Thesis
Application
Events
About us
home page forums

Personal Finance

"Neither a borrower nor a lender be, for loan oft loses both itself and friend, and borrowing dulls the edge of husbandry (thrift)." --Shakespeare's Hamlet (King Claudius’ counselor, Lord Polonius, admonishing his son, Laertes, who is off to school in Paris.)

"We make a living by what we get, we make a life by what we give ." --Sir Winston Churchill.

"Wealth is what is left after all the money is gone." --Roger Hamilton.

Notes

The reality of inflation

Most people are not aware that 80% of the value of the dollar was destroyed by inflation between 1972 and 2007 as measured by official government statistics. Unfortunately, the United States is in much worse shape right now than in 1972 and inflation has accelerated.

Read: Hidden Gold Taxes: The Secret Weapon Of Bankrupt Governments. Daniel R. Amerman Turning Inflation Into Wealth uses precious metals for Asset Deflation arbitrage, rather than as a Monetary Inflation hedge.

Further reading: Puncturing Deflation Myths Part One: Inflation During The Great Depression, Inflation Index Manipulation: Theft By Statistics

How the Economic Machine Works. by Ray Dalio (updated March, 2012), who runs the largest hedge fund in the world. A detailed discussion of Credit and Money.

Savings and debt

There are unspoken assumptions underlying savings and debt: (1) that the currency is stable, (2) that assets and debts each maintain their value, and (3) that a dollar is a dollar. The problem comes when these assumptions are incorrect. With powerful inflation, what a dollar is worth changes every year (and every month), and that turns our notions of savings and thrift upside down.

Trying to outrun inflation with traditional investments is a very difficult thing to do, and becomes near impossible for most people when we consider tax consequences. Unfortunately, government tax codes don't take inflation into account. If an asset appreciates in dollar terms but not in inflation-adjusted terms, the government doesn't care. You still pay taxes on the phantom "profit" you make when you sell the asset. The primary victims of inflation tend to be the older part of the population, and the primary beneficiaries are the younger people.

Homeownership - a consumption good; not an investment (or, a liability; not an asset)

Up until the end of World War II most homeowners purchased their homes outright or on short-term notes--typically 5 years or less. Ditto auto owners. That homes were within the reach of ordinary citizens attests to a inverse relationship between credit and affordability. It appears that our forbears knew something that we do not: homes are shelter, a consumption good; they are not a capital good, an investment as they do not generate wealth-producing assets (or even other consumption goods) and income (unless, of course, they are purchased as a rental property). See To Our (Dis)Credit

When Credit = Capital

There is a legitimate and productive role for credit, when credit = capital. That is, when credit is used to finance the manufacture or acquisition of capital goods. My definition of capital goods is expansive: anything enabling the production of other capital (and consumption) goods and generates income for the producer(s). See To Our (Dis)Credit. Ultimately, savings resulting from income-producing capital is the best way to finance new capital.

Regarding leverage: "If you're smart you don't need it; if you're dumb you shouldn't be using it." --Warren Buffett.

Credit worthiness

The credit worthiness of a buyer. The seller must trust but verify (due diligence):

  1. Character. The buyer's good intentions.
  2. Credit. The buyer's historical track record.
  3. Capital. The buyer's skin in the game. LTV = Loan to equity.
  4. Capacity. The buyer's percentage of income allocated to service the debt. DTI = Debt to income ratio.
  5. Collateral. The quality of maintenance and upkeep of the property being considered.

The Old Rules of Money - Robert Kiyosaki

  1. Go to school (to get a safe and secure job). You need more education that the school system provides. Schools provide very little if any financial education. Most people are in trouble financially.
  2. Work hard to earn more money. Most people get a job as an employee or a specialist (i.e. doctor, lawyer, accountant, etc). Better to become an enterpreneur or an investor. Enterpreneurs and investors get tax breaks. Earned income is taxed at the highest rate (25-50%); portfolio income is taxed at 15-20%, passive income is taxed the least (as low as 0%). (401k is the worst investment vehicle. When you retire 401k is earned income.)
  3. Save money. The dollar is devaluing at an alarming rate since 1971. Even if the banks give you 5% interest, you can't keep up with the U.S. Federal Reserve Bank (the FED) printing money. Since 1971 the U.S. dollar has lost 80% of its purchasing power.You need to hedge money--hedging using oil, gold, and silver, which is a bet against the U.S. dollar.
  4. Buy a house. Your house is not an asset but a liability. Income (Income/Expense) and Balance Sheet (Asset/Liability). Does a house put money into your pocket or take money out of your pocket? For most people, a house takes money out of their pockets via a mortgage and maintenance and insurance expenses. If I have a rental house, then it's an asset (assuming the tenant continues to pay rent). Assets put money in your pocket; Liabilities take money from your pocket.
  5. Get out of debt. There is both good and bad debt. Most people have too much bad debt. Good debt puts money in your pocket--i.e. debt that other people are paying for me. Over time, debtors (of good debt) are the winners because they continue to pay their debts with dollars that are worth less and less.
  6. Invest for the long term (mutual funds). Need to know the difference between buy and sell. Buy a house (forever) and sell it every month (to the renter). You should be selling more than buying. Have something to sell every month. Keep your money moving. With mutual funds, you are risking 100% of your capital with someone else who takes no risk (i.e. no skin in the game) but takes a high percentage of the profit.
  7. Diversify. Instead of diversification, "focus." Follow one course until your successful, and then keep doing it.

The New Rules of Money - Robert Kiyosaki

  1. More financial education. Increase financial IQ. (Part 1/7) - Conventional Education vs Financial Literacy.
  2. Aim for portfolio/passive income. (Part 2/7) - The Cashflow Quadrant. Three types of income: Earned (taxed at the highest rate), Portfolio (taxed 15-20%), Passive (taxed 0% in many cases).
  3. Don't save money but "hedge". (Part 3/7) - Why Savers Are Losers in This Economy.
  4. Know differences between assets vs liabilities. (Part 4/7) - Assets vs Liabilities. Assets put money in your pocket. Liabilities take money from your pocket.
  5. Good debt vs bad debt. (Part 5/7) - Good Debt vs Bad Debt. Good debt puts money in your pocket. Debt for cash flow.
  6. Have something to sell every month. (Part 6/7) - The Difference Between Buy, Sell, and Fool. Buy a house (forever) and sell it every month (to the renter). You should be selling more than buying. Have something to sell every month.
  7. Follow one course until you're successful. (Part 7/7) - Focus! Diversification is a mistake.

Robert Kiyosaki - other

  • The Four Asset Classes. (1) A business, (2) Real Estate (wisely using debt), (3) Stocks/Bonds (you have to know what you are buying), (4) Commodities (i.e. gold, silver, oil companies). Jobs are *not* assets--you cannot sell your job, and you can get fired!
  • Good Money - The New Rules of Money. ABC News interview.
  • The Point of No Return (Part 1/2). Money collapse leads to increased governmental control (i.e. nationalization, etc). See also (Part 2/2)
  • Cashflow Quadrant. #2 (E)mployee (job - benefits and security), (S)elf-employed (you own a job; no work - no pay), (B)usiness-owner (can leave and business will continue), (I)nvestment-income (automatic paycheck).
  • Live Above Your Means. #6 Increase assets. Buy assets first, liabilities second.
  • Investing Isn't Risky. #8 Buy an asset with insurance.

Warren Buffett

  • Success principles. Integrity, Intelligence, and Energy. If they don't have the first two, the latter two will kill them. If they don't have integrity you want them dumb and lazy, not smart and energetic. See here. Buffett discusses Integrity (i.e. character qualities). General qualities for success: have an upbeat attitude on life, generous, humorous, do more than his share, thinking about something nice to do for others. People that turn you off: take credit for things they didn't do, they don't show up on time, a little dishonest about things. See here.
  • On investments. Figure out what is important and knowable (i.e. understandable business). You need emotional stability--just follow the facts and stick to your conviction. See here. Buffett's investment strategy is based on Benjamin Graham's, "The Intelligent Investor," which is focused on value investing. The idea of value investing is to buy stocks whose price is lower than their true value and then to hold those stocks until their price returns to the true value earning a return on the investment.

Mutual funds / 401Ks are EVIL

  • The 401K Fallout. A 60 Minutes episode describing the flaws with 401Ks. Most of which use mutual funds that have mediocre performances at best, with endless fees that are hidden in the fine print.

Infinite Banking - Become your own banker - (Better than a 401K)

Uses an index-universal life insurance (with floor of 3%) or whole-life, dividend paying, mutual life insurance. Infinite Banking Explained. Basically, you pay into a whole-life insurance policy until it has a good cash balance. Then, when you need a loan, you borrow from the policy and pay it back with interest, as if it were a loan from a bank. The key is to have the discipline to pay yourself back. If you don't have the discipline, then this plan will not work. Some of the unique benefits:

  • Rate of return. Earns a small, guaranteed rate of return, usually 3%.
  • Liquidity. Is available to you at any time and for any reason.
  • Tax benefits. Can potentially be utilized tax free and without penalty.
  • Better than a 401K. In a 401K, if you take out your money early you get penalized. Not so with this plan.

Infinite banking notes:

Here's a video series I need to watch. It's a little slow...

The Richest Man in Babylon (published in 1926 by George Samuel Clason)

Book that dispenses financial advice through a collection of parables set in ancient Babylon. Here are the "Seven Cures for a Lean Purse" (see here):

  1. Start thy purse to fattening. Keep one-tenth of all that is earned.
  2. Control thy expenditures. Do not confuse necessary expenses with desires; all men are burdened with more desires than they can gratify.
  3. Make thy gold multiply. Put the one-tenth to work earning interest.
  4. Guard thy treasures from loss. "Guard thy treasure from loss by investing only where thy principle is safe, where it may be reclaimed if desirable, and where thou will not fail to collect a fair rental. Consult with wise men. Secure the advice of those experienced in the profitable handling of gold. Let their wisdom protect thy treasure from unsafe investments."
  5. Make of thy dwelling a profitable investment. "Own thy own home."
  6. Insure a future income. "Provide in advance for the needs of thy growing age and the protection of thy family."
  7. Increase they ability to earn. "Cultivate thy own powers, to study and become wiser, to become more skillful, to so act as to respect thyself."

Four quadrants

The individuals value set or mission in life regarding: (1) money, (2) core assets, (3) heritage, and (4) contributions. Most important is getting an education on how to become an entrepreneur. Learn and start your own home business. Secondly, learn how to keep and grow the money you earn. Learn how to be your own banker (i.e. infinite banking concepts) and seller. Learn the difference between money and currency (i.e. fiat money). [Betting on Volatility: If you believe a market is going to be volatile over a period of time, you can back up your view with a binary bet or an Option. Need to read up on Volatility arbitrage.]

Social Security

Further reading: Social Security - January 2012 and Beyond

We crossed a big corner at SS in 2010 when the first annual cash flow deficit was reported. SS will never again see a cash surplus. The only question is how rapidly the deficits will rise.

If we experience a recession in 2013, and the Fed maintains its low interest rate policies, it will be a very bad year for SS. The cash deficit would explode under these conditions. It could easily exceed $100b. The wheels will come off of SS’s cart. As we are seeing now, it is extremely difficult for SS to bounce back in good times. it will be impossible if we hit another economic slow patch.

This is precisely the scenario I’m anticipating for 2013. It will be a decisive year. If we end up going down an economic road as I have described, then SS will fall into full deficit (operating cash deficit + interest income). That would happen circa 2015. The Social Security Trust Fund is forecasting this event but it believes it will happen in 2021. When people realize that the Trust Fund has topped out, and the implications are understood, significant changes at SS will follow.

We won't see any reforms in America’s entitlement programs in 2012. The election will see to that. The immediate priorities of 2013 will not include SS. The other problems facing the economy will be more pressing. But by 2014, the jig will be up. By then, there will have been so much damage to SS that a very significant set of changes will be required to minimize what will then be seen as a systemic risk.

Milton Friedman

Through most of the U.S.'s early history, the government didn't take more than about 3% of GDP. When you have more government, corporations tend to take it over, and the two form a coalition against the ordinary worker and consumer. We don't want government to step in and help corporations. We want corporations to be subject to the marketplace and competition, to make a better product at a lower cost.

Capitualism is a necessary condition for freedom, but not a sufficient condition for freedom. It doesn't mean that wherever you have capitalism you have freedom, but rather, wherever you have freedom you will have capitalism.

Socialism. A supposed emphasis on moral values and ignorance or misunderstanding on the relationship of moral values and economic systems. Supposed objectives of equality and social justice. But you have to ask the question: Does it produce the results?

The fallacy of money versus wealth (i.e. goods and services). What the government takes from the people via tax is money that would otherwise be used to create wealth.

What Leads To Success

  1. Passion. "I'm driven by my passion." --Freeman Thomas, car designer, DaimlerChrysler. The do it for love, not money. "I would pay someone to do what I do." --Carol Coletta, radio producer, Smart City.
  2. Work. "It's all hard work. Nothing comes easily. But I have a lot of fun." Rupert Murdoch, CEO.
  3. Good. To be successful put your nose down in something and get damn good at it." --Alex Garden, game developer. There is no magic, it's practice, practice, practice.
  4. Focus. "I think it all has to do with focusing yourself to one thing." --Norman Jewison, filmmaker.
  5. Push. "Push yourself. Physically, mentally, you gotta push, push, push." --David Gallo, marine scientist. You have to push through shyness and self-doubt. "I always had self-doubts. I wasn't good enough, wasn't smart enough. I didn't think I'd make it." --Goldie Hawn, actor. It's not always easy to push yourself, that's why God invented mothers. "My mother pushed me." --Frank Gehry, architect.
  6. Serve. "It was a privilege to serve as a doctor." --Sherwin Nuland, professor of surgery, Yale. To be a millionaire you have to server others with something of value.
  7. Ideas. "I had an idea--founding the first micro-computer software company..." --Bill Gates, Microsoft. There is no magic to ideas, just: Listen, Observe, Be Curious, Ask Questions, Problem Solver, Make Connections.
  8. Persist. "Persistence is the number one reason for our success." --Joe Kraus, co-founder, Excite. You have to persist through failure. You have to persist through CRAP (i.e. acronym for, Criticism, Rejection, Assholes, and Pressure).

Five dangerous things you should let your kids do

  1. Fire. Learn about Intake, Combustion, and Exhaust.
  2. Knife. An empowering tool. Learn to cut away from your body. Always keep it sharp. Never force it.
  3. Throw a Dangerous Object (like a Spear, etc). Our brains are wired to throw things. Add strength to the muscles and brains. Attention and concentration.
  4. Desconstruct Appliances. When you throw out an appliance, first dissemble them with your kids. The sense of knowability.
  5. Drive a Car. In an empty lot!

Why Choice Makes People Miserable

  1. Regret and anticipated regret. The choice of one over the other.
  2. Opportunity costs. I'm doing this when I could be doing that.
  3. Escalation of expectations. The more choices, the less perfection.
  4. Self-blame.

    The official dogma of choice is that in order to maximize welfare, we should maximize freedom and choice. And that more choice means more freedom, and more freedom means more welfare. Too much freedom and choice leads to paralysis.

See also: (TED Talks) Dan Gilbert: The surprising science of happiness.