1. “Wealth is not about having a lot of money; it’s about having a lot of options.” Chris Rock.
“The only thing money gives you, is the freedom of not worrying about money.” Johnny Carson.
The best thing about having money is having good choices in life. An essential challenge if you are poor is having terrible choices. Having terrible choices feeds back in a self-reinforcing negative way. People who think that the best thing about wealth is that it allows you to have material things are, well, bonkers.
How far this faulty thinking can go is best illustrated by a story. A successful businessman parked his brand-new Porsche in front of his office so his colleagues could see it. As he stepped out of the new car, a truck passed too close and ripped off the door on the driver’s side. A bystander dialed 911 and within a few minutes a policeman arrived. Before the officer could ask any questions, the business man began screaming hysterically that his new Porsche was now completely totaled. It was only after a half hour of ranting that the officer was able to talk to the man. “I can’t believe how materialistic you are,” the police officer said. “You are so focused on your possessions that you don’t notice anything else.” The businessman was clearly offended: “How can you say such a thing?” The policeman replied: “Don’t you know that your left arm is missing from the elbow down? It must have been torn off by that truck.” “My God!” screamed the man. “My Rolex!”
2. “If you’re an average layperson, your grasp of high finance consists of knowing your ATM code.” Dave Barry. The average person is an idiot when it comes to spending and investing money. There is no getting around this fact and sugarcoating the problem does not help anyone. The skills that allowed humans to survive in a more primitive world do not naturally provide the skills necessary for a human to prosper as a consumer or investor in a modern word. In other words, evolution did not equip humans to spend and invest wisely.
The good news is: you can learn to spend and invest better since it can be trained response. The bad news is: the need to train yourself never ends, requires hard work and is contrary to the desire of most humans to enjoy present moment consumption. People who have not trained themselves to be investors need help. The best sort of help is self-help in the form of reading and paying attention. Yes, you may be able to find a trustworthy advisor to help you but you still must work and educate yourself and find an adviser who adds value – and then properly take their advice.
Unfortunately, most people don’t even know where to begin. So the result is predictable. As just one example, on the savings side of the house: Adults under age 35 (millennials) currently have a savings rate of negative 2%, according to Moody’s Analytics. That compares with a positive savings rate of about 3% for those age 35 to 44, 6% for those 45 to 54, and 13% for those 55 and older.” Bankrate reports that “26 percent of Americans have no emergency savings and 41 percent say their ‘top financial priority’ is simply staying current with their expenses or getting caught up on their bills.”
3. “About 15 years ago, I saw an Oprah show where she said, ‘Always be the only person who can sign your checks.” At the time, I had no money. I was at Second City in Chicago. I came to New York in 1997 to work on Saturday Night Live. I realized I have no head for business. And it would have been very easy for me to let someone take control of my money – for me to say, ‘Here, sign my checks…whatever.’ But that line from Oprah has always been a reminder. Today, as much as it makes me super sleepy, I have to pay a lot of attention when my business manager talks to me about money. He talks to me about taxes, and I get really, really sleepy. But I listen.” Tina Fey. I’m old enough to have seen misplaced trust go wrong many times. A classic example happens when a child is managing money for a parent and spends it on themselves in ways that the parent is unaware of (e.g., gambling, travel, toys). The person who breaks trust will often try to justify the spending by saying to themselves that they will pay it back with interest. Systems that promote trust are fundamental to commerce. For example, the invention of the cash register was an important development in spreading commerce. Another system for not having your life ruined by someone who breaks your trust is “signing your own checks.”
4. “A fool and his money are soon partying.” Steven Wright
“Cocaine is God’s way of saying that you’re making too much money.” Robin Williams. I’m unfortunately old enough to have seen people literally kill themselves because they had too much money and took their love of stimulating substances to an early grave. The number of lives and families I have seen ruined by alcoholism is too big to count. I’m not saying don’t drink, but I am saying you should be very careful – especially if you have a family history of alcoholism. Chris Rock points out that substance abuse can dissipate money fast: “Wealth is passed down from generation to generation. You can’t get rid of wealth. Rich is some shit you can lose with a crazy summer and a drug habit.”
5. “Liz Lemon (as played by Tina Fey): “I have got to make money and save it and I have to do that thing that rich people do where they turn money into more money. Can you teach me how to do that?” Jack: ““With my eyes closed.” The Mathew effect (i.e., the rich get richer) is one of the most powerful forces at work in society today. It explains a lot about many things, including income and wealth inequality. Both success and failure have always fed back on themselves, but in a digital economy that process is accelerated and creates what Nassim Taleb calls Extremistan. Edgar Bronfman said once: “To turn $100 into $110 is work. To turn $100 million into $110 million is inevitable.”
Comedians know all too well that incomes in their industry reflect a power law. Acting is similar: “‘If you’re [a big star], you’re getting well paid’” says one top agent, ‘but the middle level has been cut out.’ As an example, Leonardo DiCaprio made $25 million for The Wolf of Wall Street, while co-star Jonah Hill was paid $60,000. According to the most recent Screen Actors Guild statistics, the average member earns $52,000 a year, while the vast majority take home less than $1,000 a year from acting jobs.”
6. “When people are getting richer and richer but they’re not actually producing anything, it can’t end well.” Louis CK. During the portion of the Internet bubble that lasted from 1999 to 2000, the thing that troubled me the most was that it seemed like everyone I knew was too rich. It was possible to go out to lunch and come back $500,000 richer on paper. This paper wealth wasn’t real but yet it drove extreme “fear of missing out” which drove the bubble to ever-higher levels. If loads of people in society are not producing anything but they are getting richer nevertheless, it is what poker players call a “tell.” When the tide eventually goes out, it is easy to spot who has been swimming naked. It’s like the story about the man who walked by a table in a hotel and noticed three men and a dog playing cards. “That is a very smart dog,” said the man. “He’s not that smart,” replied one of the players. “Every time he gets a good hand, he wags his tail.”
7. “Credit and debt is the root of all evil.” Chris Rock. If you borrow money to invest, the outcome of your successes will be magnified, but so will the outcome of your mistakes. If you are investing, compounding is a tailwind, but if you are borrowing, compounding is a headwind. Few people have trained themselves to understanding the power of compounding. There is a story that is relevant: “The king was a big chess enthusiast and had the habit of challenging wise visitors to a game of chess. One day a traveling sage was challenged by the king. To motivate his opponent, the king offered any reward that the sage could name. The sage modestly asked just for a few grains of rice in the following manner: the king was to put a single grain of rice on the first chess square and double it on every consequent one.
Having lost the game and being a man of his word, the king ordered a bag of rice to be brought to the chessboard. He started placing rice grains according to the arrangement: 1 grain on the first square, 2 on the second, 4 on the third, 8 on the fourth and so on. Following the exponential growth of the rice payment, the king quickly realized that he was unable to fulfill his promise. On the twentieth square the king would have had to put 1,000,000 grains of rice. On the fortieth square, the king would have had to put 1,000,000,000 grains of rice. And, finally on the sixty fourth square the king would have had to put more than 18,000,000,000,000,000,000 grains of rice which is equal to about 210 billion tons – allegedly sufficient to cover the whole territory of India with a meter thick layer of rice.
The king should have responded in the following way: “Before you receive the rice, just to be sure you are getting what you asked for, I’d like you to count each and every grain.” It takes one second to count a grain of rice. To count the number of grains he’d been promised, it would have taken the sage a half-trillion years.
8. “A bank is a place that will lend you money if you can prove that you don’t need it.” Bob Hope. There is a related joke on the topic of collateral: A man drives into a new city in an expensive Porsche and visits a prominent bank. While there he asks for a loan of $1000 since forgot his wallet. The banker says” “OK, but you have to leave your Porsche and the keys here as collateral”. The man agreed and at the end of the week he returned the $1000 plus interest of $4 for a short term loan plus processing fee. Curious, the banker asks why he didn’t just get a wire transfer and the man replied “Where else could I park my car for $4 for a week?”
9. “My bank is the worst. They are screwing me. You know what they did to me? They’re charging me money for not having enough money. Apparently, when you’re broke, that costs money.”
“I had five dollars [in the bank] that I couldn’t have for three days until they charged me another 15. Leaving me with -10. What does that mean? I don’t even have no money any more. I wish I had nothing… I have not ten. Negative ten. I can’t afford to buy something that doesn’t cost anything. I can only afford to get something that costs, you-give-me-ten dollars.” Louis CK. One way to get to negative money is to have an overdraft protection agreement with a bank. This arrangement allows the consumers spend more money than is in their accounts for a fee that averages $34 per transaction. This is essentially a loan, and the effective interest rates are massive.
Overdraft loans are not the only problem. There are now more than 20,000 payday lenders in the United States. The mean payday loan borrower earns $22,476 a year and is paid $458 in fees. The median amount borrowed from a payday lender was $350, for a 14-day term. Median fees amount to $15 per $100, which is an APR of 322%. Borrowers with payday loans on average are in debt to their lenders for 199 days during a year.
10. “Wealth – any income that is at least one hundred dollars more a year than the income of one’s wife’s sister’s husband.” H. L. Mencken. Envy has zero upside. None whatsoever. If you can learn to turn off the envy, your life gets better. To the extent you are successful, you will hopefully be happier and you will make better decisions. But, of course, it is easier to say than do. Joan Rivers said once: “Don’t expect praise without envy until you’re dead.” If what she said wasn’t a little true, it wouldn’t be funny!
Warren Buffett put it this way: “As an investor, you get something out of all the deadly sins—except for envy. Being envious of someone else is pretty stupid. Wishing them badly, or wishing you did as well as they did—all it does is ruin your day. Doesn’t hurt them at all, and there’s zero upside to it. If you’re going to pick a sin, go with something like lust or gluttony. That way at least you’ll have something to remember the weekend for.”
11. “There are two times in a man’s life when he should not speculate: when he can’t afford it, and when he can.” Mark Twain. There is arguably nothing more fundamental to investing than the difference between a speculator and an investor. John Maynard Keynes defined speculation as “the activity of forecasting the psychology of the market.” Speculating is about trying to forecast price. Investing, by contrast, is about trying to buy an asset at a discount to its value. The semantics on this set of issues are tricky and both Robert Hagstrom and Howard Marks have nuanced and well thought through views that are worth reading.
The key to understanding the difference is determining whether a given activity is net present value positive or negative. Which reminds me or a story. A friend of mine once went into a butcher shop and said, “I will bet you $500 that you can’t reach that bit of meat,” pointing to a cut of beef hanging above him on a hook. The butcher looked up and said, “No way I will take that bet.” My friend asked, “Why not?” And the butcher answered, “The steaks are too high!”
12. Navin R. Johnson: [played by Steve Martin] “’I’ve already given away eight pencils, two hoola dolls, and an ashtray, and I’ve only taken in fifteen dollars.’ Frosty: “Navin, you have taken in fifteen dollars and given away fifty cents worth of crap, which gives us a net profit of fourteen dollars and fifty cents. Navin R. Johnson: “Ah… It’s a profit deal. Takes the pressure off.” This dialogue from the movie The Jerk has always appealed to me, since so many people in life don’t understand the difference between revenue and profit. People will often say that X “makes” a lot of money. What the heck does “make” mean? Counterfeiting? The idea that revenue and profit are not the same thing escapes too many people. Whether a business creates value and whether a business captures value are independent outcomes. Too many people have an understanding of business that is similar to the “Underpants Gnomes” in the South Park episode in which the following business plan is presented:
- Collect Underpants
This problem is made worse by certain financial practices invented by creative CFO’s. Jim O’Shaughnessy points out that many investors “argue that earnings can be easily manipulated by a clever chief financial officer, using an old joke as an example: A company wants to hire a new chief financial officer. Each candidate is asked just one question. ‘What does two plus two equal?’ Each candidate answers four, with the exception of the one they hire. His answer was: ‘What number did you have in mind?’”