"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."
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.
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,
Index Manipulation: Theft By Statistics
the Economic Machine Works. by Ray Dalio (updated March, 2012),
who runs the largest hedge fund in the word. 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.
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
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
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.
The credit worthiness of a buyer. The seller must trust but verify
- Character. The buyer's good intentions.
- Credit. The buyer's historical track record.
- Capital. The buyer's skin in the game. LTV = Loan to equity.
- Capacity. The buyer's percentage of income allocated to service
the debt. DTI = Debt to income ratio.
- Collateral. The quality of maintenance and upkeep of the
property being considered.
The Old Rules of Money - Robert Kiyosaki
- 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.
- 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
- 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.
- 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.
- 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
- 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.
- Diversify. Instead
of diversification, "focus." Follow one course until your
successful, and then keep doing it.
The New Rules of Money - Robert Kiyosaki
- More financial education.
Increase financial IQ. (Part
1/7) - Conventional Education vs Financial Literacy.
- Aim for portfolio/passive
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).
save money but "hedge".
3/7) - Why Savers Are Losers in This Economy.
- Know differences between
assets vs liabilities. (Part
4/7) - Assets vs Liabilities. Assets put money in your pocket.
Liabilities take money from your pocket.
- Good debt vs bad debt.
5/7) - Good Debt vs Bad Debt. Good debt puts money in your pocket.
Debt for cash flow.
- 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.
- Follow one course until
you're successful. (Part
7/7) - Focus! Diversification is a mistake.
Robert Kiyosaki - other
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!
Money - The New Rules of Money. ABC News interview.
Point of No Return (Part 1/2). Money collapse leads to increased
governmental control (i.e. nationalization, etc). See also (Part
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).
Above Your Means. #6 Increase assets. Buy assets first, liabilities
Isn't Risky. #8 Buy an asset with insurance.
- 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
Mutual funds / 401Ks are EVIL
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,
- Liquidity. Is available to you at any time and for any reason.
- Tax benefits. Can potentially be utilized tax free and without
- 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
Book that dispenses financial advice through a collection of parables
set in ancient Babylon. Here are the "Seven Cures for a Lean Purse"
- Start thy purse to fattening. Keep one-tenth of all that
- Control thy expenditures. Do not confuse necessary expenses
with desires; all men are burdened with more desires than they can
- Make thy gold multiply. Put the one-tenth to work earning
- 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."
- Make of thy dwelling a profitable investment. "Own thy
- Insure a future income. "Provide in advance for the
needs of thy growing age and the protection of thy family."
- Increase they ability to earn. "Cultivate thy own powers,
to study and become wiser, to become more skillful, to so act as to
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
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 SSs 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 Im 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 Americas 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
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
- 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.
- Work. "It's all hard work. Nothing comes easily. But
I have a lot of fun." Rupert Murdoch, CEO.
- 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.
- Focus. "I think it all has to do with focusing yourself
to one thing." --Norman Jewison, filmmaker.
- 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.
- 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.
- 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.
- 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
- Fire. Learn about Intake, Combustion, and Exhaust.
- Knife. An empowering tool. Learn to cut away from your body.
Always keep it sharp. Never force it.
- 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.
- Desconstruct Appliances. When you throw out an appliance,
first dissemble them with your kids. The sense of knowability.
- Drive a Car. In an empty lot!
Why Choice Makes People Miserable
- Regret and anticipated regret. The choice of one over the
- Opportunity costs. I'm doing this when I could be doing
- Escalation of expectations. The more choices, the less perfection.
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.