In the midst of the constant headlines concerning government ‘bailout’ initiatives that have resulted from a credit crisis in the financial sector, one must stop to wonder whether the government is acting responsibly and what the likely results of these actions will be. (In truth, one doesn’t have to wonder that much … the government is acting with an almost complete lack of anything resembling financial responsibility.)

The core driver of this problem is that public agencies making market decisions will tend to make them based on political expediency instead of market effectiveness.  From the perspective of a politician, “long-term” thinking only lasts until the next election.  The reason is because most politicians are unconcerned what will happen after they are out of office and can no longer take credit for successes, and will not be subject to blame for problems.

Unfortunately, this decision making framework has spilled into the realm of government subsidies and bailouts.  This has amplified the scope of collective irresponsibility since public resources are not only used to sustain an out of control government, but have now been expanded to supporting businesses that are uncompetitive in the free market and depend on political support with taxpayer money for their success.  This has allowed many companies and executives that made destructive decision to stay in business because of public funds that were granted by government officials.

In a free market, companies that make critical errors would be re-structured in bankruptcy, or liquidated and sold off to new investors.  Unfortunately, the US government is choosing to drastically increase the amount of currency in circulation as a means to finance its spending, including bailouts to keep the failing companies afloat and stem the impact of a sharp reduction in credit availability.  (This process is also known as ‘printing money’)  This drastic increase in circulating dollars will eventually produce significant inflation.  This is caused by increasing the amount of currency in circulation, but keeping the amount of national output the same . . . more money chasing fewer goods MUST result in increased prices.

When inflation occurs, it de-values savings, home equity, and fixed-rate investments like CD’s and Bonds because those instruments tend to increase in value very slowly, and the purchasing power of the dollars they are denominated in consistently erodes.  Conversely, inflation rewards people who have taken out a large amount of fixed-rate debt by de-valuing the principal & interest payments.  Effectively, inflation punishes responsible behaviors like saving and paying down your mortgage while rewarding irresponsible behaviors like taking on large amounts of debt.

Ultimately, living with an irresponsible government means that you will be indirectly punished for acting responsibly.  By working hard to earn a high income, keeping lots of money in savings, and paying off your mortgage, you will be set-up for a tremendous double-whammy from taxes and inflation.  The massive government deficits make some form of future tax increases all but inevitable … much of this will be driven by inflation pushing up the nominal wages of individuals and corporations, driving “bracket creep” where people’s higher nominal income is taxed at higher marginal rates.  The second half of this pitfall comes from de-valued savings and home equity.  The people who have worked the hardest, sacrificed the most, and saved the most diligently will be punished by the inevitable inflation that is bound to stem from many decades of irresponsibility.

Fortunately, there is a way that regular people can profit from future inflation.  The prime strategy for beating inflation involves using long-term debt leverage to purchase investment assets that produce income and appreciation.  The most common way to do this is through rental real estate investments.  The way this works is that you purchase a rental property with a fixed-rate loan and lease it out to tenants.  When the inflation starts to hit, it will push up the home value & rents because the increased amount of dollars in circulation will be chasing after the same number of houses & rental units.  Since your investment is financed at a fixed interest rate, your expenses will stay relatively flat while your income inflates.

In the end, there is nothing that any one person can do to stem the tide of collective government irresponsibility that is overshadowing the entire global economy.  However, there are things that each individual person can do to protect themselves and their families from the effects of inflation.  Ultimately, our future is driven by the decisions that we make each and every day.  As you go throughout life, make sure that each decision you make is one that will help to create a brighter future.

 

There is a famous statement that an optimist will see a glass half that is full, while a pessimist will see a glass that is half empty.  The basis behind these distinctions is that people who possess a more optimistic worldview tend to focus on what is there, what is present, what is available.  Conversely, people who possess a more pessimistic worldview tend to focus on what is missing, what is gone, what cannot be attained.

To many people, the color of reality is closer to the view of the pessimist than the optimist.  After all, life isn’t fair.  The nice guy always seems to finish last.  Vast inequality exists between people and between countries that defy many people’s imagination.  How can somebody possibly be an optimist?  Optimism seems to be the province of a foolish Pollyanna type worldview that fails to comprehend reality.

The Truth of Reality

In order to objectively examine the quality and power of our worldview, it is important to gain an understanding of the true and full nature of reality.  Simply put, reality is what is.  Reality is and only can be what exists, what is here, what is present.  Reality must be something … it must contain a form.  Reality must be defined by substance, it cannot be defined by a vacuous and subjective notion of what is missing.

Understanding this fundamental truth focuses the context of our experience, and allows us to live in the world of what is.  By focusing our attention on what is, instead of allowing ourselves to be distracted by wants and wishes, it creates a much more solid basis upon which to act.  Accepting what is does not mean that we cannot create change … it means that we understand how change works within the context of our present reality.  We must influence our reality in order to change it.

The Power of the Optimist

The power of seeing a half full glass comes from the focus on objective reality that can only spring from what is.  The reason for this is because our only point of influence on reality comes when we change the nature of what is.  This requires us to focus on the things we can influence, and only the things we can influence.  Most people waste their creative power by obsessing on what they feel to be missing, , what they feel to be wrong, or what they feel to be unfair.

The power of the optimist flows from their focus on what is available and what is present.  Most people possess far more power to influence their life than they are able to understand.  Our futures can be definitively shaped by the decisions that we make.  As the quality of these decisions increase, and as the proximity of these decisions converge on the segments of our life that we can influence and change, our control on the future increases.

Possibility Exists Beyond the Reach of Blame

A principal problem in the interactions between most people, companies, and governments is that too much discussion revolves around blame.  A prevalent destructive assumption is that anything which goes wrong must be somebody’s fault.  This creates a fire storm of blame shifting and blame deflecting.  To the person who seeks to influence the course of their future, they must learn to look beyond whose fault the problem is, and focus on what can be done to improve the future.

To the extent that mistakes are or have been made, it is important to learn from them so that they are not repeated.  However, excessively focusing on who is to blame for mistakes all but guarantees a lack of future achievement.  Even when bad things happen to us that we do absolutely nothing to cause, we must understand that our lives exist in a reality of random events that are largely beyond our control.  Railing out against the person who caused our hardship does absolutely nothing to improve our situation.

When understood and applied properly, these principals create a tremendous base of power for us to influence our personal, professional, and financial lives.  Many of our personal relationships encounter difficulties when we blame one another for problems or mistakes.  Many of our workplace problems revolve around assigning blame, shifting blame, and attempting to avoid blame.  Many of the financial problems that people work themselves into evolve from an unwillingness to admit past mistakes and learn.

In the end, each of us possesses the power to influence the course of our personal, professional, and financial future.  Unfortunately, there are startlingly few who choose to use this power.  Too many people allow their pride, politics, and emotions to block the actions and decisions that can shape the course of their future.  Too many people cannot let go of their conceptions about the problems and unfairness of life, and fail to create the changes in their own life and the lives of people about them that can help to bring about the changes they desire.  Each of us must make our own choices, must decide how we will view the glass, and mus take ownership over the future direction of our life.

 

There is a disturbing trend among both people and politicians to find somebody to blame for each setback, difficulty, or annoyance they experience.  This phenomenon frequently provides a convenient alibi for failure, as some opaque persona such as ‘big business’ or ‘the man’ is blamed for our problems.  The most critical danger of focus on these ghosts of failure is that they give us a subconscious excuse to avoid doing what is necessary for success.  However, the realization of our goals, dreams, and aspirations will require many of us to ‘man up’ (or ‘woman up’ as the case may be) to make our goals happen.

The importance of ‘making it happen’ cannot be overstated, since it shifts the responsibility for our circumstances squarely onto our shoulders.  This means that we can no longer place the responsibility for our wellbeing onto other people (or politicians) and must take full accountability for our achievements and failures.  This means that if there are great things we want to achieve, that we must personally take action.  If there is something that we want to do in the future, we must first become educated and then we must take action.  If things don’t turn out the way we wanted, it is our responsibility to study our decisions and learn what we can do differently next time.

Make Your Own Luck

There is a popular aphorism that you make your own luck.  While this is not completely true, it contains a valuable nugget of insight.  Luck is a factor that is beyond our realm of control.  However, we have supreme control over whether we will be prepared to reap the benefits when fortune turns in our favor.  Every person experiences opportunities that emerge throughout the course of their lives.  However, not all people are willing or able to capitalize on opportunity when it occurs.  Thus, by perpetually preparing yourself to capitalize on opportunity, you will be able to create the conditions for success when luck turns in your favor.

The truth is that we each have the ability to influence the shape and course of our personal, professional, and financial future.  The decisions we make create the basis for our future achievements.  Each step that we take builds on the actions and decisions that we made in the past.  We make our future happen through intelligent decisions.  If we want to enhance the trajectory of our future, we only need to increase the number of intelligent decisions that we make.  In this way, our part of success boils down to a science of increasing our velocity of intelligent decisions.

We may not be able to directly create the luck that we need to achieve all of our ambitions, but we can make the conditions happen that will allow fortune to smile on us.  If we truly wish to achieve our ambitions, we must move beyond ‘hoping’ that they happen and embark on a journey to ‘make’ them happen.  This is likely to involve a significant intellectual commitment, but is a matter of critical importance to our personal, professional, and financial lives.

In practice, this mindset is quite liberating since it frees us from the constant feeling that we are being held down by somebody else.  The counterpoint to that mental freedom is the realization that all of the obstacles in our way that prevent us from achieving success are really self-imposed.  The truth is that those self-imposed obstacles have always been there . . . it’s just that we were previously unaware of their existence based on a belief that something external was responsible for our failure.  Once we become aware of our ability to influence our own achievements, it becomes our responsibility to identify and remove the obstacles that we have placed in our own way.

 

One of the things that we have been conditioned to believe in both business and in life is that mistakes and errors need to be avoided.  This idea pervades our education system, our mindset as employees, and our behavior as business owners.  It is important to understand that mistakes cannot be completely avoided.  Thus, an attempt to “eliminate” mistakes generally results in hiding them until they are so large that they become devastating.

This is what precipitated the financial crisis of 2008.  A long history of regulations that consolidated power in major banks, and policy decisions that attempted to “fine tune” the economy and seemingly avoid a crisis resulted in a financial disaster that is beyond the ability of most people to comprehend.  The thing that is important to understand is how the financial crisis emerged from an attempt to disguise risk and hide errors instead of any particular lack of regulation.

The financial system was built for “stability” since each bank purchased a “diversified” portfolio of debt from other banks.  This meant that all of the major banks had access to a regular stream of capital … until investors became justifiably concerned that they might not be paid back.  This happened because the banks financial decisions became progressively more risky, until the plank finally broke and Bear Sterns announced they would not be able to pay their financial obligations since nobody would lend them new capital, and their investment portfolio contained a large amount of toxic debt.  What precipitated was a freeze of credit markets as all the players became concerned that they would lose their investment if they loaned to the troubled entities.

What all of this demonstrates is how a cluster of (minor) errors is necessary for a robust business, life, and economy.  Making mistakes is how we learn.  It is much better to learn from small mistakes than from large ones, and a system that is built around steady course-correction from many small errors is much more robust than one that attempts to conceal errors and mistakes with bailouts and guarantees.  Sooner or later these concealed risks will become too large to conceal, and will result in a collapse.

An example of this phenomenon in the physical world is to consider driving an automobile.  If you run into a wall at 5 mph, it will cause a small degree of damage to your car, but will not result in any permanent harm.  Furthermore, it will serve as a legitimate warning to avoid driving habits that could cause collisions.  In fact, you could reasonably sustain 100 of these 5 mph collisions without significant adverse effect, outside of the nuisance associated with re-painting your bumper.  However, let’s assume that a new technology designed to avoid collisions warns you when you are about to hit something.  Furthermore, let’s assume that the quality of your automobile rises such that you can run at very high speeds and receive preliminary warning before a crash occurs.

Carrying this analogy further, let’s assume that you are able to drive your car at 500mph, achieving incredible mobility and with no perceived risk because of your warning system.  You have increased the efficiency of your transportation by a factor of one hundred.  You are a genius of efficiency and mobility … until something in the system doesn’t work.  What happens when your warning system does not signal correctly while you are moving at 500 mph?  The answer is that you become involved in a crash that is fatal to you, everybody riding with you, and everybody around the area of the accident.

Now take this same principal, and apply it to the entire financial system.  What results is the situation that precipitated the financial crisis of 2008.  The way that future disasters of this variety can be mitigated is by ensuring that mistakes are localized instead of centralized.  In the realm of our personal lives, this means taking more small risks.  This allows us to learn from our failures and evolve them into future successes.  It also avoids a situation where years and years of playing it safe back us into a corner where we must take large risks all at once, and place our entire future on a single roll of the dice.

In the end, mistakes and errors are impossible to avoid.  They can be hidden or concealed for a certain amount of time, but they will eventually come to bear.  The key principal for people to understand is not how to avoid mistakes, but how to ensure that the impact of our mistakes stay small and localized so that we can learn from them to achieve more in the future.  Ultimately, each of us are responsible for our own personal, professional, and financial future.  In order to get there, it turns out that a perpetual cluster of (minor) errors is a necessary part of the growth and development that we all need to reach our goals.

 

Contemporary business theory places great amounts of emphasis on strategy and long-term thinking.  These concepts are most definitely of great importance, but there is one critical aspect of successful long-term strategy that many theories and systems fail to comprehend.  That critical insight is how all strategies, regardless of how large or small ultimately distill down to steps that must be acted upon in the present tense.  Furthermore, these action steps frequently break down into smaller steps.

Thus, it becomes true that the largest, most grand, and most complex strategies all come down to one small step.  That one step is the next step.  Once the next step has been taken, focus shifts tot he step after that, and the step after that, and the step after that.  The long-term perspective must always yield to the immediate action, because long-term results can only be accomplished through a continuous string of actions.

Another way of considering this concept is to understand the relationship between past, present, and future . . . both in regards to thought and action.  The past is beyond our ability to influence, but its insights are ours to discover.  Yesterdays victories cannot be relied upon to sustain us into the future, and yesterdays failures have passed into history.  We cannot exist in the past, because the past is gone.  The present is where we recognize current opportunities and act to capture them.  The knowledge of the past can help us to see opportunities, but they must all be captured in the present.

The present represents both the past of our future and the future of our past.  Todays opportunities will be gone tomorrow, and tomorrow’s opportunities cannot be captured today.  As we look into the future, we see the present that has not yet come to past.  None of us can act in the future until the future becomes the present.  The opportunities of the future are valuable to understand, as they will pass into the present tense over due time.

We must be mindful of the future, but we cannot live in the future.  The future is most certainly inevitable, but all that we do must take place in the present.  Furthermore, it is not practical to indefinitely delay all enjoyment of life for the sake of the future.  Life is for living, and each person must balance the present against the future, without being weighed down by the past.  We must understand that the future can only be built by decisions and actions that we take in the present.  Thus, what we do now is ultimately what is of the greatest importance, since the future necessarily build on the present.

In this way, we realize success by taking one small step . . . our next step.  The steps that we take are shaped by our vision of the future, and our recognition of opportunity.  However, the only way that we can turn this into reality is by taking action in the present.  Each of us has the distinct opportunity to shape our lives by taking action right now.  Success is not a multi-thousand step process, it is a one step process . . . your next step.  By consistently taking action on your next step toward success, it will keep you perpetually moving toward greater and greater achievements.  Each of us can increase the influence that we wield over our lives by taking action right now on one small step toward success.

In the end, achieving our ambitions is both more complex and more simple than most people realize.  The complexity arises from prioritizing between all the things that we wish to achieve and all the decisions that we must make.  The simplicity comes from the fact that all achievements result from individual actions.  And we can achieve our goals by isolating and prioritizing the individual actions that need to be taken.  Thus, one small step … followed by another and then another is the way that we gradually build the stairway to our goals and ambitions.

 

One of the ideas that has become quite pervasive within the minds of investors is the notion of a “good stock” or a “good property” to own.  This notion stems from a general desire on the part of most people to own things of quality.  In our personal life, this frequently manifests itself as a desire to own a comfortable home, and a reliable automobile.  Quality gives us a feeling of safety and security.  Thus, it seems completely natural to want our investments to be the stock of a high quality company, the bonds of a high quality corporation of government, or a property that is desirable in both its quality of construction and location.  The problem with this view is that it only provides one half of the information that you need to determine whether an investment is a good deal.

The second half of this investing puzzle is price.  Put bluntly, the quality of a stock, bond, or property investment only matters in relation to its price.  This means that a ram shackled, blighted property can be a phenomenal deal at a certain price.  The stock of media darling companies such as Apple, Google, and Amazon can all be terrible investments at a certain price.  It is certainly true that high-quality investments can frequently justify a higher price than lower quality investments.  However, it is equally true that any investment can be a spectacular deal if the price is right.

The key for investors is to determine when the price of a high-quality stock, bond, or property is over-valued, or conversely when the price of a lower quality stock, bond, or property is under-valued.  Any investment is a good deal at one price, and a poor deal at a different price.  Unfortunately, it is frequently very difficult to determine exactly where these two boundaries are drawn for any particular investment.

When estimating the appropriate price for a particular investment, there are two relevant factors that need to be considered.  The first is the expected future price, the second is expected future cash flow, and the third is taxes and inflation.  When combined, they will create a holistic picture of the value for any particular investment.

Expected Future Price

• In the world of stock and real estate investing, this is referred to as appreciation.  Fundamentally, it represents the expectation that the future price of an investment will be higher than the price you paid to purchase it.  This is frequently referred to as the ‘buy low, sell high’ philosophy.  For most investors, this is the primary source of value that they see.  Stock market tickers report the price of securities, and the Multiple Listing Service reports the price of properties.
• However, the ubiquitous availability of price information frequently causes people to over-emphasize price appreciation as a source of value.  It is most certain that price appreciation is an important source of value for investments, but it is certainly not the only value vector.  The fact that so many people focus on market prices has made them become very volatile over the past few years.  Values for stocks, bonds, and real estate have all fluctuated significantly.  This has made future price appreciation very difficult to predict.
• In addition to all of this, there is one further characteristic of price that investors must take into consideration.  In order to capture the benefit of price appreciation, you must sell the investment.  This means that watching the value of your stocks or real estate skyrocket means absolutely nothing unless you sell and lock-in the gain.  Thus, in order to realize the full gains from future price appreciation, it means that you must sell at the right time.  In practice, this is very difficult to do and frequently results in selling while values are still going up.

Expected Future Cash Flow

• Another key characteristic of what makes a good vs. bad deal for investors is the cash flow that is produced.  In the case of stocks, this comes from dividends.  In the case of bonds, this comes from interest payments and the future return of the bond face amount.  In the case of real estate, this comes from rents that are paid by tenants for the use of your property.  The importance of cash flow to the value of an investment is that it represents a current, tangible return.  Typically, investments that produce the best cash flow don’t always have the best appreciation.  However, they also tend to be less volatile since the price tends to be more highly correlated with the rate of cash generation than the market expectations for future price increases.
• The way that most investors articulate the future cash flow of an investment is through its yield.  In simple terms, the yield of an investment represents its annual cash flow divided by the price paid for the asset.  In the case of stocks, the “dividend yield” is the annual dividends divided by the current market price.  In the case of rental real estate, the “capitalization rate” is calculated by dividing the annual net operating income of the property by the purchase price.  In the case of bonds, the discounted future value of all payments is compressed into an internal rate of return, which is articulated as the bond yield.
• In most cases, the rate of cash generation for an investment is much less volatile than the market price of that investment.  Stocks that pay dividends tend to adjust their dividend rate at a much slower rate than the market value gyrations of its price.  Rents from income properties tend to shift much more slowly than the value of the property.  Bonds typically feature a fixed interest and repayment price, with their market value being determined by the movement in yield rates for similar instruments.  When market yields increase, the price of bonds currently on the market go down.  When market yields decrease, the price of bonds currently on the market go up.

Taxes and Inflation

• The final key characteristic that differentiates good vs. bad investments is inflation and taxes.  Inflation represents the erosion of you investment’s purchasing power and taxes represent the amount of your gains that need to be paid to the government.  One of the oldest and most important concepts in finance is that “It’s not what you make, it’s what you keep” … fundamentally, this means that the “real” rate of return for your investments is much more important than the “nominal” performance.
• Starting with inflation, it is important to understand that when the amount of money in circulation expands more quickly than the amount of goods and services being traded, it creates upward pressure on prices.  For some asset classes, the effect of inflation is relatively benign, for others it is beneficial, and for some it is devastating.  By and large, property values tend to be lifted in proportion with inflation, while cash flows from dividends and rents are also increased by inflation.  Some stocks move up with inflation, but certainly not all.  On the other hand, bonds with a fixed interest rate are destroyed by inflation since it de-values the interest payments.  Conversely, fixed-rate debt that you owe is wiped away by inflation as the dollars you use to re-pay the loan become less valuable.
• Another key characteristic to understand is taxes.  Different types of income are subject to different rates of taxation.  Generally speaking, income that is earned from a job encounters the most taxes.  Income that is earned passively encounters less taxes, and income earned from capital investment encounters the least taxes.  Astute investors also understand the impact of legitimate business deductions, non-cash expenses such as depreciation, and deferring capital gains through a 1031 exchange to reduce their tax burden down to the legal minimum.  In many cases, it is tax advantages that turn a good investment into a great investment.

Ultimately, it is the responsibility of each person to determine what constitutes a superior investment deal.  Since people have different appetites for risk, there will always be a variety of investors bidding for a variety of assets.  What is most important for the individual investor to do is take an honest assessment of their personal investment tolerance and make decisions that incorporate all of the major value factors.  By balancing the future price, future cash flow, inflation risk, and tax characteristics, it will allow you to build a strong portfolio of optimized deals.

 

The financial planning profession has a long history of demonstrating the power of compounded growth to clients who are looking to invest for the future.  Typically, a chart will be shown that shows the difference between investing $100 per month at 1%, 5%, 8%, and 10% rates of return for 20, 30, and 40 years.  As expected, the results are typically astounding.  The extended impact of compounding for a longer period of time at a higher rate of return creates a tremendous difference in the amount of compounded returns after a long period of time.  Thus, the fundamental assumption behind all contemporary financial planning models is to invest money into financial products that have historically produced a high rate of return so that you will be able to enjoy a happy and comfortable retirement from your compounded returns.

Unfortunately, there is one question that never seems to enter into the conversation.  This question is whether the historic rates of compounded growth for the stock market will continue into the future?  If the returns produced by the stock market in the past do not extend out into the future, there will be many hundreds of millions of people who have their entire financial lives decimated.  And the shock will be even more severe, as many people have not even considered that it could happen.  For many years, it has been assumed that the stock market can continue to grow faster than Gross Domestic Product (GDP) indefinitely.  However, that assumption may be faulty.

Currently, the ratio of total US Stock Market Capitalization compared against GDP stands at approximately 95%.  This means that the total value of all US stocks adds up to 95% of total US economic output for one year.  This ratio is consistent with the 10-year average from 2000 through 2010, but is higher than the 20-year or 30-year average for the stock market to GDP ratio.  This disconnect raises an interesting question.  How much longer can the stock market continue to grow faster than the economy?

It is important to consider that the overall stock market can only grow if new capital is invested.  Individual stocks will go up or down in value as people switch from holding one company to holding another, but there is only one thing that can propel the entire market upward, and that factor is additional investment.  However, that additional investment must come from economic activity.  What happens if the level of investment required to continue driving the stock market upward at historic rates is larger than the amount of economic growth?  The answer should not come as a surprise … if the money to invest isn’t being generated by the economy, it won’t be invested, and the stock market won’t grow at it’s historic rate of appreciation.

To illustrate this point, both total stock market capitalization and GDP have been projected out at historic growth rates over the next 15 years, starting with actual data from 2010.  Over the last 30 years, the total stock market capitalization has grown at approximately 9% per year, while GDP has grown at approximately 5% per year.  When these assumptions are extended out to 2025, the infinite compounding fallacy becomes quite clear.  in order to maintain the historical rates of appreciation that are used in almost every financial planning model, the stock market will need to be $17.4 Trillion dollars larger than US Gross Domestic Product by the year 2025.

When one considers that this gap represents approximately 57% of Gross Domestic Product, it becomes increasingly evident that the total stock market capitalization simply cannot continue to grow at its past rates because there is not enough additional output being generated to fund the incremental investments that would be necessary to continue driving market values upward.  Thus, the answer to the question of what will happen to stock market capitalization is very apparent.  Unless the economy grows dramatically faster than it has in the past, there will be insufficient capital to propel the stock market values upward at previously experienced rates of appreciation.

Upon further analysis, the problem grows even more complicated.  Since the ratio of total stock market capitalization to GDP is currently equal to the 10-year average from 2000 through 2010, and is higher than both the 20 and 30 year averages.  This means that if the ratio between stock market capitalization and GDP regresses back to historical levels, the growth in stock market valuation will not only be constrained by GDP, but may actually grow slower than overall economic output.

Over time, it is not possible for the stock market to grow nearly twice as fast as the economy.  Eventually the capital required to drive further value growth equal to past rates of appreciation will not be available.  In this way, the fallacy of infinite compounding becomes strikingly apparent.  Financial planning models have been built on the assumption that one can passively generate a rate of return significantly higher than the growth rate of the overall economy.  Over time, this assumption will prove to be faulty, and spell ruin for the traditional models of investment planning.

So what can a person do?  It’s one thing to point out the problems with compounded appreciation assumptions built into financial planning models, but it’s another thing entirely to plot out a new course that overcomes these challenges.  The truth is that this course will be different for every person.  However, there are a few guiding principals that will make finding this course much easier.  These considerations are that cash is king, and leverage amplifies results.

Cash is King

This is the oldest and most hallowed of financial axioms.  Cash stands and the fundamental basis of investment value.  The ‘real’ value of an investment is the cumulative discounted value of all future cash flows it produces.  This can come in the form of dividends from a stock or rent revenue from an income property.  When evaluating an investment based on the cash it produces, the value is easy to see.  However, if the value of an investment depends solely on selling it to somebody else for a higher price in the future, it can result in tremendous volatility and risk … especially if the investment does not produce any cash flow.  Thus, the paradigm of the future for investors should be to seek cash flows.

Leverage Amplifies Results

Another fundamental consideration for astute investors is the power of leverage.  This can take the form of both financial leverage and organizational leverage.  In either case, the leverage will allow you to amplify the results produced by your efforts.  In the case of financial investments, borrowing at a low rate of interest and investing at a higher rate of return will allow you to amplify your returns much higher than could be earned with cash alone.  Similarly, leverage will amplify any losses that are incurred from your investments.  This is equally true with organizational leverage for business owners.  Amplifying your time through the efforts of others will allow you to generate better results if you are highly effective, or will create chaos if you are disorganized.

In the end, future investors will need to rely on their ability to create value.  The days of infinite compounding from perpetually escalating market values are reaching an end.  The people who survive and thrive in this environment will be the ones who focus on fundamentals and create value.  It is important to understand that every difficulty carries an opportunity, and that each person is responsible for capturing that opportunity to create the best future that they can.

 

Though the iPad got the ball rolling, Windows 8 may be the catalyst that finally brings about the “post-PC” era, as Apple likes to call it (and others prefer not to).

While many digirati were attending a conference in Rancho Palos Verdes, Calif., I was further down the coast in San Diego attending a less glamorous but hardly less important Qualcomm conference. Qualcomm is, after all, the enormously profitable company (with a market cap just shy of $100 billion, rivaling Intel, which is at about $115 billion) that supplies the guts of many of the world’s feature phones, smartphones, and, increasingly,
tablets.

Chips it designs essentially define the hardware and performance of the phones many people use. Qualcomm’s role in the phone industry is analogous to Intel’s in the PC industry. (Qualcomm said at the conference that 250 future devices are being designed around its “Snapdragon” processor.)

Which brings us to the future Windows 8 PC. Qualcomm chimed in this week, saying it will build quad-core Snapdragon processors for Windows 8 devices, in addition to the dual-core chips it is beginning to supply now for tablets like HP’s upcoming TouchPad.

“This will require high-performing, low-power processors…with features like 3G and 4G wireless wide area network (WWAN) connectivity,” Qualcomm said in its Windows 8 statement Wednesday.

When Qualcomm speaks about Windows, people should listen. As Qualcomm CEO Paul Jacobs is always quick to point out, Qualcomm is the exclusive supplier of processor silicon for all Windows Phone 7 devices.

So, with Qualcomm and others set to supply high-performance ARM processors for Windows 8, what will these Qualcomm-powered Windows 8 devices be exactly? Jacobs gave us a hint this week. “You will see some clamshell looking devices. Some of them will be convertible. Some of them will be just tablets. We’re going to see a wide range of stuff going on,” he said at press conference on Wednesday.

Though Jacobs was referring to products coming out later this year and early next year, similar design themes will apply to Windows 8 devices.

What will a Windows 8 PC be? A few rough ideas:

• A 2.5GHz quad-core ARM chip-based Windows 8 tablet?
• Newfangled Windows 8 tablet-centric hybrid with slider keyboard?
• Motorola Atrix smartphone-with-laptop-dock kind of device?
• Tried-and-true clamshell laptop sporting a high-performance ARM chip?

I say all of the above will be a PC, if that’s the primary device you do most of your personal computing on, including lots of business productivity apps like Microsoft’s Office suite. Along these lines, a comment at one of the technical sessions at the Qualcomm conference stuck with me: many young people in the future may skip the traditional PC all together. They may grow up using a device that bears little resemblance to today’s laptop.

Intel will contribute to this, too. Intel’s next-generation Haswell chip design–due roughly in the same time frame that Windows 8 appears–will be the company’s first system-on-a-chip, or SoC, for mainstream laptops. An SoC is the same kind of all-in-one chip design Qualcomm uses today for feature phones, smartphones, and tablets. And, by the way, it’s what Apple uses in its
iPhone and iPad.

That means Intel also subscribes to a very different kind of future PC design. And with Qualcomm, Microsoft, Google, and others like Nvidia behind this, Post-PC or not, the PC will look very different for a lot of people.

Article source: CNET

 

In the midst of persistent economic turmoil, there is a growing sentiment that somebody should do something about all of these problems.  This is a natural reaction to what feels like an opaque and impersonal market.  The actions of Washington and Wall Street show no semblance of connection with that of the regular people who drive the economy forward.  In light of this clear lack of interest to do anything that is not oriented toward special interests, there is a persistent feeling that ‘somebody’ should do something.  Unfortunately, nobody seems to really know who that person is, since the governing institutions are pervasively corrupt.

This has become a key point of concern for an increasing population of citizens.  These ‘regular people’ are working hard to build a life for themselves and a legacy for their posterity.  As election cycles come and go with repeated broken promises of reform devolving into ever greater levels of corruption, there seems to be nobody that is going to ‘do something’ about the current situation.

At this point of apparent hopelessness, there is a fundamental insight that has the power to set you free from the shackles of dependence and create a life of power and prosperity.  This insight is that the key question is not one of what ‘they’ need to do; it is one of what ‘you’ need to do.  The future of each individual person is the aggregated total of the decisions that they make over an extended period of time.  While the actions of others (or lack thereof) may be eternally frustrating, they are not the determinant of our future.  It is what we decide to do and decide not to do that creates our future wellbeing.

This is the fundamental reason why it is so important to build a personal portfolio of success.  This can take the form of passive investments such as income properties, a small business, multi-level marketing opportunities, or any of the many ways that are available to earn income and create wealth.  By taking personal control of your financial future, it will create the freedom to pursue your dreams and live your priorities.  Many people will have their future dictated by the actions of Washington and the machinations of Wall Street, but you have the power to write your own destiny.  Using this power wisely is one of the greatest legacies that you can create for posterity.

 

One of the ideas that is most common in business literature is the notion of solutions.  Namely that leaders should seek to find solutions to problems.  Instead of selling a product, sell a solution.  Instead of doing a job, solve the problems of your group manager.  Creative problem solving has become its own genre of business writing.

Unfortunately, there is one critical insight that this genre frequently leaves out of the analysis.  This learning is that perfect solutions do not exist.  Every choice requires that we forgo other alternatives.  Every problem that we solve results in the emergence of new problems.

Thus, the paradigm is not one of solving problems, but making decisions.  There are no solutions in the world, only decisions.  Each decision has different costs and consequences.  This is an important insight because it highlights the fallacy of solving short-term problems, only to create long-term problems.  Thus, we are not faced with the issue of solving a single problem, but an entire system of decisions that we must attempt to optimize in such a way that we receive the greatest total benefit for the least total cost.

This phenomenon is complicated when dealing with short time windows such a single year, and is further complicated when we are spending other people’s resources.  When making decisions, most people only think about what is happening right now, and assume that they will be able to deal with whatever comes about in the future when it arrives.  Unfortunately, this frequently results in decisions that pull benefits into the present and push costs into the future.  Many people have amassed large credit card bills based on this principal alone.  When costs are continually pushed into the future, they do not go away.  They simply grow and compound until they are so large that drastic action is necessary in order for them to be addressed.

Let us also consider what happens when we are spending other people’s resources.  One of the singularly dominant themes in all stripes of economic thought is that people do not spend other people’s money as wisely as they spend their own.  Evidence of this can be found in both the public and private sectors.  Decision makers in both sectors spend other people’s money.  Politicians and public employees spend taxpayer money for the ‘general good’ or ‘social welfare’ of their community.  Unfortunately, this is a very loose concept and frequently allows considerable room for funneling resources to special interests and pet causes to help the politicians stay in power.  Corporate decision makers use the resources of shareholders in an attempt to earn profits.  Wile considerably less vague than ‘social welfare’ this arrangement still leaves room for self-serving interests to override service to the shareholders.

Thus, we can see that short-term “problem solving” with other people’s money has the potential to create a perpetual cascade of bad decisions that eventually result in problems that are too large to address without making significant sacrifices.  The prime example of this in the United States is our national debt and entitlement liabilities.  Large promises of future entitlement payments have been made to multiple generations of workers, based on programs that fund current expenditures with current revenues.  This means that as the number of recipients grows relative to the number of payers, the programs will quickly run out of resources.

When addressing a problem of this magnitude, it is important to understand that there is no “solution” to be found.  There is no way to keep the (unrealistic) promises that have been made without imposing more costs on more people.  This situation is aggravated by the fact that current federal government spending exceeds tax revenue by nearly $1.6 trillion dollars.  When combined, these two problems spell future fiscal calamity since the US cannot borrow indefinitely at current interest rates.  Sooner or later, major sacrifices will need to be made.

One way to address the problem is by reducing future promises, cutting spending today, and re-aligning the tax code to provide incentives for greater economic growth.  Another way to address the problem is by raising taxes to capture more revenue, and sacrifice future economic growth for the sake of current spending.  A third option is to ignore the problem entirely and attack anybody who proposes reforms as a radical extremist.  This is the path of least resistance for politicians, and will ultimately prove to be the most painful.  The many promises that have been made cannot all be kept.  Simply opposing any changes will not alter the fact that the resources to fund these promises do not exist.  Very large cuts will be required in the future if action is not taken in the present.  Unfortunately, politicians have almost no incentive to make current sacrifices for future gains.  Those future gains won’t be realized until after they are out of office.

Fortunately, our individual lives are not directed by the sway of public opinion.  Each person has the ability to decide and to act.  The decisions that you make will shape the future you experience.  The problems that you face can be addressed many ways, but each decision you make will spawn new problems.  Thus, the real question is not one of how to solve problems, but which problems you face, and when you face them.  Your life comes down to decisions.  Which ones will you make, and how will it shape your future.  The answer to those questions is difficult at best, but in any circumstance it is certain that delaying all of our major decisions until later will result in a worse situation than if we take action today.