official, but Greenspan promised to deliver some “shocking surprises” in his 640-page memoir due out in September.

Sources who have been admitted to a closed interview with Greenspan explain his take on the global financial markets. He was fearful after the Stock Market Crash in October 1987. “We were on the edge of a world-wide financial collapse,” he said. It was “scary.”

Similarly, in 2001 after the terrorist attacks on New York and Washington, Greenspan again categorized the scenario as “scary” injecting over $40 Billion dollars of new liquidity, as well as slashing interest rates to a mere 1%.

Greenspan is apparently deeply worried about another case of “irrational exuberance” in the financial markets. “The biggest surprise to me is that real interest rates all over the world are at near historical lows!” he quoted in warning. He reiterated how all crises’ are “unpredictable”. The October 1987 crash, the 1997 Asian currency crisis, the 2001 terrorist attacks – they all were like “black swans,” to use Nassim Taleb’s term for unforeseeable events. Greenspan’s conclusion: “Because we cannot forecast these events, we must be prepared to deal with them when they occur.”

What should you do to get prepared? Mark Skousan tells us, “If you are currently invested in stocks (something we advise not to commence at the moment) use protective stops to get you out in times of a stock market collapse. Buy gold and silver coins for survival protection and keep a large position in cash. If Alan Greenspan and his successor Ben Bernanke are preparing for future “black swans,” maybe you should too”.