Monday, June 29, 2009The Madoff Lesson
From The Curious Capitalist:
If Madoff's clients had only put 5% or 10% of their assets in his Ponzi scheme, it just wouldn't have been that big a deal. Instead we have for months been hearing story after story about individuals and families and even foundations that put all their money with the guy. These weren't the kind of folks who spend much time reading Harry Markowitz or Burton Malkiel—instead, they didn't want to have to think about their investments at all. They wanted to leave their money with somebody they trusted, and get on with their lives. Which is a pretty reasonable desire. But, it turns out, a dangerous one.
Monday, May 11, 2009A Good Read and some Happiness
It's been extra challenging to find new takes on our financial crisis that are accessible, interesting, entertaining, and educational. This article from the Atlantic Monthly qualifies on all counts. (Hat tip to John F. for pointing this one out). It's long but it is worth it. If you don't want to plough through it here are some of my favorite excerpts to entice you to read the whole thing:
I haven’t depended solely on Merrill Lynch for advice. I believed I could find investments for myself. I stayed away from mutual funds because I couldn’t figure out who ran them. And I applied Warren Buffett’s famous dictum—Don’t buy something you don’t understand—to my trading, so I bought, in our Merrill Lynch account, such companies as Johnson & Johnson and Procter & Gamble and Illinois Tool Works and Caterpillar, and these have been kind to us, until now. (I also bought the Internet company Ariba, because I heard about it from a guy who heard about it from a guy. It went up to about $1,000; I didn’t sell, of course, and now it’s at $8.) And every so often, I would follow the recommendations of the financial magazines, SmartMoney in particular, because for a long while I was an ardent consumer of financial pornography. No more. In the harsh light of recession, I find it hard to believe I listened to a magazine that, in August 2007, recommended American Express at $63 a share (a “conservative way to make hay from global credit-card growth”), which as I write this is selling for $13 a share; Wynn Resorts, $94 then, $20 now; HSBC, $93 then, $25 now; Washington Mutual, $36 at the time, seized by the government last September—rendering the stock worthless.
IT TURNS OUT that my crucial mistake was believing that the brokers and wealth managers and cable-television oracles who make up the financial-services industrial complex actually had my best interests at heart. Or so say the extremely smart—and wealthy—people I asked to help me figure a way out of my paralysis.
One of these people was Robert Soros, the deputy chairman of the fund started by his father, George. I went to see him at his office, where he spent two hours performing an autopsy on my assumptions.
“You think a brokerage should be a place you go to pay commissions for fair and unbiased advice, right?” he asked.
“Yes,” I said.
“It’s not. It never has been.” He then cited another saying of Buffett’s: “‘Wall Street is a place where whatever can be sold will be sold.’ You are the consumer of their dreck. What they can sell to you, they will sell to you.”
“But they told us—”
He went on: “You should be disheartened and disappointed. But don’t kid yourself. You’re a naive capitalist. They were never your advisers. Do not for a moment think that a brokerage firm is your friend.”
“So who’s my friend?”
“You don’t have one. This is the market.”
“Okay, that’s Merrill Lynch. What about the others?”
“They’re not your friends,” Soros said patiently.
“What about Chuck Schwab?”
“All brokers move products based on volume and commission,” he said.
I had a benevolent, advertising-induced understanding of Schwab. It was the billboards: “I’ve got a lot less money. And a lot more questions. Talk to Chuck.” And: “It’s not just money. It’s my money. Talk to Chuck.”
I thought that perhaps Schwab, a discount broker, might be able to answer the question Soros could not: Why had my full-service financial adviser stopped calling me?
I did what I was told, and called Chuck. His spokesman intercepted the call. I explained that I was trying to understand the role financial advisers play in the life of the small investor, but the spokesman, Greg Gable, said that Chuck would not, in fact, talk.
“We’re not going to be able to help you out,” he said.
But then I thought, This is Bill Ackman standing before me. He’s a great investor. Maybe he can give me some advice.
So this is what came out of my mouth: “What do you tell the ordinary mortal—say, the person who works in the press that you talked about—what do you say to the person who has $20,000, $50,000, $100,000, or $200,000, maybe, parked somewhere doing nothing? What is your advice right now for that person?”
I looked around. The wizards in the room were having difficulty calculating figures of such humble size. I had thought $200,000 sounded like a large and unembarrassing number. But the room reacted as if I had asked, “Bill, I have 75 cents in my pocket. Do you think I should buy Twizzlers or a big red gumball?”
THE WAY I SEE IT, it’s all a con game,” Cody Lundin was saying. “What I mean is that Wall Street has always been an illusion. Now it’s an illusion that’s crumbling. Wall Street is like someone who’s having heart trouble. It’s in constant need of resuscitation, but after a while, it just doesn’t work anymore. People think that Bernard Madoff was unique, that he was an illusion, but he’s just an extension of the same illusion, the same con game. This is one of the reasons I don’t like to have any debt. When you have debt, you become part of this illusion, and sometimes you get trapped by it.”
I asked Cody how he invests his money. “I don’t believe in the intangible economy; I believe in the tangible economy. When I have extra money, I buy tools, food, or land. I like to be able to see what I’m buying. And I really don’t like debt, so I’d rather not have certain things than be in debt to anyone. I just feel better knowing that I don’t owe money, and I feel good knowing that I can take care of myself. That’s the American way, to be able to be self-reliant.”
For the record, I don’t think the grid is buckling under the weight of consumer debt or the mistakes of AIG. But we’re in a strange moment in American history when a mouse-eating barefoot survivalist in the mountains of Arizona makes more sense than the chief investment strategist of Merrill Lynch.
“People need a plan, they need skills, and they need supplies. What would happen if the ATMs stopped working for a couple of days? People would panic. But you won’t panic if you’re prepared to ride out a disturbance.”
(Seth Klarman) agreed with Robert Soros that the financial-services industry treats the small investor not as a client but as a source of ready cash. “The average person can’t really trust anybody. They can’t trust a broker, because the broker is interested in churning commissions. They can’t trust a mutual fund, because the mutual fund is interested in gathering a lot of assets and keeping them. And now it’s even worse because even the most sophisticated people have no idea what’s going on.”
After 15 years of pabulum, I was enjoying, in a perverse sort of way, receiving straight talk from masters of finance.
I found this interesting quote on happiness last week here
As a motivational speaker and executive coach, Caroline Adams Miller knows a few things about using mental exercises to achieve goals. But last year, one exercise she was asked to try took her by surprise.
Every night, she was to think of three good things that happened that day and analyze why they occurred. That was supposed to increase her overall happiness.
"I thought it was too simple to be effective," said Miller, 44, of Bethesda. Md. "I went to Harvard. I'm used to things being complicated."
Miller was assigned the task as homework in a master's degree program. But as a chronic worrier, she knew she could use the kind of boost the exercise was supposed to deliver.
She got it.
"The quality of my dreams has changed, I never have trouble falling asleep and I do feel happier," she said.
Results may vary, as they say in the weight-loss ads. But that exercise is one of several that have shown preliminary promise in recent research into how people can make themselves happier — not just for a day or two, but long-term. It's part of a larger body of work that challenges a long-standing skepticism about whether that's even possible.
Thursday, April 16, 2009Good Common Sense
God did not put you on this planet to be a beggar. God put you here and said: You are the prince of the throne and an heir to all powers, principalities, and kingdoms. I will give you the Light. I will sustain you forever, and all you have to do is come back to Me.
Please read this good common sense from the excellent Nassim Nicholas Taleb in a recent Financial Times article:
People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.
Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.
Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the "Nobel" in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.
Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.
Friday, February 6, 2009A Crisis of Values
An MSIA staff member approached me the other day and said that reading this bog had made them scared to spend money. They had wanted to go to a Judy Collins concert but didn’t want to part with the $40 ticket price.
I was both proud and horrified. Proud that they were carefully evaluating where to spend their money and not acting on impulse. Horrified that they were scared of spending money.
So let me clarify. This blog has followed three main themes:
1) Yes, we are in a financial crisis but that following the principles of abundance and prosperity, also known as being a Joyful Giver, puts us on a Grace track as opposed to a struggle track. We are watchful, alert, and relaxed.
2) That deciding what your values are is a critical piece of the puzzle, for that will guide you on your actions and spending your money.
3) There is never a reason to live in lack because there is endless supply.
I do believe that the reason this economy is in such trouble is that the foundation on which it has been built over the last 25 years has been dishonesty and greed. In other words--no foundation at all. It had to fail. Dishonesty and greed are not values for sustained growth and expansion.
Please read this excellent interview with best-selling author Jim Collins in Fortune Magazine. Excerpt:
So what did these companies do to get through the tough times?
A couple of things really jump out. No. 1, in times of great duress, tumult, and uncertainty, you have to have moorings. Companies like P&G, GE, J&J, and IBM had an incredible fabric of values, of underlying ideals or principles that explained why it was important that they existed. One of the things that was very distinctive about P&G, for example, was that they said a customer will always be able to depend on the fact that a product is what we say it is - we will always build our reputation on quality. When they were under pressure to start cutting corners or use cheaper ingredients, they just didn't do that. What we have found is that what really matters is that you actually have core values - not what they are. The more challenged you are, the more you have to have your values. You need to preserve them consistently over time.
Saturday, January 31, 2009Fire Drill
When we do a fire drill at Prana it is always a nuisance. The alarm sounds, which is obnoxiously loud, you have to stop whatever you are doing, you wonder if it is a drill or there really is a fire, and if it is a fire, what to take out of your office, and if you take too much you look really stupid, but if there is a fire you look really intelligent, then again you realize that most accidents in fires happen because people try and retrieve their belongings instead of running for their lives.
Then it turns out that it is just a drill and you laugh because there are fifty people looking dazed around you and what the heck it is a nice day and you haven't seen the staff and residents in a while anyway.
One thing that nobody ever says about a fire drill is that we shouldn't do one because it is thinking negatively.
So in February we will be going through our own financial fire drill. We are going to begin with what we know, then go to what we think, then what we don't know, and lastly what we are going to do with all that.
Sunday, December 28, 2008More Education
When one person becomes free of materiality, it’s like an infection going the other way. Instead of greed affecting honest people, honest people start affecting the greedy. You let go and give to God, joyfully and unconditionally. With people who say, “I don’t have enough to tithe,” I say, “Don’t tithe,” because their feelings of lack are telling them that they’re going to need it. And with that attitude, they won’t have enough anyway. Because they’re hanging on, God can’t supply them with more. They’re holding on to it, scared to death about letting go of it. However, if they let go, they can rise to new heights inside themselves and get freer.
(From God Is Your Partner by John-Roger, DSS)
If you are like a lot of folks and are looking for a book that explains financial and investment matters in an accessible, easy to understand way, The Shortest Investment Book Ever, by James O’Donnell may be for you. I haven’t read it myself but this review was helpful and I intend to buy it. Excerpt from review:
The entire book has a feeling of a conversation, almost one on one with O’Donnell. It begins with him explaining the realities of retirement and investing. The realities of retirement today is that you cannot depend on Social Security, you will run a significant risk of outliving your savings, and you will also likely underestimate how much you will spend while in retirement. Those are just three of several reasons he cites and those are well understood ideas in the financial planning world, they’re just not well understood by many outside of that world.
Read here if you don’t know the difference between a Money Market Fund and a Money Market Account and if you want the best rates on where to park your money in relative safety (FDIC insured). Excerpt:
In the world of banking products, you are always trading off interest rate for flexibility.
Typically the higher the interest rate, the less flexible the account. Take CD rates for example, they are often higher than savings accounts and they are less flexible. You decide how long you’re willing to keep your money locked up and then pick a bank that offers the best rate for that term. If you wish to get your money early, you pay penalty. On the other end are checking accounts.
Checking accounts have the worst interest rates but offer the most flexibility. You can get your cash whenever you want it, write as many checks as you’d like, and visit your own ATM without penalty. For that flexibility, you earn very little, if any, interest.
Where does that leave money market accounts?
Money market accounts are like a hybrid between checking and savings accounts.
If one of your New Year’s Resolutions is to spend less money in 2009, you’ll do well to follow this sage advice from The Simple Dollar. Excerpt:
Focus on just one aspect of your spending at a time. Much like a diet, many people tend to dive into cutting spending with a short-term religious-like fervor, cutting every dime of frivolous spending.
Much like a diet, this works wonders in the short run. Your spending drops significantly and you feel really good about it. Eventually, though, you begin to feel the resistance - and eventually, you lose your grip and fall back into most of those old routines. Right back where you started.
Instead of attacking fifteen different bad habits at once, though, just focus on one bad spending habit.
Do you buy a coffee every morning? Focus on nothing but cutting down (or cutting out) that cost.
Do you often stop at your favorite store and spend more than you should? Focus on cutting down on those trips. And let everything else go. Don’t try to make radical changes in other aspects of your life. Just cut down on this one thing.
Saturday, December 27, 2008Education
I know people who tithe a lot and some who try to get out of it. You don’t have to tithe anything. But if you’re going to tithe, first and foremost you’ve got to be cheerful about it, and then you’ve got to be grateful and thankful about it, and finally, you’ve got to be honest inside of you about it.
There’s a trust that you’re doing what is right and proper for you.
(From God Is Your Partner by John-Roger, DSS)
1) If you have wondered what all the talk about "Treasuries" means and what is meant by the "Yield Curve" this excellent tutorial will set you straight. Highly recommended.
2) Does it seem that life has speeded up since last year, and the year before that? You are not imagining it, as you will see from this presentation.
Sunday, November 2, 2008Great Stuff
I am stilled awed by the Internet. Today I stopped by Mark Lurie's office at Prana where his wife, Julie, and he were facilitating the MSS 1--in Edmonton, Canada! Via Skype. Amazing. It is a pioneering class and it looks like this is a new era for PTS. They were able to see and hear me clearly, and I heard and saw the class of five very clearly.
In the same vein of wowness, I am amazed by how much great free stuff there is out there. If you have a Mac check out this post for 25 items of free software.
And get your pencil out and check out this sensible list of financial skills you should know. Really, make sure you know them, and if you don't find out how.
I think that's enough to keep you busy.
Wednesday, October 29, 2008Books are Food
The sleeper goes for abundance by manifesting illusion out of greed and insecurity. The one who is awakened only has to take in the next breath.
(From Tao of Spirit by John-Roger, DSS)
I mentioned yesterday that one of my core values is simplicity. Another one is frugality. A search of the MSIA database revealed very little—J-R has not said anything quotable on frugality per se. Although I have heard him refer many times to people with “champagne tastes on beer income.”
Frugality is not an attractive sounding word. For example, elegance, sounds, well, elegant. The dictionary reference I like on frugality is “that careful management of anything valuable which expends nothing unnecessarily, and applies what is used to a profitable purpose.” (From Webster’s Revised Unabridged dictionary)
Frugality to me is certainly not deprivation as the above definition shows. It is a purposeful use of resources. One of the areas I spend money on is books. Good books. Helpful books. I was feeling a little guilty about it. After all, there was an element of retail therapy involved. But people pour their life experiences into books and for $10 or so you can be the beneficiary of it. To me, it’s a deal.
When I took by guilty feelings to my equally frugal wife, Shelley, having spent some more of our money on Amazon, she said, “books are food, spend as much as you like.” That was tremendously freeing for me. Since then I have slowed down on my purchases for the simple reason that I thought it was about time to actually read the books I had bought, nonetheless I loved the way Shelley looked at it. Part of what frugality means to me is having the resources to spend money on what really matters.
Word of the Day (From Word Spy)
recession chic n. Style and elegance on a tight budget.
Frugal Tip of the Day
Check your tire pressure
Following yesterday’s post when Jim changed my air filter I mentioned I had no idea that it impacted my gas mileage. Jim explained that the two main things any person can do to improve their gas mileage is change their air filter, and even more importantly, check the pressure on their tires. If your tires are below their recommended pressure it can have a big impact on how much you spend on gas.
Smile/Zen Moment of the Day:
If you lend someone $20 and never see that person again, it was probably worth it.
If you have noticed a reduction in the amount of credit card offers you have been receiving, here is why. Great news for frugality and responsible finances, terrible news for the economy. Financial Quote of the day (From the New York Times):
After years of flooding Americans with credit card offers and sky-high credit lines, lenders are sharply curtailing both, just as an eroding economy squeezes consumers.
The pullback is affecting even creditworthy consumers and threatens an already beleaguered banking industry with another wave of heavy losses after an era in which it reaped near record gains from the business of easy credit that it helped create.
Lenders wrote off an estimated $21 billion in bad credit card loans in the first half of 2008 as more borrowers defaulted on their payments. With companies laying off tens of thousands of workers, the industry stands to lose at least another $55 billion over the next year and a half, analysts say. Currently, the total losses amount to 5.5 percent of credit card debt outstanding, and could surpass the 7.9 percent level reached after the technology bubble burst in 2001.
Tuesday, October 28, 2008Feeling Ordinary
You don't have to pretend to be anything. You can just be ordinary. You can just breathe your air in and breath your air out.
You don't have to dramatize. Just be ordinary. That is the prior condition to the energy that you have conditioned. That's spiritual. YOU can't do it. IT does it.
The reason you can't do it is because as soon as you put your mind to it, you condition the energy, and then you can't have it. And as soon as you feel it, you've conditioned the energy, and you can't have it.
So you say, "Well, I might just as well let go and let God." That's right. There's not another way you can get it.
(From The Tao of Spirit by John-Roger, DSS)
For some reason, this whole financial meltdown business and the change in the mood of the country has been making me feel very ordinary. It’s nice to know, from and MSIA perpsective, that it’s a good thing. It’s a wonderful time to re-set, and renew the values I live by, to take stock of the things that are really meaningful to me, and make sure I do what is most important. And to look carefully and see if the way I spend my money reflects those values.
I am going to begin a series of posts re-looking at our finances and their relationship to our values. Of course the first step is knowing what our values actually are. For example, one of my core values is simplicity. Perhaps you can start to write down what yours are. Start with your five main ones, and feel free to share.
(The dictionary defines values as: One’s judgment of what is important in life. The principles a person lives by.)
Frugal Tip of the Day:
Check the air filter in your car
I didn’t even know I had one, and when my mechanic, Jim Matson, said I needed it changed, I just shrugged and put it off. A month later I read in the Wall St Journal that a dirty filter substantially affects a cars mileage--by as much as 10% I checked and sure enough my mileage was lower by 10%. I drove over to Jim’s immediately to get it changed.
Smile/Zen Moment of the Day:
Be here now.
Be someplace else later.
Is that so complicated?
(From Zen Judaism by David M. Bader)
This is a big one. Financial Comment of the Day:
In the last forty years, as relative wealth and freedom have improved, the birth rate has declined. The situation where fewer numbers of working people have to pay the pensions of increasingly large numbers of retirees is simply untenable. However politically unpalatable it is for governments to deal with, there is simply no way future pension liabilities can be paid for under the current system. This probably means that some mix of measures such as smaller pensions, higher taxes, later retirement ages and greater immigration will have to be implemented, and adhered to, in order to deal with this issue.
--David Fuller in Fuller Money