There is an old proverb that states you should be careful what we ask for, because you just might get it.  The wisdom of this insight lies in the fact that most things we want are accompanied by undesirable consequences.  Children and adolescents frequently desire things that carry unwanted consequences with them, but generally lack the foresight to see the future impact.  Part of the responsibility implicit in becoming an adult is to anticipate when ‘getting what we asked for’ will result in something very unpleasant.

Unfortunately, this principal seems to be very difficult to communicate when it comes to electoral politics.  Evidence of this assertion is found in the general trend amongst free electoral systems for the populace to overwhelmingly support political candidates that promise to give ‘free’ services from the government.  However, very few people stop to consider where the resources for these government services will come from.

For example, the United States has a very large entitlement liability from Social Security and Medicare that is likely to result in tremendous demands for payment in future years.  (The current ‘bailout’ initiatives feed this phenomenon as well)  The options for raising the money necessary to meet these obligations all involve undesirable effects.  The ‘best’ alternative is for the economy to grow tremendously over the coming decades, creating a large increase in the tax base.  This alternative requires that the government maintain pro-growth policies for an extended period of time, while holding spending in check . . . all of this in spite of pressure to further increase entitlements.  The next alternative is for the government to either drastically increase taxes or issue new debt for the unfunded liabilities.  Unfortunately, this option constricts the economic activity that is necessary for generating future tax revenues.

The final alternative is to simply ‘print money’ or devalue the currency by increasing the amount of money in circulation by simply issuing new treasury certificates into the open market.  This is far and away the most likely scenario, because is the least visible and doesn’t require a direct vote by the legislature.  The unfortunate end result is that the increase in currency will cause large amounts of inflation that devalue savings, home equity, and entitlement payments.  Thus, the very same people who have demanded entitlements for many decades may see that the actions needed to finance their entitlements will ultimately erode the value down to where they would be better off if no entitlements had been created in the first place.

 

The current economic and political environment is one that has become increasingly polarized.  News continues to come in about a building US government debt spiral that is running a very real risk of destroying the international prominence of US dollars in the global marketplace.  There are serious problems on the horizon if large efforts are not made soon.

In response to this situation, people react predictably according to their political persuasion.  Those of a left-leaning persuasion exhibit a noted tendency to blame all economic problems on President Bush, high-income earners, and foreign military operations.  Similarly, those of a right-leaning persuasion are more likely to blame President Obama, and government spending.  However, there is a key principal that people on both sides frequently miss.

For the sake of argument, let’s say that all of the nation’s problems are the responsibility of George Bush / Barack Obama.  (Pick whichever name makes you feel more vindicated)  Now that we have “proven” who is responsible for all of the country’s problems, what are you going to do next?  In response to this question, most people will trail off into some manner of semi-coherent mumbling about fiscal policy, national priorities, or some other form of rehearsed phrases.  Moreover, this narrative completely misses the point of the question.  Most people get so wrapped up in what they think other people should do, that they completely lose focus on what they should be doing.

Thus, the important question for people to ask themselves is not whose fault the problems are, or even what the government is going to do about it.  The wheels turning those cogs will continue to spin with or without our constant attention.  The prescient question for each person to ask themselves is what they are doing for their own future and that of their family.  What decisions will you make right now that create a future of happiness and prosperity?  What sacrifices are you willing to make now for the sake of your future?  Are you prepared to rely on yourself when cuts to government services become unavoidable?

The answer to this question will frame the future of your personal, professional, and financial life.  The difference between informed achievers and self-indulgent whiners is the propensity to take action.  What action are you going to take today?  Are you going to start a business to create an additional stream of income?  Are you going to build an investment portfolio to gain greater control over your financial future?  The exact decision that you make is less important than making a decision and taking action.

In the end, each person is ultimately responsible for the well being of themselves and their family.  The government has made more promises than can possibly be financed, so dramatic changes of one stripe or another are inevitable.  That’s not politics, its math.  Smart players in the game of life will focus on the decisions that enable them to gain greater control over their personal, professional, and financial life.  The unfortunate truth is that there are many undesirable things in the world that we have no ability to control.  Excessively worrying about them only serves to distract our attention away from the actions and decisions that bring us closer to control over our own future. It is certainly worthwhile to stay up to date on the events of the day, but study them from the perspective of a person who takes thoughtful action.  This will train your mind to see opportunity so that it can be captured with intelligent action.

 

The current world is one where information abounds.  The flow of information moves so fast and increases so quickly that many have led themselves to believe that this extreme amount of information means that we have greater mastery over chance and uncertainty.  However, the financial collapse of 2008 demonstrated quite aptly that there is a prolific difference between “Know What” and “Know How” when it comes to situations of volatility or uncertainty.

For those who have not been living in a cave for the last few years, volatility and uncertainty are an inextricable part of life that cannot be controlled with mathematic algorithms.  This is where ‘know what’ has become woefully inept.  By attempting to force reality into mathematical models, the purveyors of self-proclaimed intelligence place the entire world at the mercy of their algorithms.  The pseudo-intellectual class has attempted to make itself “master of the universe” by publishing highly detailed forecasts built on nothing more than subjective assumptions that have been rolled into a quantitative model.  The problem compounds even more when people demand that public policy be based on the output of these models.

This phenomenon results in a form of “Scientism” that emerges from a combination of mathematical techniques that are used as a justification for pushing subjective views or beliefs.  The method for holding up these forecasts that border on religion are to use the ‘credentials’ of people who form the predictions as a method of insulating them from criticism.  The implicit belief of “Know What” or “Scientism” religion is that only the elite possess the necessary intelligence for creating forecasts.

In contrast to this view, we have an emphasis on “Know How” or the viewpoint that nobody possesses the necessary knowledge to accurately predict the future.  In this worldview, future trends represent the emergence of many people making independent decisions, and success is less about knowing what will happen and more about knowing how to make astute decisions.

The net effect of recent focus on “Know What” and econometric forecasts has been a de-facto regression toward medieval religion where the edicts of leaders are to be obeyed without any thought or question.  In the current environment, just like the middle ages this phenomenon creates a tremendous opening for graft and corruption by those who construct the edicts that are handed down to the ‘little people’ who are expected to obey.

The challenge that most people face in the face of this conflict between “Know What” and “Know How” is that the promises of comfortable retirement made by the “Know What” apostles are quickly becoming revealed as vacuous and empty.  The pension funds, trust accounts, and other means that politicians have used to purchase votes with public funds are not sufficiently capitalized to support the promises made to future retirees.

Ultimately, the only financial security available to regular people is to “Know What” is necessary for building a portfolio that is completely owned by them and free from the prying fingers of politicians, union bosses, and corporate executives.  This stands contrary to the “Know What” religion, since it involves a departure from dependence on the pseudo-intellectual elite for people’s wellbeing.  The unfortunate reality is that political power comes from influence, and dependence on the government places a tremendous amount of influence in the hands of those who run the government.

When going throughout your life, resist the temptations from hucksters and shysters who claim to have a ‘secret’ to financial success that they will reveal only if you purchase their $6,000 system.  These people are simply peddling false hope to people who are desperate for a way to improve their financial situation.  Similarly, resist temptations to believe people who try to tell you that a particular pension fund will completely take care of your retirement needs, and that no other investment is necessary.  These people are also playing on a desire to believe in financial security.  In both cases, false hope is being sold to exercise influence over large groups of people.

Actively seek knowledge about the principles of success that will help you “Know How” to achieve your goals.  Much of this information is available for a very low cost through your library, the internet, or other methods of distribution.  The rub is that very few people will actively market the principles of success.  Most people marketing information are trying to sell a ‘system’ that is based on some form of ill-conceived prediction model.  In the end, your best alternative for creating a strong financial future is to build it yourself by practicing the principles of success.

 

As we go throughout life, it can sometimes seem mysterious to think how we arrived at our current place.  Each person’s life represents the aggregate total of all their decisions and the influence of chance.  For many of us, it can be tempting to blame ‘fate’ or the actions of other people for the fact that their life has not turned out the way that they had previously imagined it would.  For many people, this has resulted in a slowly burning internal anger against their circumstances.  The enduring problem created by this phenomenon is that it constructs a mental barrier that prevents people from taking the actions that are necessary to improve their circumstances.

The first and most important insight that must precede any sustainable improvement in our life situation is the realization that we are fully responsible for the course of our life, and our decisions are the means by which we navigate the river of chance.  It is most certainly true that we cannot control chance.  There will always be events and circumstances in our life and the world at large that are out of our control.  The secret to influencing your future lies in understanding that there is no point in worrying about things that we cannot control and focusing all of our attention on the decisions and events that we can influence.

One example of how this situation creeps up on people is where you have a person that is living paycheck-to-paycheck and encounters an unexpected automotive repair, medical bill, or some other necessary expense.  With no financial reserves, this person may find themselves forced to go into debt, or possibly default on their financial obligations if they are already in debt.  From this person’s perspective, they have been assaulted by fate and ruined by chance.  However, the situation that placed them at the mercy of chance was completely the result of their decisions.  By modifying their lifestyle, these people could have built-up a savings reserve so that unexpected expenses could be met without destroying their budget.  By consistently living below their means, they could have ensured that their debt limits were not maxed out so that true needs could be met at the critical moment.  By understanding that the future is necessarily uncertain, and planning accordingly, many of the disruptions that cause disasters for other people could have been effectively avoided.

The critical insight here is that our ability to shape our future is dependent on our willingness to embrace a long-term perspective.  By thinking further out than our current wants and needs, we begin to see the benefit of making short-term sacrifices for the purpose of long-term gains.  Thus, by improving our decisions, we make the outcome of our future less dependent on luck.  In this way, making intelligent choices reduces our exposure to chance.  It requires us to discipline our feelings and emotions so that they do not dictate our actions.  It requires us to make conscious decisions that support optimal long-term results.

In the end, our circumstances are determined by both choices and chances.  However, the impact of chances is directly related to the choices that we have made in the past and continue to make into the future.  Each of us must ask whether the choices we are making today prepare us for a more prosperous future.  Each of us must ask whether the decisions and choices we make are the result of our feelings and emotions or if they are conscious and deliberate.  Most of us have a clear vision of what we would like our future to look like, and most of us also know the kind of things that are necessary to attain that vision.  What remains is to develop the discipline so that our decisions turn that vision into reality.

 

Karen and John talk about spending, budgets, and planning for the future.

See more at the Business of Life YouTube Channel.

 

Upon reading the headline of this article, most people begin to think of company evaluations similar to those performed by Jim Collins in his book “Good to Great”.  (Incidentally, two of the companies highlighted in “Good to Great” were Fannie Mae and Circuit City, both of which have subsequently become epic failures)  The purpose of this analysis is much more broad than corporations.  Begin by considering that the notion of a corporation is only a few hundred years old.  However, there is another entity with a much longer track record, and much more spectacular results.  This entity is the family.

Every year, the US census bureau collects a large amount of data regarding demographic and economic trends.  This data is then reflected in terms of ‘households’ for the purpose of reporting.  Each time that this data is collected, the results show some of the same trends.  The most pronounced of these trends is a trend for lower income households to have fewer people and fewer income earners.  Another trend is for higher income households to have a higher concentration of ‘families’ with two parents and children.  This is one reason why it is fallacious to cite ‘household income’ figures as evidence of economic depravity . . . the average ‘household’ size at the lower quintiles is much smaller than at the upper end of the scale.  With less people in a household producing earnings, it stands to reason that there will be a lower level of affluence.

The logic behind this trend is quite clear.  When a household is populated by people who make coordinated efforts and shared sacrifices, it produces more advantageous economic outcomes.  Consider what behaviors create economic prosperity?  Some of the primary factors are engagement in productive work, innovation, and sacrificing current consumption for future gain.  All three of these building blocks are regularly practiced by family units as the primary breadwinner engages in economically productive activity.  In order to accommodate schedules and stay within the family budget, great amounts of innovation are frequently required.  And finally, families regularly sacrifice short-term consumption and enjoyment for the purpose of investing in the future.  This takes the form of both financial investments and the development of human capital in their children.

However, there are some tricky characteristics of families that make them difficult for politicians to reconcile.  Most prominent is that the government cannot ‘create’ families.  The true benefits of productivity and sacrifice only come from voluntary formation of families.  Attempting to “fine-tune” this process with government policy leads to unintended consequences in the best case (such as fueling a housing bubble) and wholesale disaster in the worst (such as the explosion in single parent households that resulted from government entitlement programs)  Thus, it stands to reason that while government cannot ‘create’ families, it can most assuredly destroy them.

In a strange sort of irony, many in the political class attempt to replicate the family model with society, and cast government as the head of household . . . but with disastrous results.  In the context of a family who loves one another, the notion of making sacrifices is gladly accepted by everybody involved.  However, when the government attempts to force sacrifices onto people, there is no familial bond.  The ‘sacrifices’ only serve to benefit the political class.  Government programs designed to benefit the next generation of citizens frequently foster a culture of dependence that simply perpetuates the mother-government nanny state.

Conversely, it is equally silly to impose a market economy into a family setting.  When my family is eating dinner, I don’t attempt to auction off a cookie and garner the highest price.  We share in the effort and rewards of our life.  The familial bonds of love compel us to forsake a complete pursuit of immediate personal gratification.  Put another way, the phenomenon of family expands the scope of ‘self interest’ beyond simple personal gratification out to the care and development of our whole family.  This simple paradigm shift is the primary driver of the tremendous benefits that families offer to society.

The purpose of this analysis is not to denigrate single people or households that have encountered difficulty.  Rather, it is to highlight the importance of self-sacrifice and delayed gratification and how families have a built-in incentive to practice both of these principles.  There are many people who engage in these behaviors independently, and those people should be applauded.  However, the way that these principles have proliferated broadly across society has been through families.  By making sacrifices for the benefit of posterity, it simultaneously creates a brighter future for society as a whole through the opportunity that emerge from fundamental economic growth.

In the end, the prosperity of humanity is not created by corporations, but by individuals.  Individuals who produce great things and make personal sacrifices that benefit future generations.  The family serves as the ‘front line’ of this phenomenon when individual people make individual decisions to produce and sacrifice for the benefit of their children.  However, the larger society benefits from the economic output, investments, and development of future productive citizens that are regularly conducted by families.

 

One of the oldest and most important notions in Finance is the statement that “Cash is King”. The purpose of this cliche is to focus examination for a business deal, product decision, or prospective investment on cash flow. This is especially important when the accounting profit & loss is different from the cash flows.

Consider the difficulty of running a business where all of the value comes from a future sale of the business to somebody else? What happens if large losses must be absorbed until the future sale? What happens if the future price is lower than your projections? How much of your future are you willing to stake on anticipated gains that may not materialize?

This is not to say that all focus should be on short-term results, with no thought of the long term. Quite to the contrary, we should view the future as an opportunity that is waiting to be discovered. However, we should avoid the trap of vague ideas about value or gains. If a deal or investment is a sound decision it must produce results. (Typically measured in terms of cash)

Consider the paradigm shift of stock market investors away from dividends (cash flow) toward capital appreciation. During the bull market of the ’80′s and ’90′s, values climbed and people simply assumed that they would keep going up. After the tech and credit bubbles, values have become highly volatile. In order to capitalize on value gains, you must know when to sell. Since nobody knows when markets will break up (or down), market timing has become a very risky proposition.

In the end, each of us must learn to incorporate the lessons of cash flow into our investment and financial decisions. This frequently requires that we move contrary to most other people, since fads are what create (and destroy) market bubbles. By maintaining an even focus, it will allow us to achieve ever greater heights of success.

 

A recent article from Gallup shows that distrust in the media has reached an all-time high.  The results of this pull largely show that perceptions of the mainstream media are tilted toward the liberal viewpoint.  Historically, perceptions of the media have broken out along political affiliations with Democrats viewing the media as fair and Republicans viewing the media as biased leftward.  This is not particularly surprising, given that the overwhelming majority of journalists hold left-leaning political views.  Under this landscape, a systematic leftward tilt is inevitable because of the large concentration of like-minded (liberal) people who populate newsrooms.

The insights revealed in this report show that moderates and independents are both trending toward an elevated level of distrust and a perception of the media as carrying a liberal bias.  Ultimately, this trend means that the power of mass media to persuade the electorate is eroding.  Granted, there is still a sizable block of people who agree with the mainstream media portrayal of major issues.  However, most of these people are likely to vote in the same manner as the journalists they watch, without any persuasion being necessary.

The impact in any election comes at the margins where people who have not already made up their minds seek information and insights.  As trust decreases and perceptions of bias increase in the minds of moderates and independents, there will be an increasing amount of these people who seek their own information instead of checking in with the news media as their primary source of information.  As this phenomenon unfolds, ideas will become more important.  In the past, public opinion could be bent and shaped by whomever controlled the television set.  In the future, an emerging population of unaffiliated voters are becoming increasingly involved in making their own personal and political decisions.

On balance, this phenomenon creates a ray of hope for the future of our political system, since the power of centralized media to persuade the electorate is dissipating.  Regardless of which party happens to be in power, they always seem to express great concern about making sure that the “right” people are monitoring media communications.

In the end, this trend is quite welcome, due to the persistent history of people in positions of political power to use their influence to suppress and marginalize voices of opposition.  As the medium of debate shifts away from control of media toward the power of ideas, it may allow us to preserve the voices of freedom for future generations.

 

The scheduled release of a sequel to the 1987 film Wall Street has revitalized the fictional character of Gordon Gekko, who ascended to popular culture fame with his famous statement that “Greed is Good”.  The persona of Gekko as the stereotypical “Evil Capitalist” has provided a face to serve as an effigy for all of the frustrations, criticisms, and disagreements that people have with free markets.  The actions of this fictional character have been taken by those who are hostile to economic freedom as emblematic of the ultimate results that are driven by a capitalist system.

However, we should stop to ask what really creates the Gordon Gekko archetype?  Is it simply that greedy people on Wall Street are the beginning and end of financial corruption and strife?  Or is it possible that corporate raiders can only exist if companies are run so inefficiently that the value of their assets exceeds their market value?  is it possible that a mortgage bubble only exists because the government directly subsidizes risky loans by using Fannie Mae to force banks into more high-risk lending unless they want to lose Fannie Mae as a source for selling their loans.  Is it possibly true that the people who run government and “non-profit” organizations have a vested interest in making their organizations more powerful?  Is it possible that the platitudinous claims of caring about “people, not profits” is little more than a shill to hide the self-interested actions that they criticize businesspeople for expressing out in the open.

For some strange reason, the greatest critics of capitalism seem to place supreme faith in government.  However, is there greater virtue in creating products and services (that people have a choice whether they want to buy) or creating rules and regulations that must be followed to avoid imprisonment?  Is there virtue in using public resources to secure favor with special interest groups who directly contribute to your perpetual re-election?  Is there virtue in extracting resources from one group of citizens through taxes so that it can be re-distributed to another group who votes in your favor because of the ‘free’ benefits that you have given to them?

In the world of reality, virtue does not come from intention, it comes from results.  The question is not one of what you want, but what you do.  Affluence is a function of what we produce.  The ambition to produce and achieve is what has driven the achievements of our past, and is the resting place of our sole hope for a greater future.  In a twist of irony, the infamous “greed is good” speech from Gordon Gekko holds many of the concepts and ideas that are the key to our future affluence.  By shifting a few points of emphasis and adding a few degrees of scope, the resulting creation represents a surprisingly accurate appraisal of our current situation and its remedy.

Well, ladies and gentlemen we’re not here to indulge in fantasy but in reality. America, America has become a second-rate power. Its trade deficit and its fiscal deficit are at nightmare proportions. Now, in the days of the free market when our country was a top industrial power, there was accountability to the stockholder and accountability to the taxpayer.

The Carnegies, the Mellons, the men that built this great industrial empire, made sure of it because it was their money at stake. Today, management has no stake in the company! Where does management put their multi-million dollar salaries?  Not into the company’s stock; management doesn’t own the company. You own the company. That’s right, you, the stockholder. And you are all being royally screwed over by these bureaucrats, with their luncheons, their hunting and fishing trips, their corporate jets and golden parachutes.

And now we have a new class of bureucrats who work for the government that have just as many luncheons, vacations, jets, and golden parachutes.  But they’re not just screwing the shareholders of a corporation.  They’re shafting every person who lives lives in America or ever will live in America by wasting our money on makework projects and sticking us with the bill to pay off the special interests who keep getting them re-elected.

This flimsy experiment in social utopia has failed in every way possible to imagine.  Failed to save money, failed to produce growth, failed to produce jobs, and failed to preserve the freedom and liberty granted to us by our forefathers.  The new law of evolution in America seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated.

The free market is not a destroyer of companies. It is a liberator of them! The point is, ladies and gentleman, that ambition, for lack of a better word, is good. Ambition is right, ambition works. Ambition clarifies, cuts through, and captures the essence of the American spirit. Ambition for life, for money, for love, and knowledge has marked the upward surge of mankind. And ambition, you mark my words, is our only hope to save this failed state called the USA. Thank you very much.

In the end, it is the ambition to produce and succeed that will be the only savior of our country.  Our feeble attempts to “reform” and “stabilize” the free market have led us down the road of failure, leading to a chasm of financial collapse.  The future can only be won by producing and creating.  There is no strategy of re-distribution or entitlement that can or ever will replace ambition and industriousness.  The future is speaking, but we will only benefit if we can muster the wisdom to listen.

 

One of the most prescient concepts in economics is the notion that “all changes occur at the margins”.  Expressed another way, this means that when things change, it happens in small incremental movements.  One of the commonly cited axioms of economics is that “rational people think at the margin”.  What this means is that our decisions should be framed in the context of what impacts our next action or decision, and ignore costs that are sunk or decisions that have already been made.

The importance of this concept comes into play when making both personal and financial decisions.  When deciding whether to fix an old car that has broken down, the only factors relevant to the decision should be the facts at hand.  It does not matter how much money you have already spent to fix the car . . . it only matters what you do with the current situation.  (Note that from a financial perspective, it is optimal to repair your existing automobile unless the cost of repairs exceeds the value of your car in reasonable working order.  The decision to get rid of your old car and buy a new one is almost never financial optimal.  This doesn’t mean that you should never get a new car, only that the purchase is a ‘lifestyle’ decision and not a ‘financial’ one.)

The inevitable result of thinking ‘at the margin’ is a narrowing of focus onto the decisions and opportunities at hand instead of dwelling on mistakes and missed opportunities of the past or fantasizing about expected opportunities in the future.  The only time that anybody ever has to act is now.  The past is gone, and the future has not yet come.  Action must always occur in the present tense.  This is not a renouncement of the benefits that come from planning for the future, but a realization that the future is built on many successive decisions, and that each decision we make builds the road for future decisions.

By zeroing-in on the decisions that you can influence today, it will create a remarkable degree of emotional freedom.  This liberation will come when you are no longer shackled by old decisions and no longer nervous about what will come in the future.  The future is and has always been uncertain.  However, people who have grown accustomed to making rational decisions develop the confidence that they can adapt to whatever future situations unfold.  The most important thing is to use the information and resources at hand to make the best decisions possible.  This crystallizes a seemingly infinite number of possible future options into one decision . . . your next one.  The result of that decision will set the stage for future decisions, but so will external events that are beyond your control.

The single area where most people run into trouble is that they under-estimate the extent to which their future will be shaped by things that they do not control.  Thinking about the unknown is inherently frightening, because we cannot plan for something we do not know will happen.  However, the unknown should not be allowed to become a crutch that scares us into inaction, but should also be appropriately heeded so that actions are not taken that greatly depend on a specific future outcome that is far from guaranteed.

The extent to which we can control our lives always is, always has been, and always will be at the margins.  We can influence small iterative changes that compound over time to produce tremendous results.  On balance, it is best if our actions create outcomes that are robust or adaptable to future changes in the marketplace.  While we may not know what these changes will be, we can be confident in our ability to adapt to them.  By shifting our focus to present things that happen ‘at the margin’ it will allow us to enhance our circle of influence by improving the effectiveness of our decision making.