Coming home from a Salt Lake visit we flew the whole way under Instrument Flight Rules, or IFR, which means we were in the clouds. An IFR rating is very valuable, evidenced by a couple of younger pilots sitting in the airport lobby watching me take off, while they waited for the skies to clear. An IFR rating also adds a higher level of safety since sometimes non-IFR pilots find themselves unexpectedly in deteriorating weather conditions.
When I was studying for my IFR certification my instructor spent a lot of time reminding me that when you are flying in the clouds, or on a dark night without a horizon, it is very easy for the body’s senses to be fooled. The clouds flying past your windshield have a way of distorting those senses. This is why an instrument pilot is taught to focus on the instruments and trust them, regardless of what the physical senses are saying.
This point was made clear on one training event when my instructor took me into the clouds and told me to hold the plane straight and level without looking at the instruments. It was a challenging experience. At one point I sensed the plane pitching up so I gently lowered the nose to keep it in a proper level flight. My instructor asked how I felt and I told him I was pretty confident in my orientation. He then directed my attention at the instruments which showed I was actually rolling pretty hard to the right and headed downward. I was stunned and remember feeling very strongly that the instruments were wrong.
He then taught me a great lesson. He told me that if I am in darkness and I dwell on the darkness, then the darkness will disorient me and my life will be in danger. He pointed to my brightly lit array of computer instruments and said, “When you are flying in darkness, this is your light – stay focused on the light.” It was an impactful lesson.
Investors spend significant effort worrying about the endless negative news and considering all the things that could possibly go wrong. Dwelling on the “darkness” they become financially disoriented and fail to see the wonderful world of possibilities ahead of them.
As I have continued my study of our nation’s greatest investors I am continually impressed that none I have found so far made their fortunes being pessimistic. In fact, the only really successful pessimists I am aware of made their fortunes selling negativity, not investing in it.
It is good to be aware of the risks we face, but American history teaches that optimism has always won out, sometimes against some very high odds. I advise investors to not be ignorant of the darkness, but in seeking good investing ideas, they should do as the greatest investors before them and always look for the light.
As the saying goes, “A fool and his money are soon parted.” The sad reality is that most of the people I have dealt with who have lost money in fraudulent investment schemes have not been fools at all. They have been intelligent investors who are honorable in their business dealings. In most cases their downfall has been that, as good people themselves, they are naturally trusting of others. It is that wonderful quality of trust that is taken advantage of by unscrupulous individuals. In investing, it is wise to follow Ronald Reagans sage advice to “Trust, but verify.”
An investment scam that never seems to die is the foreign currency scam. To give an example of how this works let’s take the Iraqi Dinar scam. After the fall of Sadam Hussein, the Iraqi Dinar, which previously had been trading for three U.S. dollars (a price set by Saddam) fell to an almost worthless level. At this point scammers stepped in and started touting the Dinar in blogs and radio shows, explaining quite convincingly that when the government of Iraq stabilized, the Dinar would regain its former glory and investors could become overnight millionaires. These bloggers would then direct their trusting followers to companies that sold dinars (often secretly affiliated with the scammer themselves) where they could purchase huge quantities at fractions of a penny each. The scam resulted in massive amounts of Iraqi dinars printed to satisfy demand.
The scam played on greed since a person might be able to buy 10 million dinar for a “mere” $10,000. The scammer claimed that even if the dinar regained a fraction of its former value, the investor would become rich. Rather than go into a long explanation of why this can’t happen, let me boil it down to simple math. It is estimated that there are currently 40 Trillion Iraqi dinars in circulation. That’s Trillion with a “T.” For comparison, the total U.S. currency in circulation is only 1.5 Trillion, according to the Federal Reserve.
Currency scams usually focus on obscure currencies whose true value Americans would not commonly know. They tout currencies like the Vietnamese Dong which trade at a fraction of a U.S. dollar, making them seem cheap. They promote the “how can I lose at this price?” mentality. Some of these currency sites charge many times what you would pay for the same currency at your local bank.
Though not illegal, it is dishonest to sell foreign currencies at grossly inflated prices. If you want to invest in currencies, which is generally a high risk proposition, find a legitimate firm to trade with and do an internet search or call your banker to make sure the price you are paying is the current market rate. Or better yet, don’t invest in things you know nothing about. The willingness to do so, coupled with a generally trusting attitude, places a huge target on your life savings.
Our daughter Natali plans great vacations, so when she invited us on a future photo safari, we were thrilled at the chance. We have always wanted to see Africa and being able to do so with a travelling expert made it all the more exciting.
After checking all the cool travel sites, I decided to review some safety precautions. My first stop was the State Department website. Though the information there is designed to be helpful, I must say I suddenly felt my enthusiasm for the trip waning a bit after reading all their warnings.
I then looked up the CDC to learn about immunizations. I was initially pleased that my trip had only one “required” immunization, but then it went on to highly recommend four more, and encouraged the consideration of an additional eight. Each recommendation was accompanied by an unpleasant description of some potential disease.
I decided to put together a spreadsheet listing the pros and cons of each of the 13 possible inoculations, noting the likelihood of contracting each specific disease, as well as potential side effects of the shot itself. Like all travelers, I weighed the risks and benefits and came to a personal decision.
As I went through this process there were times when I considered giving up on the whole trip. In a way, it has given me more appreciation for people who come to me and sheepishly admit they haven’t invested since their market losses in the 2008 crash. They know they have missed out on a tremendous opportunity, and have wanted to invest, but fear of the risk has kept them away.
Fear is overcome by education, so I ask these individuals how they invested prior to 2008 that lead to their losses, and discuss what they might have done differently. We review their future goals and talk about what level of risk might be necessary to achieve them. We learn about risk and attempt to separate real and likely risks from perceived or unlikely risks. The process is similar to my immunization spreadsheet which showed that at least half of the diseases mentioned we had almost no chance of encountering.
I also help people understand that there is risk in not taking risk, known as the opportunity cost. If you aren’t willing to take investment risk, then you risk missing opportunities that could provide a better life for your family. In similar fashion, if I never travel because I get too worried about all the risks, then I will miss out on many wonderful experiences.
Ironically, those who try the hardest to avoid risk often face even greater risks for doing so. Consider a risk averse friend of mine who never leaves the U.S. because he considers international travel too dangerous, yet he loves to visit New York. Risk can be scary, but knowledge can help reduce that fear to an acceptable level and allow you to enjoy the benefits available only to those willing to take a little risk to obtain them.
Every week my dad organized a family chess tournament among the kids, offering one dollar to the winner and an additional dollar if that winner could go on to beat him. I never lost one of those tournaments which made them increasingly fun for me but decreasingly fun for the other siblings. Eventually he added a prize for second place to keep the other kids interested in competing.
Chess is regarded as a “zero sum” game because the number of winners and losers is exactly the same. For every winner, someone has to lose. In the investing world there are also many examples of zero sum investments. This would be an area where you win by someone else losing or lose when someone else wins. The buying and selling of options is an example of zero sum investing.
In other areas zero sum investing works a little differently. For example, let’s suppose in your town there is an intersection with gas stations on each corner. Each day a pretty stable flow of cars choose where to buy gas and as they do, some stations’ revenue increases while others decrease. The total gas sold at the intersection remains stable, but how much each station sells is constantly changing. If one of those stations went out of business, would the amount of gas sold on that intersection change? No, it would just shift to the others.
Unlike with chess, a zero sum game in investing can actually be played to your advantage to reduce risk and improve the likelihood of success. In fact, during the gas wars of the 60’s and 70’s some major oil companies played this game by effectively buying out all the gas stations at the intersection. This allowed them to focus on the total gas sales at the intersection, with no concern as to which station a car actually stopped at.
Surprisingly there is a similar option for regular investors. Rather than trying to pick which “station” or stock is likely to survive, they can buy pooled investments that hold large baskets of stocks. In this way they can reduce the risk of individual company failure and focus more on the economy as a whole or on a specific sector. These are sometimes known as index funds, or ETF’s (exchange traded funds) which essentially allow investors to buy the entire “intersection” rather than individual “stations.” There is still no guarantee of profits from index type investing, but you have at least eliminated or managed some of the risks.
As investing has become more transparent and in a world where news, and fake news, spreads uncontrollably at times, I believe investing in individual companies today carries more risk than it once did. It can be profitable for the “chess players” who are confident in their decisions and willing to take more risks, but for most investors I believe an approach that allows ownership of entire “intersections” might make more sense.
In a recent column Andrew Sorkin commented, “We have a financial literacy epidemic in America.” His was referring in part to some foolish fiscal Ideas being floated by elected officials. Many of these ideas are coming from the younger members of congress, those of the so-called millennial generation.
Millenials are often ridiculed by other generations for their self-centered, internet addicted lifestyles. They are mocked for acquiring massive student debt while blaming their elders for that debt. Yet, ironically the new political leaders of this much maligned age group seem to believe there exists unlimited piles of money sitting around waiting to be spent on their idealistic causes.
The current debate may lead one to believe that somehow our financial literacy problem is a new thing. Millenials are commonly maligned while the world heaps praise on the greatest generation, those depression era children, for being the wise old sages who lived frugally and responsibly. But the facts tell a different story. Among retirees today, none of whom are millennials, 38% of their retirement income comes from social security payments while only 29% comes from their personal savings. I have had the opportunity to work with many of the great savers from the greatest generation, but I am fully aware that many others in that age group were woefully unprepared for retirement. Baby Boomers may be even less prepared.
As we struggle with our national financial illiteracy problem, we must accept that it spans all generations. The problem is not limited to millennials, boomers, Gen X, Gen Y, or the greatest generation. It has been a group effort of them all. Our nation is drowning in unimaginable debt and while the Millenial leaders blame their elders for the problem, they too are showing by their words and deeds they have every intention of continuing to add to it. There is plenty of financial illiteracy to go around.
I do not need a crystal ball to see that somewhere in the future the greatest threat to our economy, and to investors, may by our out of control growing national and personal debt. Though sometimes necessary, it would seem that during these times of record economic growth, adding trillions more to that debt represents the height of financial illiteracy. Sadly, and quite unfairly, the ones who will suffer the most under all that debt have likely not even been born yet.
Current investors may dodge the bullet but future investors face a very real risk from a rising national debt if something is not done. Like a family, a nation can borrow against the future and get away with it for quite a while, but not forever. It is simple math and investors need to keep a watchful eye as the economic threat of this math grows.
The great frustration with this very real problem is that the solution for both families and governments is so very simple that even a child can understand it. Spend less than you make - Financial illiteracy problem solved.
In training, flight instructors often give challenges far beyond what you are likely to experience in a real flight by artificially simulating multiple system failures at the same time. On one challenging maneuver I missed an action to which my instructor replied, “Make sure you never forget to hit that switch in this situation.” Exhausted, I replied, “OK, but what is the worst thing that could happen?” He didn’t respond but just gave me that “We are 25,000 feet above the earth” look.
I receive regular emails asking what I consider to be the greatest current risks to investors, or what the worst case scenario might be. So I thought I would list some of the items I think we should keep an eye on. I do this as a training exercise while I continue to be generally positive about our economy in the near term, 12-18 months.
Unresolved Trade Wars – We need trade with other countries to remain a vibrant economy, and they need trade with us. In a localized economy the big player on the block usually has the advantage, but on the world stage the biggest player is often taken advantage of. The current administration is in a trade battle mostly with China that is hurting the economies of both countries. The numbers show China to be suffering more but their non-elected lifetime leaders have staying power. Both sides have ample motivation to resolve this sooner rather than later, which I expect, but as it drags on it will continue to hurt both sides.
Interest Rates – We need low rates for growth but high enough rates to temper inflation. It is a delicate balance. When rates were going up in the fall, the market panicked. Now that rates have levelled and may even go down this year, investors fear it may be a sign the Federal Reserve sees economic weakness. The best hope is for very small interest rate changes, which I expect.
Deficit Spending – As I mentioned last week, the math of debt is very simple. Either you control it or it will control you.
Healthcare – In 2018 Americans spent $3.65 trillion on healthcare making it the biggest portion of our economy. More people are employed in healthcare than any other industry. Interestingly, that amount was about ½ the total world spending on healthcare, despite our relatively small population. The cost of healthcare is sucking a lot of money out of other growth areas of the economy, which will suffer long term without a more efficient healthcare solution.
Political infighting and extreme ideas – The highly polarized environment in Washington has made it difficult to deal with our national challenges. Some solutions being floated are in direct opposition to the free flow of ideas and capital that have built our nation and its world leading economy. Somehow, common sense and common ground must be found to resolve these and other issues. For investors and our economy in general, if we don’t find a way to solve problems together, this may actually be the worst thing that could happen.
I remember the very first time I held a five dollar bill of my own. I earned it by working 10 hours over two Saturdays at my Dad’s shop. When I got the job, I dreamed of the candy I would buy when payday came. But as I sat on my bed that day looking at that bill, turning it over and over and seeing those amazing big number 5’s on it, I suddenly had a difficult time deciding what to do with it. It was no longer just money waiting to be spent, but it was a valuable representation of long hours of work; Work, that would have been wasted if I wasted the money. That moment in time is fixed in my memory.
Our office recently received a call from a child of one of our long time clients. We had worked with the client for many years and had a very close relationship. This couple had lived a normal middle class life, faithfully saving a portion of their monthly income and spending wisely so that it might last throughout their retirement.
The phone call was very short and amounted to the child of our client informing us that their last remaining parent had passed away the night before. As the successor trustee he asked how much money the parents had left, then said that he and his three siblings wanted the account cashed out and sent to them as soon as possible. Because Investment markets are constantly moving, it’s often not the best idea to just liquidate everything all at once, but as we tried to explain this to the trustee he made it clear that he just wanted whatever cash could be generated as quickly as possible. The tone of the call, literally hours after their parent’s death, was disturbing.
Sadly this situation is not uncommon. I have often thought that if parents could foresee the way their kids behave when they find out they have an inheritance coming, they might seriously reconsider how they leave money behind. There are certainly children who are not this way, but far too many are unprepared financially or emotionally to be given money they did not earn.
My experiences have taught me that when you work for money, when you sacrifice to save your money, you have a much greater respect for it. You tend to be more cautious about how you invest and spend it. On the other hand, it is often the case that heirs who are not financially sound themselves, can be very quick to demand their share and even quicker to spend it.
If your estate plans include “leaving a little something” for your kids, consider that a good example and some well-timed lessons can be much better than a big check. One of the best things my Dad ever did for me financially was to give me the chance to earn that $5 bill, rather than just handing it to me. That lesson has blessed my entire life.
Many years ago I was affiliated with an investment firm that was bought out by an insurance company. We were promised the deal would improve service and product availability. As an added bonus the new company provided health insurance coverage to its reps.
Initially it was a good relationship, with them leaving me alone to run my business without corporate interference. Quite regularly they would send me notifications from the home office of investment ideas along with literature highlighting some of their insurance offerings. It was useful information and I occasionally found their products provided a good solution for my clients’ needs.
It wasn’t long before I noticed the material from the home office was focusing less on investing and more on their proprietary insurance offerings. Since they were mainly an insurance company this did not surprise me. Then one day I received a call from an office rep asking why I was not selling more of their insurance products. I responded that I had a responsibility to my clients to do what was in their best interests and so I used their products only when they provided the best solution. I was then told that if I didn’t sell a minimum quota of company sponsored insurance products, my company health plan would be terminated. Shortly after this conversation I resigned my association with that firm, being unwilling to work in an environment that did not allow me to put my clients’ needs first.
For several years regulators have been trying to clarify the level of care financial advisors owe to their clients. Currently there are two standards. One follows a “suitability” definition which means that any product offered a client must be suitable to their needs. The higher level is known as the “fiduciary” standard which means all products recommended must be in the clients’ best interests. I can illustrate the difference with a simple analogy. Suppose an 80 year old needs a new car to drive mostly around town, about 3000 miles per year. The salesman might sell her an $85,000 BMW, which would certainly be suitable as it would get the job done, but would paying for such an expensive luxury car really be in the buyers best interests? (Although it could be argued the sale of the BMW would probably be in the salesman’s best interest) The fiduciary standard requires a financial advisor to put a clients’ interests ahead of their own, but a large number of financial advisors in the securities and insurance industries are not currently required to abide by this higher level of care.
As the regulators attempt to sort out the issue, it is useful for the clients of financial services to know that advisors work under two different standards. Knowing which standard your advisor is bound by will help you know whether what you are being recommended is required to be in your best interests, or if it just satisfies the lower “suitability” standard.
In 1975 an unsuccessful man by the name of Gary Dahl was hanging out with friends at their favorite bar. They happened to be discussing their family pets and how much trouble they were. The more they drank the louder they laughed until Gary, without any forethought, blurted out that he had the best pet in the world. His pet needed no food or care or training. “What possible pet is this?” his friends asked. Gary responded that his pet was a perfectly behaved little rock. The group laughed and headed to their homes but the conversation inspired Gary to create the Christmas gift sensation of 1975, the Pet Rock. In a short three months he sold over a million rocks for $4 each (which he purchased for a penny). Then as quickly as it began the fad ended and Gary walked away with a small fortune, leaving a huge pile of unsold rocks in his storage yard.
Years ago I attended a convention with a speaker who was teaching us how to build a successful company that would leave a lasting legacy. He asked, “What impact would it have on the world if you disappeared? If your company disappeared?” The question had such impact on me that I keep the saying on my phone where I can see it regularly. It is a humbling thought to consider how and if you will be missed when you are gone.
I have found great value in applying this question to the businesses I evaluate for investment purposes, recognizing that a company that would be desperately missed should have more staying power through the ups and downs of the economy. I suggest investors look through their own portfolios item by item and consider the same question.
In many cases you might realize our modern lives have become heavily dependent on the products and services you have invested in. If so, then you are probably on solid footing with these investments. In a few instances you may find companies that produce a currently popular product, but one which could fade away without too many people noticing it gone. With these, proceed with caution lest you be caught holding an investment that was yesterday’s news. And finally, you may even find one or two that fall under the “Pet Rock” heading where the only people who would care if the company failed would be the investors. I doubt many people still own their pet rocks or would even admit to having bought one.
A company whose absence would not be missed may offer a higher risk for a retired investor who needs an income stream they can depend on. As you evaluate your portfolio based on this question, focus on products and services you feel the world just can’t live without. The Pet Rocks did well for Gary Dahl, but after Christmas he sold his remarkable trademark pets to other investors who, over 40 years later, are still waiting for the world to want their product again.
There once was a farmer who wanted to raise a turkey so he built a pen with a nice bed of straw, fresh water daily and plenty of food. He put a baby turkey in the pen and each day checked on the bird, changed its water, and filled its food bowl. The turkey loved his little place and the bigger and fatter he got, the more he bragged to the other farm animals about his wonderful life.
One day the farmer came to the pen to visit his turkey but this time rather than carrying a handful of feed, all he had in his hand was a sharp axe. The moral of the story is, “Past performance is no guarantee of future results.”
I receive regular investor fraud notices and today I read once again of a Ponzi scheme that cost retirees millions of their hard earned dollars. I commented to someone in my office about how this type of fraud has gone on for decades. I asked out loud when people will finally stop sending money to these criminals, to which someone in the office replied, “When we eradicate greed.”
Despite all the warnings, Ponzi schemes continue to succeed because of their brilliant marketing plan. All they require is for the scammer to get a few people to give him money, for which he almost immediately begins to send them a very high rate of return. In no time at all his investors will begin bragging to their friends and neighbors about their wonderful investment. Ignoring all red flags, others rush in to invest because they don’t want to miss out on the big profits that everyone else seems to be making. Common sense goes out the window when greed steps in to take its place. This genius marketing plan costs almost nothing to implement. Before long the scammer is syphoning off huge amounts of money, unbeknownst to the happy investors upon whom the axe will soon fall.
As long as there is a market for greed, criminals will continue to profit from it. If you want to avoid such schemes, begin by recognizing that an unreasonable rate of return is a huge red flag, regardless of how long a friend of yours says they have been receiving it. One of the first signs of fraud is the use of testimonials from other “satisfied” investors who themselves have been duped into being unwilling accomplices. They might be very excited about the investment because the payments keep coming into their bank accounts each month, unaware that the scammer is merely giving them other investors money, which will eventually run out.
Past performance can be valuable in evaluating an investment but it is only one of many factors to consider. Never use it alone as evidence of a good investment, or you may one day wind up like that happy turkey looking at the wrong end of a sharp axe.
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 375 E Riverside Dr, St. George, UT 84790
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