Why Listen to Buffett?
What can we learn from Warren Buffett about our personal finances and running our businesses? Much more than I can mention in a brief blog, but I'd like to at least reflect on some practical lessons from his most recent report to his shareholders.
Warren Buffett, the world's richest man (worth over $50 billion), didn't inherit his money - he earned it starting at age 6 selling Chicklets (candy-coated chewing gum) in his front yard. He added to this money from other rather ordinary jobs - caddying, finding and selling golf balls, paper routes, etc. Rather than spending his money, he saved it and began investing at age 11. Fascinated with business and investing, he had read over 100 books on the subjects by high school graduation. So he learned business by both running them and studying them.
In the 44 years that he's invested his money (and other fortunate investor's money) through Berkshire Hathaway, he's averaged yearly returns of over 20%, more than doubling the gain of the S & P 500 during the same time period.
From my study of Buffett, his extraordinary returns come, not so much from his knowledge of movements in the stock market (which he claims are rather unpredictable, particularly in the short term), but from his unsurpassed understanding of businesses. He knows what extraordinary businesses look like; that's how he knows which businesses to buy. So what can we learn from such a financial wizard?
Lessons
I'm extrapolating here, so don't put this in Buffett's mouth. When he talks of a business doing things right, I'm applying it to individuals.
1. Don't give up. The economy's in shambles, and will probably remain that way for some time. But don't assume life as we know it is disappearing. Plan toward a bright economic future. Over the past 100 years, the free market economic system has worked wonderfully, increasing our standard of living seven-times in the 1900's, while the Dow rose from 66 to 11,497. In his opinion, "America's best days lie ahead."
2. Plan for inflation. The battered economy and bailout by the government will probably result in inflation. (Steve's note: houses rise in value with inflation. If you live in a relatively stable area, like us in metro Atlanta, owning your house and a rental house, if you don't have to incur debt, might be a good idea.)
3. Save massively during the good times, so that you'll have cash during difficult times. Birkshire is in great shape to weather extended hard times, since they stored up huge cash reserves during the good times. Now they can purchase great businesses at bargain prices and help their existing businesses to weather the hard times.
4. Keep your near-term obligations modest. Don't overborrow. Don't live beyond your means.
5. Continue to develop "new and varied streams of earnings."
6. Invest in great leadership. Being the manager of my family and a small business, that means, first of all, increasing my own skills and productivity, as well as my children.
7. Do the basics right. Speaking of Birkshire principles, he praises one of his CEO's for focusing on "blocking and tackling, day by day doing the little things right and never getting off course."
8. Don't buy a house unless you can afford one. If you can't put down at least 10% and if you can't comfortably make the payments on your current income, don't buy it. As basic as this sounds, those ignoring it both from the borrowing and lending side, were major players in the present crisis.
Your ideas? Share them below.
Monday, March 9, 2009
Monday, March 2, 2009
On Predicting the Economy
To make business plans or retirement plans or even plan for a summer vacation, we'd like to take into account the future of the economy. If things are to get worse, we need to go conservative. If they'll pick up in six months, we'd like to start paddling out into the surf so that we're ready to catch the next wave of growth and prosperity.
Since we're not economic experts, we rely on the opinions of those who spend their days researching the economy, interviewing people on the economy, and helping to set government policy concerning the economy. That's probably why CNBC has record ratings during this economic crisis. We crave expert advice.
Which brings up an important point: can the experts be trusted when they make pronouncements like, "The next six months will be rough, but I see us getting back to steady, albeit slow growth in the last half of the year."?
Unfortunately, I don't believe there's adequate evidence that the experts can predict the future of the economy. Here's why...
1) Governmental figures and most heads of companies have every reason to bias their reports toward the positive. This is shown on a smaller scale by how CEO's of failing companies keep giving hope to their employees and stockholders, even when all the facts in their grasp tell them that the company will fold completely in six months. If they were to admit that the company's failing, stockholders would immediately sell all their shares and employees would bail for other jobs.
Aren't government officials in the same position? If they felt the evidence led them to think we were headed for a depression that history would label "The Greater Depression," they couldn't speak out about it, lest everyone lose confidence in the economy and sell off all their stocks, thus ushering in an even worse recession.
2) Studies show that experts do a poor job of predicting the economy. Professor Philip Tetlock teaches at the University of California-Berkeley. He's an expert on top experts. For about 19 years (culminating in 2003), he studied 300 academics, economists, policymakers and journalists, to find out how they made their economic forecasts and chart how often they were right. According to Tetlock, "we found that our experts' predictions barely beat random guesses - the statistical equivalent of a dart-throwing chimp.... Ironically the more famous the expert, the less accurate his or her predictions tended to be."(1) Thus, odds are, that expert you heard forecasting the economy on the evening news, if you were to chart his past predictions, would probably have been wrong as often as he was right.
My guess as to their inability to conjure up an accurate picture of our economic future is that, in order to predict it, they'd have know many facts that nobody can possibly know. For example:
So what do I do in the present economic climate? Despair?
No, I simply do what everyone should have been doing when most economists were predicting more cheery economic futures - don't believe them. Nobody knows. Realize that at any time, things could turn around and we'd be off to a prosperous decade, so that whoever bought up the cheap stocks would look brilliant in retrospect. Alternately realize that at any time, the economy could go to hell and we'll see a repeat of the Great Depression. Then again, things may continue as they are now for some time, neither getting better nor worse.
As author Kurt Vonnegut observed in his novel, Slapstick, "History is merely a list of surprises. It can only prepare us to be surprised again."
In other words, we don't know the future. Once we accept that, we can go about our plans with that in mind. That's why we major on the basics that work in any economy:
End Note
1) Eric Schurenberg, Why the Experts Missed the Crash, Money Magazine, February 18, 2009, 4:10 PM, ET.
Since we're not economic experts, we rely on the opinions of those who spend their days researching the economy, interviewing people on the economy, and helping to set government policy concerning the economy. That's probably why CNBC has record ratings during this economic crisis. We crave expert advice.
Which brings up an important point: can the experts be trusted when they make pronouncements like, "The next six months will be rough, but I see us getting back to steady, albeit slow growth in the last half of the year."?
Unfortunately, I don't believe there's adequate evidence that the experts can predict the future of the economy. Here's why...
1) Governmental figures and most heads of companies have every reason to bias their reports toward the positive. This is shown on a smaller scale by how CEO's of failing companies keep giving hope to their employees and stockholders, even when all the facts in their grasp tell them that the company will fold completely in six months. If they were to admit that the company's failing, stockholders would immediately sell all their shares and employees would bail for other jobs.
Aren't government officials in the same position? If they felt the evidence led them to think we were headed for a depression that history would label "The Greater Depression," they couldn't speak out about it, lest everyone lose confidence in the economy and sell off all their stocks, thus ushering in an even worse recession.
2) Studies show that experts do a poor job of predicting the economy. Professor Philip Tetlock teaches at the University of California-Berkeley. He's an expert on top experts. For about 19 years (culminating in 2003), he studied 300 academics, economists, policymakers and journalists, to find out how they made their economic forecasts and chart how often they were right. According to Tetlock, "we found that our experts' predictions barely beat random guesses - the statistical equivalent of a dart-throwing chimp.... Ironically the more famous the expert, the less accurate his or her predictions tended to be."(1) Thus, odds are, that expert you heard forecasting the economy on the evening news, if you were to chart his past predictions, would probably have been wrong as often as he was right.
My guess as to their inability to conjure up an accurate picture of our economic future is that, in order to predict it, they'd have know many facts that nobody can possibly know. For example:
- If our economy did better after government intervention following the last depression, how can we know for certain that the government intervention was the cause of the recovery.
- Since no two economies are ever identical (in a sense, a visit to the past is a visit to a foreign country), how can we know that what worked then will work now?
- The world's economies are more entertwined than ever before. How can we know what may happen in another country to either delay or speed our recovery?
So what do I do in the present economic climate? Despair?
No, I simply do what everyone should have been doing when most economists were predicting more cheery economic futures - don't believe them. Nobody knows. Realize that at any time, things could turn around and we'd be off to a prosperous decade, so that whoever bought up the cheap stocks would look brilliant in retrospect. Alternately realize that at any time, the economy could go to hell and we'll see a repeat of the Great Depression. Then again, things may continue as they are now for some time, neither getting better nor worse.
As author Kurt Vonnegut observed in his novel, Slapstick, "History is merely a list of surprises. It can only prepare us to be surprised again."
In other words, we don't know the future. Once we accept that, we can go about our plans with that in mind. That's why we major on the basics that work in any economy:
- work hard. You never know when you might get sick or your services might no longer be required.
- keep sharpening your skills so that you'll be the last one fired in a downturn and the first promoted in good times.
- save all you can.
- keep a large emergency fund on hand in case you lose a job for an extended time.
- don't live beyond your means. Debt is always scary, good times or bad.
- diversify your investments. Since the past isn't prologue, we can't know if the long-term gains of stocks or bonds or CD's or real estate will be the same as the past. Since we can't know which will do better, we diversify.
End Note
1) Eric Schurenberg, Why the Experts Missed the Crash, Money Magazine, February 18, 2009, 4:10 PM, ET.
Wednesday, December 10, 2008
Recent Interview: 5000 Years of Money Experience
In my ongoing interviews (100 people over 50 years of age), I spoke to a lady in L.A. and a man in Atlanta.
L.A. Lady: "Understand Your Investments"
She looked to be about 70 years (I never ask women their age), and she was distraught about her retirement. She normally goes to Mammoth Mountain every year to enjoy the wilderness, but she couldn't go this year. Due to the fall in the stock market, things were too tight.
I asked what she would advise the younger generation about the money and she responded, "Don't fall in love with your investments. I should have sold my stocks earlier this year, but my financial adviser kept telling me to 'stay on course.' As a result, I lost 2/3 of the value of my stock funds. When my son studied my situation, he told me I should sell my stocks to avoid losing more. After all, I could live several years on that money. So I sold."
She was so distraught at her huge loss that she didn't want to think about it. So I refrained from asking her any more questions. But here are my thoughts:
#1 - Since she was so close to retirement, why did she have such a large proportion of her retirement in stocks, seeing that she thought she would need the money soon? My mother's investments (she's well over 70) weren't really affected by the current crash, since she's not invested heavily in stocks.
#2 - She did what "the herd" always seems to do: sell low. When the stock market's this low, Warren Buffett's on a buying frenzy. In general, I don't want to be selling when Buffett's buying.
#3 - People simply must understand their investments. I feel really badly for her. People need to understand that stock funds can go down 2/3 and not bounce back for some time. If you don't want that kind of volatility, don't be in stocks.
Atlanta Man: Just Walk In and Ask People for Jobs
He's 72 years old and driving the shuttle from the Atlanta Airport. His advice to the younger generations:
#1 - Working is better than not working, even if it's at a low-paying job. You can't get ahead while you're not working. Sometimes he worked more than one job, just to see which one turned out better before dumping the worse job.
#2 - If you need a job, just walk up to people and ask them for a job, whether they say they're hiring or not. Employers seem to respect that kind of initiative. If they don't have a job, ask if they know anyone else who's hiring. (This advice jives with studies of those looking for jobs. Advertised job openings are flooded with applicants, making your odds on getting the job slim. Instead, decide what kind of job you want and approach those companies for a job, whether they are hiring or not. Maybe they just lost someone and you're the answer to their prayers. The last thing many companies want to do is to take time off from profitable work to start interviewing scores of people.)
L.A. Lady: "Understand Your Investments"
She looked to be about 70 years (I never ask women their age), and she was distraught about her retirement. She normally goes to Mammoth Mountain every year to enjoy the wilderness, but she couldn't go this year. Due to the fall in the stock market, things were too tight.
I asked what she would advise the younger generation about the money and she responded, "Don't fall in love with your investments. I should have sold my stocks earlier this year, but my financial adviser kept telling me to 'stay on course.' As a result, I lost 2/3 of the value of my stock funds. When my son studied my situation, he told me I should sell my stocks to avoid losing more. After all, I could live several years on that money. So I sold."
She was so distraught at her huge loss that she didn't want to think about it. So I refrained from asking her any more questions. But here are my thoughts:
#1 - Since she was so close to retirement, why did she have such a large proportion of her retirement in stocks, seeing that she thought she would need the money soon? My mother's investments (she's well over 70) weren't really affected by the current crash, since she's not invested heavily in stocks.
#2 - She did what "the herd" always seems to do: sell low. When the stock market's this low, Warren Buffett's on a buying frenzy. In general, I don't want to be selling when Buffett's buying.
#3 - People simply must understand their investments. I feel really badly for her. People need to understand that stock funds can go down 2/3 and not bounce back for some time. If you don't want that kind of volatility, don't be in stocks.
Atlanta Man: Just Walk In and Ask People for Jobs
He's 72 years old and driving the shuttle from the Atlanta Airport. His advice to the younger generations:
#1 - Working is better than not working, even if it's at a low-paying job. You can't get ahead while you're not working. Sometimes he worked more than one job, just to see which one turned out better before dumping the worse job.
#2 - If you need a job, just walk up to people and ask them for a job, whether they say they're hiring or not. Employers seem to respect that kind of initiative. If they don't have a job, ask if they know anyone else who's hiring. (This advice jives with studies of those looking for jobs. Advertised job openings are flooded with applicants, making your odds on getting the job slim. Instead, decide what kind of job you want and approach those companies for a job, whether they are hiring or not. Maybe they just lost someone and you're the answer to their prayers. The last thing many companies want to do is to take time off from profitable work to start interviewing scores of people.)
Wednesday, October 15, 2008
Personal and Business Advice in Turbulent Times
Last night I attended a Town Hall Meeting at Kennesaw State University. I heard some great advice I felt I should pass on.
The Economic Summit Town Hall Meeting, held Tuesday evening at the KSU Center, allowed individuals and business owners to voice their economic concerns and get responses from experts. Sponsored by the Kennesaw State division of the Small Business Development Center and KSU’s Econometric Center, the panelists included Joseph Brannen, President of the Georgia Bankers Association; Tony Britton, Senior Vice President of Wachovia; Dr. Gene Henssler, President of G.W. Henssler & Associates and host of the popular radio program, Money Talks; and Dr. Donald Sabbarese, Director of KSU’s Econometric Center.
After opening remarks by Dr. Lendley Black, Provost & Vice President for Academic Affairs, Lydia C. Jones of the SBDC introduced the discussion format and established an informal, accessible atmosphere to discuss potentially volatile and emotional issues. “Please, no political comments!” Jones warned.
Although we hear abundant reports and advice on the economy, the unique value of this meeting was the opportunity to ask specific questions and to get answers that applied specifically to our region.
The bad news is that building and manufacturing are suffering. One in six homeowners are “under water,” owing more than their homes could sell for. Although exports have been the good news in recent years, now other countries are hurting, which will of course negatively impact overseas sales. But then, we’ve heard all the bad news over and over.
What about the good news?
1. Don’t get rid of your key people.
2. Be informed, but don’t take drastic measures.
3. Keep your optimism.
4. Don’t overreact. Keep the lines of communication open.
5. Don’t cut back on marketing. Sell, sell, sell!
The Economic Summit Town Hall Meeting, held Tuesday evening at the KSU Center, allowed individuals and business owners to voice their economic concerns and get responses from experts. Sponsored by the Kennesaw State division of the Small Business Development Center and KSU’s Econometric Center, the panelists included Joseph Brannen, President of the Georgia Bankers Association; Tony Britton, Senior Vice President of Wachovia; Dr. Gene Henssler, President of G.W. Henssler & Associates and host of the popular radio program, Money Talks; and Dr. Donald Sabbarese, Director of KSU’s Econometric Center.
After opening remarks by Dr. Lendley Black, Provost & Vice President for Academic Affairs, Lydia C. Jones of the SBDC introduced the discussion format and established an informal, accessible atmosphere to discuss potentially volatile and emotional issues. “Please, no political comments!” Jones warned.
Although we hear abundant reports and advice on the economy, the unique value of this meeting was the opportunity to ask specific questions and to get answers that applied specifically to our region.
The bad news is that building and manufacturing are suffering. One in six homeowners are “under water,” owing more than their homes could sell for. Although exports have been the good news in recent years, now other countries are hurting, which will of course negatively impact overseas sales. But then, we’ve heard all the bad news over and over.
What about the good news?
- Ninety six percent of our banks are well-funded. Two thirds are profitable.
- The government has acted to restore confidence in the markets. The FDIC now guarantees our bank holdings for up to $250,000. (The time when the government failed to act was 1929, allowing the Great Depression to take hold.)
- Five hundred people per day are moving to Georgia.
- Atlanta is well-diversified, has no geographical boundaries, has a world-class airport and is business-friendly. No wonder it’s growing at two times the rate of the country. Atlanta real estate hasn’t “burst.” It’s only down 6.9%, one of the lowest declines in the country. (Compare this to Miami, where house values are off 44%.
- Should I get out of stocks? “This is the dumbest time ever to get out of the stock market,” advised Hennsler. When stocks are cheap, this is the ideal time to buy, not sell.
- What about unemployment? Sure, unemployment is creeping up. But in recent years it’s been at an unprecedented 5%. Manufacturing is hurting, so move into growth areas like education and health.
- Are banks doomed to failure? No. They’re simply changing getting back to basics like coaches concentrating on blocking and tackling. We had gotten away from that. People with good jobs and good credit can still get loans for houses and businesses. People with bad credit and shaky jobs and no collateral won’t be able to get loans. That’s the way it’s supposed to be. We had gotten away from that. Build relationships with bankers. Give them a detailed business plan. So much of business is about relationships. Pursue them.
- How can the government give away all that money? Won’t we have to pay for it? Henssler believes that the government could actually make money on these bailouts. Companies will have to pay on the loans and the government will own assets that they’ll be able to sell, hopefully at a profit, in more stable times.
1. Don’t get rid of your key people.
2. Be informed, but don’t take drastic measures.
3. Keep your optimism.
4. Don’t overreact. Keep the lines of communication open.
5. Don’t cut back on marketing. Sell, sell, sell!
Thursday, October 2, 2008
Wise Investing Advice for Turbulent Times
These are scary times. I heard last Friday that my bank had shut its doors. Fortunately, another company had bought them out, so that I can still write checks, visit the ATM and receive automatic deposits from my companies. What if they'd not been bought out? How could I access my funds?
These are just a few of the questions people are asking these days. David Hultstrom is a financial adviser I respect. He gave me permission to reprint his recent newsletter below.
Subject: Financial Foundations October 2008 Newsletter, by David Hultstrom.
These are just a few of the questions people are asking these days. David Hultstrom is a financial adviser I respect. He gave me permission to reprint his recent newsletter below.
Subject: Financial Foundations October 2008 Newsletter, by David Hultstrom.
There seem to be a lot of questions out there about what is going on currently, so this month's newsletter will touch on a number of items and provide links to useful resources.
1) If you need a counterbalance to all the blaring headlines and breathless reporting about the current state of the financial markets, I highly recommend listening to the presentation at http://www.dfaus.com/library/videos/different/.
2) As you undoubtedly know, bank deposits are covered by FDIC insurance. If you would like specific information about how the coverage works, see http://www.fdic.gov/deposit/deposits/insuringdeposits/index.html.
3) Investment accounts are covered by SIPC insurance and information about that and other issues related to the failure of investment firms can be found at http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/P116996.
4) There are a number of services that rate the safety of banks (see http://www.fdic.gov/bank/individual/bank/index.html), unfortunately most of them cost more than it is worth for a consumer who simply wants to know how their bank is doing. However, Bankrate.com does have a free search to see how your bank is rated at http://www.bankrate.com/brm/safesound/ss_home.asp.
5) The New York Times had a good interactive graphic that gave a sense of the size of the problems, see http://www.nytimes.com/interactive/2008/09/15/business/20080916-treemap-graphic.html and move your mouse over the listings. Note the data is a few weeks old now, which seems like an eternity in these fast-moving times. Also, this graphic gives a sense of the size of the Lehman bankruptcy http://www.investmentpostcards.com/2008/09/24/picture-du-jour-10-largest-us-bankruptcies/print/.
6) Based on monthly data since World War II, there have been 6 severe stock market downturns (declines over 20% in nominal terms). In these, the average decline has been about 1/3, and they have lasted an average of slightly over 3 years (in other words, the time from a peak through a 20% or more decline then on to a new high). In the worst of these (1973-74 and 2000-02), the market declines have been on the order of 45% and lasted 4-6 years until portfolios were back to their previous values. Currently, the U.S. stock market is down approximately 20% from its high almost a year ago. There is no way to know if it will go higher or lower from here. This is subtle but important. If there was a consensus that the market was going down further it would already be down to reflect that consensus. Conversely, if there was a consensus view that the market was headed higher, it would already be higher to reflect that expectation. There are only two ways to "win": 1) be smarter than the collective wisdom of everyone participating in the market, or 2) ignore short term fluctuations and remain with your target investment portfolio knowing that in the long run, you will be better off than the vast majority of folks who tried to time the market getting in and out. In this, as with many things, slow and steady wins the race. Occasionally, the market seems to get irrational and I think you may be able to profit from being less subject to the current hysteria (either positive or negative), this does not appear to me to be one of those times. I think the possible outcomes are much more uncertain than normal from this point and there is a significant chance of further deterioration and also a significant chance that the market could recover from this point. I don't know, and I know that I don't know (which might possibly make me smarter than the TV talking heads though less entertaining - I leave that for you to decide). Uncertainty and risk is why none of our clients have a 100% stock portfolio and none of our clients have 100% of the stocks they do own located solely in the U.S.
My tentative plan is to write next month about lessons that can be learned from both the technology bubble in the late 90's and the lending bubble we are still recovering from. Until then, if you need anything - even just to talk about what is going on - please feel free to contact us.
Note: Our clients are located around the country (and world), if you know someone we may be able to help, we would be happy to do so. While Financial Foundations is intended primarily for our clients, we are happy to expand our readership so feel free to pass this along. If you have received this from someone else in that manner and would prefer to get it directly from us each month, please let us know. Similarly, if for some reason you no longer wish to receive this (as unimaginable as that seems) simply let us know that as well.
Regards,
David E. Hultstrom
MBA, CFP, CFA, ChFC
Financial Architects, LLC
Financial Planning & Wealth Management
Address: 107 Weatherstone Drive, Suite 510
Woodstock, GA 30188
Phone: 770-517-8160
Fax: 770-517-8159
Toll Free: 888-Fin-Arch (888-346-2724)
E-mail: David@FinancialArchitectsLLC.com
Web Site: www.FinancialArchitectsLLC.com
David E. Hultstrom
MBA, CFP, CFA, ChFC
Financial Architects, LLC
Financial Planning & Wealth Management
Address: 107 Weatherstone Drive, Suite 510
Woodstock, GA 30188
Phone: 770-517-8160
Fax: 770-517-8159
Toll Free: 888-Fin-Arch (888-346-2724)
E-mail: David@FinancialArchitectsLLC.com
Web Site: www.FinancialArchitectsLLC.com
Disclaimer: The information contained herein or as an attachment is intended solely for the individual or entity to whom it is addressed and may contain confidential and/or privileged material. All information is believed to be correct but accuracy cannot be guaranteed. Opinions expressed are subject to change without notice. All investments are subject to financial risk and there can be no guarantees that performance results will meet or exceed expectations. Any review, retransmission, dissemination, or acting in reliance on this information by persons or entities other than the intended recipient is prohibited. If you have received this transmittal in error, we apologize for the inconvenience. Please contact the sender and immediately delete and/or shred all copies. Thank you.
Saturday, August 23, 2008
Frugal, Frugal, Frugal
I stole this title from the title of one of Stanley and Danko's chapters in The Millionaire Next Door, reflecting the findings of their surveys of people who had accumulated over $1,000,000. It's counter intuitive to think of the wealthy as frugal, I know, since we've all seen "The Lifestyles of the Rich and Famous" and assume that all wealthy people continually indulge themselves with yachts and extravagant vacations.
But it makes sense when you think about it: to accumulate wealth, you've got to live beneath your means; to accumulate extraordinary wealth, you've got to live wayyyy beneath your means. What distinguished these people was not so much how much they made, since they were spread out among many ordinary vocations. They were distinguished, in part, by spending much less than they made - living in neighborhoods with those who made far less, buying conservative, reliable cars. They accumulated wealth by refusing to throw it away.
This is the way my parents lived, thus instilling in me a different mentality than most of the culture I sense around me. Mom's favorite place to shop for clothes is, to this day, her favorite thrift store. Her favorite car is the one she's owned for ten years. She has plenty of money saved for retirement, believe me. Yet, she detests spending money needlessly and relishes a great bargain.
In the spirit of mom and the millionaires surveyed by Stanley and Danko, I've kept my eye out for ski equipment over the months. I take some of my kids skiing once each Winter, but I detest paying such exhorbitant fees for equipment rental. If we could purchase our own equipment cheaply and avoid the rental, we'd only have to purchase a lift ticket. Enter the local Good Will store and Play It Again Sports (selling used sporting goods).
If I bought brand new ski equipment, it would be new only until I used it once. For the rest of my life, it would be used. If you can buy quality used equipment, why not skip that first "brand new" day and start off used?
(By the way, my wife's in full agreement about my frugality. We had a Saturday morning date to Goodwill and she was delighted. She picked up a small table we needed for the laundry room. Reference Stanley and Danko's findings on marrying a frugal mate!)
So I got a nice pair of skis, Saloman ski boots in my size, poles and nice carrying bag, all for under $30.00.
Looking at sporting goods sites, it appears that new skis cost anywhere from $125 to $700. Saloman Ski boots from $125 to $450, poles from $20 to $50, carrying bags starting at $50.
So it appears that, even if you took the cheapest prices, I've saved over $300 in ski equipment by shopping used in the off-season. I'm also in the process of helping my 14-year-old twins purchase snow boards. If they save a similar amount, we're talking $900 in savings as a family, which, if invested in a stock market index fund that might return the historic average (10%), would give me over $100,000 in 50 years!
It's just one item. But the impact can be huge. Doesn't it make Stanley and Danko's findings make sense? These first-generation millionaires understood the power of frugle and applied it to their cars, homes, clothes, vacations, etc. So don't be embarrassed to frequent thrift stores, shop off-season and peruse Craig's List. When you do, you're thinking like a millionaire!
But it makes sense when you think about it: to accumulate wealth, you've got to live beneath your means; to accumulate extraordinary wealth, you've got to live wayyyy beneath your means. What distinguished these people was not so much how much they made, since they were spread out among many ordinary vocations. They were distinguished, in part, by spending much less than they made - living in neighborhoods with those who made far less, buying conservative, reliable cars. They accumulated wealth by refusing to throw it away.
This is the way my parents lived, thus instilling in me a different mentality than most of the culture I sense around me. Mom's favorite place to shop for clothes is, to this day, her favorite thrift store. Her favorite car is the one she's owned for ten years. She has plenty of money saved for retirement, believe me. Yet, she detests spending money needlessly and relishes a great bargain.
In the spirit of mom and the millionaires surveyed by Stanley and Danko, I've kept my eye out for ski equipment over the months. I take some of my kids skiing once each Winter, but I detest paying such exhorbitant fees for equipment rental. If we could purchase our own equipment cheaply and avoid the rental, we'd only have to purchase a lift ticket. Enter the local Good Will store and Play It Again Sports (selling used sporting goods).
If I bought brand new ski equipment, it would be new only until I used it once. For the rest of my life, it would be used. If you can buy quality used equipment, why not skip that first "brand new" day and start off used?
(By the way, my wife's in full agreement about my frugality. We had a Saturday morning date to Goodwill and she was delighted. She picked up a small table we needed for the laundry room. Reference Stanley and Danko's findings on marrying a frugal mate!)
So I got a nice pair of skis, Saloman ski boots in my size, poles and nice carrying bag, all for under $30.00.
Looking at sporting goods sites, it appears that new skis cost anywhere from $125 to $700. Saloman Ski boots from $125 to $450, poles from $20 to $50, carrying bags starting at $50.
So it appears that, even if you took the cheapest prices, I've saved over $300 in ski equipment by shopping used in the off-season. I'm also in the process of helping my 14-year-old twins purchase snow boards. If they save a similar amount, we're talking $900 in savings as a family, which, if invested in a stock market index fund that might return the historic average (10%), would give me over $100,000 in 50 years!
It's just one item. But the impact can be huge. Doesn't it make Stanley and Danko's findings make sense? These first-generation millionaires understood the power of frugle and applied it to their cars, homes, clothes, vacations, etc. So don't be embarrassed to frequent thrift stores, shop off-season and peruse Craig's List. When you do, you're thinking like a millionaire!
Tuesday, August 5, 2008
Common Problems with Sudden Wealth
David Hultstrom is a financial planner and wealth manager for whom I have a lot of respect. His most recent newsletter was very insightful and I thought others would be interested. His contact information is at the end if you'd like to subscribe.
Financial Foundations August 2008 Newsletter
This month I would like to talk about the psychology of "sudden wealth". While probably all of us have had pleasant daydreams about the possibility of suddenly coming into a large amount of money, in fact it can cause a great deal of stress. The source of sudden wealth doesn't necessarily have to be winning a lottery or receiving an unexpected inheritance. Many people face adjustment issues even from the sale of a business, or the rollover of a large 401(k) upon retirement. In those cases, even though net worth is unchanged, having the wealth more accessible and liquid somehow makes it seem more real. Following, in no particular order, are some comments that I think might be instructive:
1) People who are prudent with small amounts of money tend to be prudent with large amounts of money. People who are profligate before an unexpected inflow will be profligate with that inflow. Or, in other words, more income or wealth won't solve what is fundamentally a spending problem. This is undoubtedly the reason that studies have found between a third and half of lottery winners end up declaring bankruptcy.
2) Far too often people who come into sudden wealth seem to almost be trying to lose the money - and subconsciously, they might be. Most people become comfortable with a certain lifestyle, self-image, etc. When something happens to change that, they may try (perhaps subconsciously) to get back to where they were previously. This is the financial equivalent of the biological process of homeostasis.
3) People think that lump sums will go further than they actually will. Someone who has made $50,000 per year all their lives may see the $500,000 in their 401(k) at retirement as an incredible amount of money, when it really isn't. The most extreme example of this that I have seen is a very successful attorney who was approaching retirement. His main assets were about $1,000,000 in his 401(k) and the value of his partnership share which his partners would buy from him for about $500,000. I asked the couple how much they needed to live on in retirement and his wife replied, "We have a fairly modest lifestyle, if we continue to get what he makes now, we should be just fine." I asked the obvious follow up question, "What do you make now?" To which he responded: "About $500,000." I wanted to ask what they planned to live on in year four (but I didn't). I also didn't get them as clients. My guess is they went with an advisor who said they were in fine shape.
4) People sometimes try to "prove something" to someone such as a spouse or a parent (even if the parent is deceased). It is not uncommon for someone to lose a great deal of sudden wealth in investments or businesses trying to demonstrate how skilled they are at investing or business.
5) Sometimes people don't know what to do so they ignore the funds completely. I once did a financial plan for a schoolteacher who lived very frugally on her salary. Her primary concern was whether she could afford to buy a condo to live in rather than continuing to rent an apartment. Her father had left her some stocks when he died more than 20 years previously, and she not only didn't spend any of the money, she had never bought or sold anything in the account. It was untouched for more than 20 years and her net worth was just under $1,000,000.
6) The receipt of sudden wealth can also cause strains with existing friends and family members. Many wealthy people are treated differently and not uncommonly feel taken advantage of. Of course, new "friends" and "advisors" become prevalent as well.
So, what is the solution? The main thing is to proceed slowly. It is OK to leave the wealth in cash while becoming acclimated to the new situation. It may not be prudent to immediately move to a nicer area, a bigger house, etc. As a first step, paying off all debt, and committing to remain debt-free is probably prudent. In addition, thinking of the wealth as an income stream, rather than a lump sum may be helpful. As I covered in the July 2007 Financial Foundations, the sustainable withdrawal rate from a portfolio is about 4% per year. Thinking of a million dollar windfall as being able to pay off a $500,000 mortgage and then have $20,000 per year from the remaining portfolio to spend, may lead to vastly different decisions than thinking about what to do with a million dollars.
Note: Our clients are located around the country (and world), if you know someone we may be able to help, we would be happy to do so. While Financial Foundations is intended primarily for our clients, we are happy to expand our readership so feel free to pass this along. If you have received this from someone else in that manner and would prefer to get it directly from us each month, please let us know. Similarly, if for some reason you no longer wish to receive this (as unimaginable as that seems) simply let us know that as well.
Regards,
David E. Hultstrom
MBA, CFP, CFA, ChFC
Financial Architects, LLC
Financial Planning & Wealth Management
Address: 107 Weatherstone Drive, Suite 510
Woodstock, GA 30188
Phone: 770-517-8160
Fax: 770-517-8159
Toll Free: 888-Fin-Arch (888-346-2724)
E-mail: David@FinancialArchitectsLLC.com
Web Site: www.FinancialArchitectsLLC.com
David E. Hultstrom
MBA, CFP, CFA, ChFC
Financial Architects, LLC
Financial Planning & Wealth Management
Address: 107 Weatherstone Drive, Suite 510
Woodstock, GA 30188
Phone: 770-517-8160
Fax: 770-517-8159
Toll Free: 888-Fin-Arch (888-346-2724)
E-mail: David@FinancialArchitectsLLC.com
Web Site: www.FinancialArchitectsLLC.com
Disclaimer: The information contained herein or as an attachment is intended solely for the individual or entity to whom it is addressed and may contain confidential and/or privileged material. All information is believed to be correct but accuracy cannot be guaranteed. Opinions expressed are subject to change without notice. All investments are subject to financial risk and there can be no guarantees that performance results will meet or exceed expectations. Any review, retransmission, dissemination, or acting in reliance on this information by persons or entities other than the intended recipient is prohibited. If you have received this transmittal in error, we apologize for the inconvenience. Please contact the sender and immediately delete and/or shred all copies. Thank you.
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