What Is Consumer Relationship Marketing (CRM)?

June 26th, 2010 No comments »

The foundation of Consumer Relationship Marketing (CRM) is a marketer in possession of data that enables the marketer to address a consumer not as an anonymous member of a mass audience but as a unique individual. However, CRM is about more than just data. A precise definition of CRM is:

Consumer

A marketer’s customers

Prospective

Current

Past

Relationship

The marketer can address the consumer specifically as an individual or a household through addressable consumer data

The marketer has the consumer’s explicit or implicit permission to communicate with and deliver marketing messages to the consumer

The marketer and consumer engage in targeted, one-to-one communications facilitated by both interactive and non-interactive media, where appropriate

The marketer transmits personalized content or messages to the consumer based on known consumer data, predictive model results, or estimated lifetime value to the marketer

The marketer optimizes the relationship by taking into account content, messages, and cadence across brands and touch points

Marketing

To set the consumer’s expectations for a future brand experience

To mentally condition the consumer for a sales transaction

To physically position the consumer for a sales transaction

To increase the likelihood that the consumer will purchase the marketer’s product in a competitive, free choice situation

This definition of CRM applies to a marketer’s entire portfolio of brands and to each individual brand within the portfolio. This portfolio approach enables the marketer to manage a cross-brand relationship with an individual as his or her lifestyle — including product needs and brand preferences — changes over time.

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Tags: consumer relationship marketing CRM

The U.S. Will Never Be Able To Pay Back Its Debts

December 5th, 2009 2 comments »

On November 30, 2009, Sandy Leeds, CFA, a Senior Lecturer at The University of Texas at Austin, provided at his website, LeedsonFinance.com, an excellent, crystal clear analysis of the Dubai debt default situation (see “Why Dubai Matters” here).

Interestingly, most of the comments from Mr. Leeds’ readers focused on a small aside that he made about the U.S. government’s own debt situation:

“Emerging nations may have trouble paying their debt, even as the global economy improves. (Personally, I’m not sure why everyone is simply talking about emerging nations – the US will never be able to pay back its debt either.)”

Mr. Leeds’ readers wanted to know if he could elaborate on his aside, answering how exactly it is that the U.S. government will never be able to pay back its debts and what the market and economic consequences might be. As of December 5, 2009, Mr. Leeds had not responded to his readers’ comments, so I decided to take a stab at a response myself. I reprise below what I had to say at Mr. Leeds’ website.

Logan Flatt, CFA

————————-

Perhaps I can help clarify Mr. Leeds’ comment regarding the U.S. government not being able to pay its debts. The question comes about through differing definitions of the term “default”.

First, we have to remember that the U.S. dollar and all other U.S. government debt (the dollar is simply unsecured, non-interest-bearing debt of the U.S. government**) are predicated on the “full faith and credit” of the U.S. government. What that means is that the U.S. government says “Trust Us” and promises to never allow its financial house to get too far out of order whereby investors in U.S. dollars and U.S. interest bearing debt would have to worry about 1) the U.S. government’s ability and willingness to pay the interest on the debt, 2) the government’s ability and willingness to pay back the principal on the debt ON TIME, and 3) the U.S. government paying back the interest and the principal with a currency — the U.S. dollar — that has lost significant purchasing power from the point at which the original investment was made and the point at which the interest and principal repayments are made.

[**NOTE: The U.S. dollar USED to be secured by the U.S. government's gold bullion ("Fort Knox") up until 1971 when President Nixon "closed the gold window" on the European banks who were hastily redeeming their U.S. Dollars for the U.S.'s dwindling gold reserves after the U.S. government started overspending on the Vietnam war and on Johnson's "Great Society" entitlement programs during the mid- to late-1960s.]

Where China, Japan, Saudi Arabia and other large holders of U.S. government debt (both interest-bearing and non-interest-bearing) are getting nervous about their vast U.S. holdings is on #3 above. What good is an investment in the debt of a government when the government can — if it freely chooses to do so — multiply the size of its money supply and credit facilities (see a chart of the U.S. money supply from 1917 to 2009 here) such that the purchasing power of the currency issued by the government falls, say, in half? In real terms, the present value of the investment falls dramatically and the holder of the debt is screwed when it receives future repayments in a highly devalued currency.

On the surface, it is currency risk. In reality, it is political risk: the investors made an investment in a government that, to the investors’ collective chagrin, could not be trusted to stand behind its promises. This has happened to many investors in developing country debts over the decades (e.g., Mexico, Argentina, Zimbabwe, etc.) and the investors in U.S. debts are beginning to question — and rightfully so — the integrity and veracity of the U.S. government in keeping its promises to never allow its financial house to get too far out of order.

So, what I — and maybe Mr. Leeds too — am suggesting is that the U.S. government will EFFECTIVELY default on its debt obligations by continuing to expand the money supply and its credit facilities (through the machinations of the U.S. Treasury and the Federal Reserve System) such that the purchasing power of the U.S. Dollar falls precipitously, thus screwing over its creditors (see the definition of “beggar thy neighbour” here). Yes, NOMINALLY the U.S. government could make its interest and principal payments to its creditors and thus legally not be in default; but, in REAL terms, the U.S. government will have proven to its creditors (and any future investors) that the government is not to be trusted to keep its promises and will have effectively defaulted on its creditors by paying them back in paper currency worth far less than the same paper currency the creditors lent to the U.S. government only years earlier. It is important to note that this default action is under 100% control of the U.S. government since it and it alone controls — via the U.S. Congress (see Article 1, Section 8 of the U.S. Constitution, the Enumerated Powers of Congress here) — the monetary policy, the money supply and the credit facilities that determine the value of the U.S. Dollar at any given time (Congress sets policy that the Fed is supposed to follow; i.e., the Congress can redirect the Fed IF Congress has the willpower and collective knowledge to do so). Therefore, the ‘default’ will be a conscious decision of the U.S. government, not a market-based outcome.

Alas, the U.S. government has shown little sign as of late in keeping its financial house in order as it bails out private, politically-favored companies under the guise of “too big to fail”, layers on even more entitlement programs under the guise of “health care reform”, funds a vast empire of 800 military bases scattered throughout the world that cost nearly $1 trillion per annum just to MAINTAIN, and fights multi-trillion dollar wars in Iraq, Afghanistan, and Central and South America (the “War on Drugs”) caused by its own misguided foreign and economic policies. And these trillions don’t even begin to touch on the UNFUNDED obligations (estimates I’ve seen are $50 TRILLION to $80 TRILLION in current dollars) that the U.S. government faces over the coming years as the entitlement programs of Medicare and Social Security become effectively insolvent through poor social policy and bad government program design stemming all the way back to FDR (1930s) and Johnson (1960s) and their ill-fated attempts to ’socialize’ the United States in the same vein as many European countries (who, however, don’t share the same Constitution as the United States, which itself effectively makes ’socialist’ government policies unconstitutional — i.e., the whole point of the U.S. Constitution is to LIMIT the size and power of the U.S. federal government, not to expand it!).

So, unless the U.S. government completely reverses course and begins to shrink itself by slashing spending and cutting departments and programs wholesale — a highly unlikely occurrence with either of the two major U.S. political parties currently in power who lack the political will to do what is right by the American people who will also be screwed by a hugely devalued U.S. dollar — the U.S. government is on a straight and narrow path to a massive currency devaluation fully under its control that will effectively lead to a ‘default’ on U.S. government debts over the next two to ten years, I suspect. At that point, yield to market rates on U.S. Treasuries will be in the double digits as investors demand far more compensation for the risks they are taking by investing in a demonstrably untrustworthy government.

It’s sad, and I wish it weren’t so; but, here we are.

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Posted in Current Affairs, Investing, Uncategorized

Tags: currency risk debt default economic policy entitlement programs gold gold standard gold window interest monetary policy money supply overspending political risk principal social policy Treasuries U.S. Constitution U.S. dollar U.S. government unfunded obligations United States yield to market

Transform with Gratitude

October 27th, 2009 3 comments »

By Logan Flatt, CFA

As Americans start the holiday season of an economically challenging 2009, we have much for which we can be thankful. After all, we live in America and we are a prosperous and generous people. For example, working hard in America today is Bill Phillips, the self-made multimillionaire and author of the bestselling book, Body for Life. Bill is thankful for his good fortune and has decided to make it his mission in life to help Americans of all colors and sizes make healthy changes in their lives so that they in turn can make a difference in the lives of other Americans. While his message may be schmaltzy at times, it is fundamentally sound: he advocates that each of us must “Be The Change” we want to see in our lives and that the best way to do that is by changing how we as Americans eat, exercise, and think. In short, Bill suggests that a healthy mind and spirit can only thrive in a healthy body for it is the body that hosts and feeds that mind and spirit.

To encourage Americans to be healthier, Bill puts up hundreds of thousands of dollars of his own money each year to challenge any and all comers to his Be the Change Challenge (It’s free. See www.transformation.com for more information). If you work hard over 18 weeks to transform your health and fitness, you could be crowned a Transformation Champion and win some of Bill’s money for yourself and for your favorite charity.

One such Champion is Denise Taylor, a married mother of five children from Sellersburg, Indiana. What made Denise’s championship unique was the venue in which she got fit: a hospital. Denise lived at the hospital while taking care of her 15-year old daughter Jonnae, who spent months there undergoing treatment for leukemia. While Jonnae slept, Denise would run up and down the hospital’s staircases for aerobic exercise. For resistance training, Denise would do push-ups and sit-ups on the floor of the hospital room while Jonnae watched and counted aloud the reps.

Denise and Jonnae were happy to support each other as each attempted to conquer her own personal adversity – Jonnae to defeat leukemia and Denise to transform her body, mind, and spirit through the Challenge. Denise likes to point out that she and Jonnae rallied together against adversity through gratitude. Both enjoyed using the gracious phrase “I get to” as a replacement for the more burdensome “I have to.” For example, Jonnae didn’t tell her friends, “I have to have a bone marrow transplant.” Instead, she told them, “I get to have a bone marrow transplant.” This simple change showed Jonnae’s gratitude for having a chance, a hope for a cure to her cancer that many other children in the world do not have.

As Americans facing economic adversity, we can all learn a powerful lesson from Jonnae and her mom. Many of us who suffered financial losses over the past year now have to work harder, save our earnings, and rebuild our investment portfolios. Many of us have to go out and try to find a new job in an economy with a 10% unemployment rate. Many of us have to move out of our cherished home and into a smaller house or an apartment to make ends meet. But, do we HAVE TO do these things? Or, do we GET TO do these things? Bad economy or not, we are still Americans living in America: we represent only 4.5% of the world population, yet we control over 20% of world economic output. Our disproportionately large control of economic power endows the average American family with many trappings of life that go far beyond those of the average non-U.S. family.

Take a look at India: it’s a country with 17.2% of the world population and its average income per person is only $2.78 a day. Could you live on only $2.78 a day, every day of the year? Probably not. You likely spend more than that on a Starbucks latte just to get your day started (the average U.S. income per person is $130 a day – before taxes). China is similar to India: it has 19.6% of the world population and its average income per person is only $8.93 a day. You likely spend at least that much on lunch. Do you think average people in India, China, and other places like Africa, Southeast Asia, South America, and Eastern Europe even have investment portfolios that they have to rebuild? Do they have good paying jobs they have to go out and find again? Do they have a comfortable family home that they have to sell? No, they don’t have to do any of these things because, for them, it is simply not economically feasible to do in the first place.

Here in America, life is different. Americans don’t have to do these things during tough economic times. Americans get to do these things – things that average people in the rest of the world would love to get the chance to do. In America, we are all privileged. We don’t have to do anything. We get to do everything – even those things we do not really want to do. It’s a valuable lesson that Denise and Jonnae knew well as they both battled to become champions. While her treatments, her mom’s love, and her own sense of gratitude kept leukemia at bay for many months, Jonnae succumbed to the disease on June 9, 2008. Her mom Denise is grateful it was a battle the two of them got to fight together.

Addendum:
Watch a video of Denise and Jonnae’s story of transformation at www.Transformation.com.

Watch a video of Denise talk about Jonnae and “I Get To” in July 2008 at www.YouTube.com.

——————-

NOTE: This article first appeared in the Thanksgiving-themed Winter 2009 issue of The Swan, a publication of the Lake Forest Community Association, Inc., a nonprofit Texas corporation.

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Tags: adversity average American Be the Change Bill Phillips Body for Life challenge champions China control Denise Taylor economic output gratitude health India investment investment portfolios investments Jonnae Taylor make ends meet money population poverty power privilege purchase saving savings spending transformation unemployment

Volunteering to be Selfish

August 3rd, 2009 1 comment »

By Logan Flatt, CFA

As the producers of the largest mass of personal wealth in history, Americans show more financial generosity than any other group of people in the world. According to Giving USA 2009, an annual publication by Giving USA Foundation, charitable giving in the United States reached an estimated $307 billion in 2008 even with the U.S. economy mired in recession last year. Yet, Americans gave away more than their money. They also gave away their time through volunteering, the voluntary act of offering or bestowing one’s services for the benefit of those in need. According to the Bureau of Labor Statistics of the U.S Department of Labor, 26.4% of Americans (roughly 62 million people) volunteered at least once between September 2007 and September 2008. Of those who volunteered in that time period, the median number of hours spent on volunteer activities was 52 hours.

The Bureau of Labor Statistics did not publish a dollar value of the more than 3 billion total hours that American volunteers gave away in the time period studied. However, volunteering does have a cost: hours given away by a volunteer could have been used instead to produce a product or service of value for which the volunteer could have been compensated. For example, a high-powered attorney who charges her clients $500 per hour for her legal services could have gained $26,000 for her law firm had she not spent 52 hours volunteering her time to those in need. An economist would call the $26,000 forgone the “opportunity cost” of the attorney volunteering her time. It is a real, legitimate cost that an economist would not ignore.

However, few volunteers in America attempt to assign a dollar value to the hours they give away to those in need. To the volunteer, the mere act of giving to those in need trumps the economist’s “opportunity cost”, regardless of its value. Ah, but therein lies what the economist might reason as selfishness on the part of the volunteer: Is the volunteer truly giving away his time without gain or pleasure, or is the volunteer gaining what an economist would consider “utility”, a measure of personal satisfaction? After all, would a volunteer actually give away his time if he did not expect to receive some sense of satisfaction in exchange? It’s rare to find a volunteer who continues to give away his time in exchange for only misery, resentment, or regret.

Following the economist’s cue, a volunteer is right to behave selfishly in seeking to maximize her “utility” or satisfaction from giving away her time to those in need. Having trouble viewing the act of volunteering as a selfish act? Well, here’s an easy, five-step process to help you maximize your personal satisfaction from volunteering your time to those in need:

Find your passion – Proactively identify the one or two causes that you feel would give you the most personal satisfaction in your life and then go out and give away your time to the cause as you see fit.
Assess the real need – Do those in need have a real need, or is it a pseudo need – perhaps a need over-dramatized for the sake of fundraising or for the PR benefit of a celebrity trumpeting her cause du jour? Look at the needs critically and then decide for yourself. You’ll be more satisfied working on the real needs.
Volunteer on your terms – Don’t volunteer just because of social pressures to do so. Giving should emerge from your passion, not from your desire to conform. Remember, maximizing your “utility” out of your precious time you choose to give away is the goal. Pleasing others in your social circle is not.
Give anonymously – there is tremendous personal satisfaction to be gained by giving away both your time and money without taking any credit for it. It can be truly liberating. Try it.
Keep it close – volunteering is about making personal connections with those truly in need, not about impressing or socially outmaneuvering friends or colleagues at cocktail parties. Oftentimes, wearing your passion on your sleeve is less satisfying than simply keeping it close to your heart.

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NOTE: This article first appeared in the volunteering-themed Summer 2009 issue of The Swan, a publication of the Lake Forest Community Association, Inc., a nonprofit Texas corporation.

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Tags: anonymous charity compensate economics economist financial generosity fundraising giving money needs needy opportunity cost passion personal satisfaction selfish selfishness social pressure time utility voluntary act volunteer volunteering

Money, You’re No Love

February 13th, 2009 No comments »

By Logan Flatt, CFA

For most people, love and money are two very important things on this Earth. The two often intersect. A person can love money. A person can use money to try and buy another person’s love. A person can use the signals of love to try and gain access to another person’s money. Honorable intentions or not, many people place love and money closely together. Yet, love and money are not the same things. They are, in fact, quite different.

Simply put, money is just a tool, one of many tools available to each of us for getting what it is we want out of life, be it love or anything else. In a truly free market economy, an individual can freely trade his or her time, ideas, skills, or labor with others in exchange for money. In turn, the individual can use the money gained to aid his or her efforts in life, liberty and the pursuit of happiness. In a country such as the United States of America, life and liberty are abundant; so, many Americans tend to focus the tool of money on the pursuit of happiness. While any pessimist may warn that “money cannot buy happiness,” the typical American certainly has the freedom and optimism to give it a try.

Unfortunately, the bad economy of 2008/2009 has cramped many of our efforts to use money to buy happiness. Flows of money have slowed down or have shut down completely. However, it is important to keep money in proper perspective. Yes, money is important to our lives here on Earth. Without money, we are destitute. We are broke. We are bankrupt. Yet, in the grand scheme of life, so what? So what if we have no money? We are still alive! We still have family, friends, and neighbors who love us and care for us! And, their love and care for us remains constant whether we have money or not. That’s the great thing about love – it tends to remain a constant in our lives whereas money does not. Money comes and goes. It ebbs and flows. Meanwhile, time and life march onward relentlessly without pause.

Yet, each and every one of us will reach a critical point where money, time, and life on this Earth cease at once. As each of us reaches that critical point, money, time, and life converge on irrelevance – but money gets there first. When your time and life are up, you cannot take your money with you. Even if you could take your money with you, you wouldn’t be able to use it – who there would be willing to accept money issued by some earthly government? Love is different. Love is unique. You can take your love with you. You can use your love, and anyone there will be willing to accept it. Love remains the only thing of relevance as each of us approaches the critical point. And, love is the only thing that we can take with us beyond that critical point.

In 2009, we all will take in the bad economic news out there in the media ether, and we will witness closer to home many of our friends, family, and neighbors – even ourselves – lose jobs, personal fortunes, and financial security. Alas, we must remember that it is all just the temporary, inherent flux of money. We still have life, and we still have time to pursue happiness. Most importantly, however, we still have love, the one constant that will always be with us. So, savor it, share it, and save it – forever.

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NOTE: This article first appeared in the Valentine’s Day-themed Winter 2009 issue of The Swan, a publication of the Lake Forest Community Association, Inc., a nonprofit Texas corporation.

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Tags: bankrupt death exchange family financial security free market economy free trade freedom friends ideas labor liberty life lose job lost job love media money neighbors optimism pursuit of happiness skills time unemployment

Why Is U.S. Currency Green?

January 26th, 2009 1 comment »

By Logan Flatt, CFA

The green color of today’s U.S. currency is an artifact left over from the American Civil War. On the eve of the War, the U.S. federal government did not issue banknotes because the U.S. monetary system at the time was decentralized and independent of government control. Instead, according to the Hodges Genuine Bank Notes of America, 1859, 1,356 private banks issued over 9,916 different banknotes upon which trade throughout the States depended.

greenback1862

Image source: Ludwig von Mises Institute.

At the outbreak of hostilities in 1861, the need for funding of Union soldiers and armaments led newly-elected President Abraham Lincoln and the Republican Party-controlled Congress to pass the Legal Tender Act of 1862, which authorized them to issue large quantities of new U.S. Notes not backed by gold or silver. U.S. Notes were informally known as greenbacks because they were printed with black ink on the front and green ink on the back to help differentiate them from the thousands of private banknotes dispersed throughout the economy. During and after the War, the government’s growing issuance of greenbacks led to significant price inflation and, thus, a loss of purchasing power for Americans using them. In January 1875, Congress passed the Resumption Act which made the greenback redeemable for gold bullion at a fixed rate of $20.67 per ounce.

greenback1862b

Image source: Ludwig von Mises Institute.

With the color green firmly associated with currency issued by the U.S. government, in 1914 its new central bank, the Federal Reserve System, continued the use of the greenbacks’ bi-color scheme when it began to issue its new Federal Reserve Notes, which replaced U.S. Notes. Initially backed by gold bullion, the Federal Reserve Notes all Americans use today are backed instead by the “full faith and credit of the U.S. government” and are used throughout the world as a medium of exchange, store of value, and unit of account.

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NOTE: This article first appeared in the Fall 2008 issue of The Swan, a publication of the Lake Forest Community Association, Inc., a nonprofit Texas corporation.

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Tags: Abraham Lincoln bank notes banknotes Civil War Federal Reserve Notes Federal Reserve System gold gold bullion green greenbacks inflation legal tender private banks purchasing power silver U.S. currency U.S. Notes

It’s Future Cash Flows, Stupid!

November 23rd, 2007 No comments »

From The Financial Times newspaper:

Link to original Letter at FT.com

It’s future cash flows, stupid!*

Published: November 24 2007 02:00 | Last updated: November 24 2007 02:00

From Mr Logan Flatt.

Sir, It is no surprise that an academic study overlaying fundamental company data with equity market data (Long View, John Authers, “Number-crunchers are socially desirable again”, November 17) would conclude that reported earnings or earnings forecasts are the “best predictor” of the market’s valuation of a publicly traded company. After all, the market’s “valuation” represents the market pricing the company’s shares based on supply and demand.

Holding supply constant, market price is determined at the margin by speculative demand for the shares. Most speculators probably formulate their demand for the company’s shares based on a mixture of its most recent quarterly earnings report, analysts’ forecasts of future earnings, unofficial Wall Street whisper earnings, and random online chatter. In the spirit of “group think”, it is entirely possible that most speculators give more weight to earnings measures simply because more people in the market talk about earnings measures than cash-flow measures.

Ah, but there’s the rub: the objective and reasonable valuation of a company has little to do with the supply of and demand for the company’s shares and everything to do with the company’s ability to generate future cash flows. Many successful investors have proven records of using cash-flow-based valuation approaches to uncover and then take advantage of compelling investment opportunities that have exceeded historical market index returns.

They gained their advantage by using estimated future cash flows to assess a company’s intrinsic value – the economic benefit today of holding onto the company’s shares over the long term for the sole purpose of collecting future cash flows from the company – and then asking themselves: “What price am I willing to pay for the company’s shares today given the economic benefit the company’s shares offer me today?”

A quick look at the ticker tape told them whether or not it was prudent to pay the prevailing market price for the company’s shares. If the company’s prevailing market price exceeded the company’s intrinsic value, these successful investors likely took no action. If the company’s prevailing market price fell well below the company’s intrinsic value, they probably committed significant capital to the investment opportunity and never looked back.

I submit that speculators’ focus on the company’s near-term earnings measures probably created the short-term market inefficiency that led to the mispricing of the company’s shares vis-a-vis their intrinsic value. Furthermore, I submit that long-term market efficiency probably ensured the successful investors’ market-beating returns since, to paraphrase Benjamin Graham, the market is a voting machine in the short term, but a weighing machine in the long term.

Logan Flatt,
PowerWealth.com,
Dallas, TX 75230, US

*NOTE: Title chosen by The Financial Times, not Logan Flatt.

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Tags: academic study Benjamin Graham best predictor Bill Nygren cash flow cash flow measures cash flow-based valuation earnings forecasts earnings measures earnings report economic benefit estimated future cash flows Financial Times future cash flows future earnings group think intrinsic value intrinsic worth investment opportunities investment opportunity investments John Authers market efficiency market index returns market inefficiency market price market prices Martin Whitman Marty Whitman Mason Hawkins mispricing near-term earnings prevailing market price publicly-traded company quarterly earnings reported earnings speculation speculative speculators supply and demand ticker tape voting machine Warren Buffett weighing machine whisper earnings

Don’t Fool Yourself – Your Home Is Not An Investment.

November 4th, 2007 2 comments »

By Logan Flatt, CFA

Recently, a respected blogger on the Web misquoted me on their blog in an entry referencing my essay, “You Don’t Own Real Estate. Real Estate Owns You.” The blogger made a couple of critical errors in quoting me but the errors have, for the most part, now been corrected based on three points I made privately to the blogger by email. Below, I present the text of my email (with some small edits) for all LoganFlatt.com readers who have an interest in real estate investing to review and consider.

******

First, I never said on my LoganFlatt.com site that a “home mortgage is not an investment.” What I said was, “…your home is not an investment…” That’s a huge difference! I think your confusion arises out of your merging of two separate and distinct financial considerations from the homeowner/borrower perspective:

1. The Asset, which is the real estate property we would call “home”; it is an asset because it has marketable value to you and others in the real estate marketplace;

AND

2. The Liability, that loan or mortgage serving as a lien on the real estate property only because the buyer of the home did not have enough cash on hand to pay for the property outright and had to borrow the money from a bank or mortgage lender to complete the purchase of the real estate property.

From the borrower’s perspective, a “home mortgage” could never be viewed as an investment. It is a legal contract obligating the borrower to pay back the money borrowed, plus interest charges and other fees. In effect, the home mortgage slowly drains the borrower of cash through those interest charges and fees paid out over time. Being legally obligated to pay someone else cash over time is a liability. One “invests” in assets, not liabilities. A freedom loving person seeks to rid themselves of a liability – having no meaningful financial obligations such as liabilities is what “financial freedom” means. Consequently, an investment in a liability is a non sequitur.

It is important to note here that only the lender would view the “home mortgage” as an investment because that home mortgage is indeed an asset to the lender – in exchange for lending the money to the borrower, the lender gets the mortgage documents signed by the borrower agreeing to pay the money back plus interest charges and other fees. So, what is a liability to the borrower – the mortgage – is an asset to the lender. If you were writing about lenders, then your implication that a home mortgage is an investment would make more sense. Unfortunately, you were writing about borrowers in your post. So, contrary to what you posted, no, I do not agree with you.

Second, my quoted statement on your site [Editor's note: the quote used from my article was, "To make it your home, you must take cash out of your pocket each month to finance it, insure it, maintain it, fix it, furnish it, and pay property taxes on it. Unlike investment real estate, your home generates no income to offset these out-of-pocket expenses. So, while you likely derive much pleasure from owning your home, you lose money on it every month. Don’t fool yourself – your home is not an investment. It is simply a purchase."] would be true for a home that had no mortgage on it if only we were to delete two words: “finance it.” So, the home need not have a mortgage on it to fail my “investment test” – even if the homeowner owns the home free and clear, there are a litany of expenses associated with home ownership that make it difficult to call a home an investment (because the home generates no income itself to offset those expenses). This was the full point of the “Personal Real Estate is Simply a Purchase, Not an Investment” section in my article on LoganFlatt.com.

Third, both you and [a financial services professional who made, in my view, an erroneous comment to the blogger's post] appear confused on the notion that the use of “leverage” to buy a home somehow instantly transforms the purchase of a home into an investment. No, it does not. While “leverage” is a sexy term used by professionals in the trade to romanticize real estate investing and make it sound exciting conceptually, it is a red herring. It masks the truth: to use “leverage” is to legally obligate yourself to a lender. In other words, what you are doing when you “lever a deal” is voluntarily take on a liability and the risk of losing your home to the lender due to your failure to pay back that liability according to the lender’s terms. The addition of a liability to your home purchase does not – poof! – make your home an investment.

To clarify, when you use “leverage” to buy your home, you are essentially completing two separate and distinct transactions at the same time:

1. purchasing a piece of real estate that will generate no income for you to help you offset all the expense associated with owning said real estate,

AND

2. entering into a legal agreement to borrow money from a lender whereby you agree to repay the money borrowed plus interest charges and fees according to the lender’s terms specified in the agreement.

Note that the addition of “leverage” to the deal did nothing to change your home’s ability to generate income for you one bit. In fact, by borrowing the money to buy your home, you simply increase your home ownership expenses by adding interest charges and fees. Clearly, “leverage” is sexy in concept only; in the harsh light of reality, it is anything but sexy.

[Blogger], I hope that you and your readers will consider reading again my article, “You Don’t Own Real Estate. Real Estate Owns You.“ to recall and reinforce its key takeaways:

1. to invest in real estate means to own and operate income-producing real estate;

2. to speculate in real estate means to buy real estate at the prevailing market price and hope to sell later at a higher market price;

3. your home is neither an investment nor a speculation – it is simply a purchase of a piece of real estate to enjoy and call “home”, not to make money from it;

4. you really don’t own real estate if a government can swoop in and take it away from you because that government thinks your real estate stands between it and a just cause – a cause apparently less important than your personal property rights.

Thank you,

Logan Flatt, CFA

******

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Tags: asset borrow borrower buyer cash on hand expenses finance financial freedom financial obligation financial services free and clear freedom government home home mortgage home ownership home purchase homeowner income-producing interest charges investment legal agreement legal contract lend lender lender's terms lever a deal leverage liability lien loan market price marketable value mortgage mortgage documents personal property rights personal real estate property purchase real estate real estate investing seller speculation

“Growth Investing” Nothing More Than Rank Speculation

November 2nd, 2007 1 comment »

By Logan Flatt, CFA

Recently, Financial Times columnist, John Authers, made a “Long View” case for growth investing over value investing (Market News & Comment – Long View, “Now may be the time to go for growth stocks”, October 6/7, 2007). Unfortunately, Mr. Authers’ case for growth investing is actually a case for rank speculation.

Thanks to decades of promulgation by the financial services industry, it is now common for many people not unlike Mr. Authers to mistakenly use the terms “value” and “growth” to describe two contrasting styles of investing. However, there are not two styles of investing. Instead, there is investing and there is speculation. What is known as “value investing” is bona fide investing where fundamental analysis, reason, long-term ownership, and patience lead most investors to wealth. What is known as “growth investing” is rank speculation where fear, greed, short-term trading, and the desire for immediate gratification lead most speculators to treat Wall Street like a casino, placing emotional bets on what seem like ever-increasing market prices. That is, until reason prevails, the tables turn, and the madding crowd rushes for the exits, losses in tow.

Mr. Authers further errs in his contrasting definitions of growth investing and value investing: “Growth takes advantage of the market’s undervaluation of future earnings while value profits from undervaluations when a company gets into trouble.” Unfortunately, neither definition is correct. Value investing takes advantage of the market’s mispricing of a company’s shares relative to their intrinsic worth (i.e., the present value of the company’s likely future dividends or after-tax free cash flows expressed on a per-share basis) regardless if the company is in trouble or is as healthy as it can be. For example, it’s the buying of a company reasonably worth $25 a share when the market has it emotionally priced at only $15 a share. In contrast, growth investing takes advantage of the “greater fool theory” – the belief that regardless of what price you pay for a high-flying stock, some other speculator will be there to pay you a higher price when you are itching to sell it.

Another Financial Times columnist, Arne Alsin, had it correct months ago (Columnists – Inside Curve, “Two simple questions that protect against the siren’s song”, March 9, 2007) when he stated, “All great investors, from Warren Buffett to Peter Lynch to Michael Price, understand a single, fundamental premise. That is, in order to be a successful investor you have to be able to answer two simple questions: ‘What does it cost?’ and ‘What is it worth?’” As Mr. Alsin went on to point out, if an investor does not answer the second question, the answer to the first question is meaningless. We can surmise then that the speculator, in contrast, finds ignorance of the answer to the second question to be perilous bliss.

That “growth investing” is rank speculation is made clear by Mr. Authers’ concluding statement, “…stick to stocks whose fundamentals are really growing and then be ready to sell at the first sign of trouble.” Only a speculator would think this way. Warren Buffett – investor par excellence – has suggested that selling the shares of a company with sound fundamentals may very well be the last thing an investor should do when “trouble” arises. Instead, Mr. Buffett suggests we take a harder look and determine whether the trouble at hand is short-term operating trouble or long-term strategic trouble. If the company has hit a rough patch operationally but nothing about the company’s winning strategy has changed, a reasonable investor would stand pat or even buy more of the company’s stock. After all, if the company was good enough for you to buy its shares in the first place, why not consider buying more of it when speculators overreact to “trouble” and post their shares up for sale at significantly lower prices?

Ultimately, if Mr. Authers is correct and growth investing is “due for a period of outperformance,” we are entering – or, more likely, have already entered – a period of widespread speculation in stocks. Caveat emptor.

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Tags: after-tax free cash flows caveat emptor dividends financial services industry fundamental analysis greater fool theory growth investing growth stocks immediate gratification intrinsic worth market prices Michael Price operating trouble Peter Lynch short-term trading sound fundamentals speculation strategic trouble underpricing value investing value stocks Warren Buffett winning strategy

Classic Analysis Always Wears Well

September 7th, 2007 No comments »

From The Financial Times newspaper:

Link to original Letter at FT.com

Classic analysis always wears well

Published: September 7 2007 03:00 | Last updated: September 7 2007 03:00

From Mr Logan Flatt.

Sir, Luke Johnson pines for high-quality stock research focused on the intrinsic worth of a company:

“.. . classic analysis of shares will come back into fashion one of these days. I look forward to its renaissance.” (“Bring on the rebirth of classic analysts”, Ft.com September 4.)

Mr Johnson should note that classic, fundamental analysis never goes out of fashion. It is timeless in its design and wears extremely well. Also, I am happy to inform him that the renaissance festival is alive and well in downtown Chicago at the offices of Morningstar, Inc.

The company’s five-star rating system is based on the “margin of safety” between market price and intrinsic worth, just as the dynamic duo of Warren Buffett and Charlie Munger advocate.

Furthermore, Morningstar’s classically trained analysts can be an investor’s source of calm amid the storm – they often remind their readers to remain focused on intrinsic worth when market prices get choppy and speculators get sloppy. Why wait for fashions to change when one can be wiser and richer today?

Logan Flatt,
PowerWealth.com,
Dallas, TX 75230, US

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Tags: analysts Charlie Munger Chicago classic analysis five-star rating fundamental analysis intrinsic worth Logan Flatt Luke Johnson margin of safety market price Morningstar out of fashion PowerWealth.com renaissance renaissance festival speculators stock research timeless design Warren Buffett wears well

A Call for Using Only Financial Metrics to Measure and Evaluate the Performance of For-Profit CMOs

August 27th, 2007 No comments »

By Logan Flatt, CFA

Recently, Advertising Age announced¹ the publication of two research studies centered on measuring and evaluating the performance of Chief Marketing Officers and other marketing executives (CMOs) at some of the world’s largest for-profit corporations. Based on the study authors’ short comments in the announcement, I question the authors’ conclusions to the studies and offer an alternate perspective on those conclusions.

A Tale of Two Studies

The first study², an academic inquiry into the CMO’s effect on a company’s financial performance, covered 167 for-profit companies over a five-year period. The study concludes that “CMOs on top management teams don’t have any effect on a company’s financial performance.” However, the authors quickly caveat the conclusion by adding, “[our] study is limited because it focuses on financial-performance metrics, such as sales growth and profitability, and not brand equity.”

The second study³, the collaborative effort of a management consulting firm and an advertising industry association, relied on insights gained from “15 incisive and revealing interviews with former and current marketing leaders at household-name companies” to conclude that “measuring CMO performance based on financial performance alone is a mistake.” One co-author of the study declares, “Financial metrics alone do not define CMO performance.” Continuing, he proclaims, “A universal panacea to making marketing accountable doesn’t exist.”

CMO Performance Metrics Must Reflect the Capitalist Imperative

As a plain-speaking Texan, I respond to the authors’ conclusions and proclamations with a drawled “Hogwash!” Why do I feel they are wrong? The authors’ conclusions do not reflect the reality that a for-profit CMO must adhere at all times to the Capitalist Imperative – the prime directive from shareholders to “use our money to make more money.” Under the Capitalist Imperative, financial metrics such as sales, costs, profits, cash flows, and ROI are the only relevant metrics to use when measuring and evaluating CMO performance.

In contrast, traditional marketing metrics such as “lift in brand awareness,” “intent to purchase,” and “brand equity” collapse under the weight of the Capitalist Imperative because they do not measure a CMO’s direct effect on a company’s ongoing financial performance. At best, traditional marketing metrics merely suggest – in vague terms – a CMO’s possible effect on company financial performance. At worst, traditional marketing metrics distract from – or can be used to mask – a CMO’s inability to use shareholders’ money to make more money. Not surprisingly, traditional marketing metrics are of little interest or use to most decision makers outside of the Marketing department. It is no wonder then why CEOs and CFOs do not report traditional marketing metrics in their quarterly and annual reports to shareholders.

Let’s Give Shareholders CMO Performance Metrics They Deserve

Shareholders need to understand and appreciate a CMO’s contribution to company financial performance. A CMO often has discretionary spending authority over many millions of shareholder dollars for company marketing initiatives each year. Therefore, any evaluation of a CMO’s performance must be linked inextricably to financial metrics that reflect whether or not he or she spends those dollars in ways that create value for shareholders.

Yes, measuring and evaluating CMO performance using only financial metrics is a difficult task. It requires a good number of assumptions, estimates, and fancy mathematics to get the job done. Still, hard work and imperfection are not good excuses for simply throwing up one’s hands and declaring that the job cannot or should not be done. Shareholders deserve better than that. They deserve to know a CMO’s contribution to company financial performance in the terms most relevant to shareholders – through financial metrics alone.

************

References

¹“CMOs Rapped for Having Zero Impact on Sales: Study Shows Difficulty in Measuring Short-Term Value of C-Suite Position,” Mya Frazier, Advertising Age, July 9, 2007.

²“Chief Marketing Officers: A Study of their Presence in Firms’ Top Management Teams,” Pravin Nath and Vijay Mahajan, Journal of Marketing, forthcoming in January 2008.

³“CMO Thought Leaders: The Rise of the Strategic Marketer,” Gregor Harter, Edward Landry, and Andrew Tipping, edited by Geoffrey Precourt, strategy+business, published 2007.

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Tags: accountability brand awareness brand equity capitalist imperative cash flows Chief Marketing Officer CMO CMO performance costs financial metrics financial performance intent to purchase lift marketing executives Metrics profitability profits ROI sales sales growth shareholder value

The Choice Is Yours

August 10th, 2007 No comments »

By Logan Flatt, CFA

“Money makes the world go ‘round.” Although it is a cliché, I have not found anything in my years so far on planet Earth that seems to suggest otherwise. Money has a powerful influence around the world. People the world over make critical decisions – good or bad – based on money. They also change personal behavior based on money. Money does not have to be present to make people change decisions or behavior. Often, it is the lack of money that most influences how people think or behave.

On the surface, the process of making money seems mysterious and complex. Don’t be fooled. Making money is simple:

Sales – Costs = Profit

That’s not to say, however, that making money is easy – because it’s not.

In fact, making money is a challenge for most of the 6.6 billion people in this world. Most live in poverty or just above it. However, the 301 million people living and working in the United States of America – who represent less than 5% of the world’s entire population – appear to have mastered the art and science of making money quite well, thank you very much, as evidenced by the U.S.A.’s $13.1 trillion economy – nearly 20% of the world’s entire economic output. No wonder then that the United States of America – with disproportionate economic power given its relatively modest population size – is referred to by many people around the world as “The World’s Superpower.”

What makes money so complicated and so seemingly hard to make? Human beings. You cannot make money in a vacuum. You need to transact with other human beings to make money. That is money’s fundamental purpose – to facilitate the exchange of goods and services among individuals, corporations, and governments. A human being or a group of human beings lies behind each of these economic entities. Now, I am sure that you will agree with me that human beings are highly complex creatures. Moreover, nowhere do human beings get more complex than when they are with – or without – money.

Pessimists, cynics, and miserablists alike claim, “Money is the root of all evil.” As is typical of their negative, self-defeating ilk, they are wrong. Money is not evil at all. Money is not inherently good either. Money possesses no emotion, no feelings, no thoughts, and no beliefs. Human beings possess these things. Human emotion is the root of all evil (e.g., envy and hate) and of all good (e.g., trust and love). Money is indifferent. Money is innocent.

Despite its neutrality, money has a special magnetic quality: money is highly attracted to reason. If you are new to the concept of getting ahead financially, you will soon learn that the best way for you to attract more money to your life is to control your own emotions. After all, emotions like fear, greed, anger, hate, envy, and even optimism can quickly lead you into financial trouble. But, to really stake your claim to lots and lots of money, you must learn to cut through the emotional haze created by other human beings with a razor sharp weapon: rational thinking.

To get ahead financially, you have to concentrate and focus your rational mind on building wealth over the long-term. You must rid yourself of the emotional distractions that keep your mind mired in the short-term and its wealth-depleting temptations. I am not saying that you must ignore everything else in your life to the detriment of your health and those you love. I am not saying focus exclusively on building wealth either. What I am saying is that to truly build wealth for you and your family, you must make a conscious, rational choice today and be committed to your choice going forward.

Your choice is between Option A and Option B:

Option A: “I am willing to do what it takes to get ahead financially over the long term.”

Option B: “I am not willing to do what it takes to get ahead financially over the long term.”

Why are you not getting ahead financially? It is likely you have made the wrong choice between Option A and Option B in the past, or more likely, you have simply neglected to make the choice at all. The point is, you have a choice. And, to get ahead financially, you must make that choice.

So which do you choose, Option A or Option B? Stop, think for a moment, and make your choice right now.

(The waiting music from the game show “Jeopardy!” should now be playing in your head).

OK, you have made your choice, right?

And, you are firmly committed to that choice from now on, right?

Congratulations! You are now further ahead financially than perhaps 90% of the American population. Most Americans have not made the choice. They simply fly their financial lives on autopilot every day. However, you are different. You have made the conscious, rational choice. You have made the commitment to yourself. You have officially turned off the autopilot and are now firmly at the controls as you fly through your financial future.

Now, the Big Question:

Did you choose Option A or did you choose Option B?

If you chose Option A, I know PowerWealth.com can help you because you are committed to doing what it takes to get ahead financially over the long term. Please return to PowerWealth.com again and again over the coming months to learn more of the insights I will be sharing with you.

If you chose Option B, I don’t believe PowerWealth.com can help you much. My insights into building wealth can only help those individuals who are committed to doing what it takes to get ahead financially over the long term. You, unfortunately, have chosen otherwise. Still, I hope you will continue to return to PowerWealth.com. Who knows? You might just learn something new. And, if you ever feel pangs of regret for the choice you have made today, please know that PowerWealth.com will be right here to guide you through the choice again.

Until next time, be sure to take time out to notice and watch how “money makes the world go ‘round.”

————————————————————————————————-

NOTE: The term “miserablism” is believed to have been first attributed to Neil Tennant in 1990.

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Tags: behavior costs decisions emotion evil good human beings long term money poverty power profits rational reason sales short term temptation United States of America wealth

You Don’t Own Real Estate. Real Estate Owns You.

July 22nd, 2007 10 comments »

By Logan Flatt, CFA

Many Americans believe that real estate can do no wrong as an asset class upon which they can build wealth. I disagree. Building wealth through real estate depends on your ability to distinguish among the three types of real estate ownership – investment, speculative, and personal. If you don’t know the differences, you may soon discover that you don’t own real estate, real estate owns you.

Investment Real Estate Puts More Cash in Your Pocket Than It Takes Out

Investment real estate refers to the ownership and operation of income-producing real estate whereby the income generated by the property – usually, rent payments from tenants – more than covers all the costs of owning and operating the property. If the income is high enough to cover all the costs of ownership and operation plus leave cash left over for the property owner, the property is said to be cash flow positive. If the income fails to cover all the costs of ownership and operation, the property is said to be cash flow negative, whereby the property owner must dig into his or her pockets to come up with the cash to pay for the remaining, uncovered costs.

A bona fide real estate investment puts more cash in your pocket than it takes out, on a repeatable, consistent basis. As such, a cash flow negative investment property is really not much of an investment at all. If you continue to hold on to a cash flow negative investment property out of pride or any other emotional attachment to the property, you are not maintaining an investment; you are maintaining a hobby. A rational real estate investor would put a stop to the repeated, consistent cash drain ASAP. In many cases, it is simply best to swallow your pride and sell a cash flow negative investment property. That way, you can let a new owner cope with the income shortfall each month while you put your sale proceeds to work in a cash flow positive investment property you can find elsewhere.

Speculative Real Estate Is a Bet Against the Odds

When buying real estate at or near the prevailing market price, many people firmly believe they will make a profit upon the future sale of their real estate. Unfortunately, there is wishful thinking and there is reality. Wishful thinking plays a prominent, defining role in speculative real estate. A new property owner may hope to sell his property at a higher market price in the future, but in reality, he has no idea what the future market price will be. Nobody does – all future market prices are unknown to everyone. That is, until the future arrives.

In the face of such uncertainty at the time of purchase, all the new property owner can know is that there are three outcomes for a future market price: significantly lower than, similar to, or significantly higher than the current market price. In other words, unable to know at the time of purchase what future market prices will be, the new property owner has only 1 in 3 outcomes where he can sell his property at a future market price significantly higher than the current market price. If each outcome is equally likely, the new property owner’s odds of selling his property at a highly inflated market price are low.

Unfortunately, the odds of making a profit on a property purchased at the prevailing market price are made even worse by the high transaction costs of buying and selling real estate. Even if a new owner sells his property at the similar future market price, he still loses money thanks to brokers’ commissions, legal fees, and other closing costs incurred to sell the property. He also loses money selling the property at a significantly higher future market price if that future market price is not quite high enough to cover the high transaction costs. Clearly, the odds of making a profit are against those who buy real estate at the prevailing market price and hope to sell later at a higher market price. Such is the nature of speculation and the wishful thinking that leads to it.

Personal Real Estate is Simply a Purchase, Not an Investment

Personal real estate is real estate you buy primarily because you believe you and your family will enjoy living there. Making money, if at all possible, is secondary. In fact, it is hard to make money with personal real estate. To make it your home, you must take cash out of your pocket each month to finance it, insure it, maintain it, fix it, furnish it, and pay property taxes on it. Unlike investment real estate, your home generates no income to offset these out-of-pocket expenses. So, while you likely derive much pleasure from owning your home, you lose money on it every month. Don’t fool yourself – your home is not an investment. It is simply a purchase.

Nevertheless, despite draining you of cash every month, owning personal real estate generally beats renting a house, condo, or apartment for an extended period of time. Owning personal real estate gives you at least two options that renting does not. These options provide you with real value.

First, unlike renting, ownership of personal real estate gives you the option to keep more of your income out of the hands of career federal politicians in Washington, D.C. Current U.S. federal tax laws allow you the opportunity to deduct mortgage interest and local property taxes from your taxable income. This helps reduce your U.S. federal income taxes. So, when you own personal real estate, more of your outgoing cash ends up helping your surrounding community, its schools, and its hospitals instead of largely going to waste in Washington, D.C. This is especially true if the investors in your mortgage are also local and in your community; such investors are more likely to reinvest your interest payments locally as well.

Second, if you ever have to move due to a job change or relocation, personal real estate ownership gives you the option to hold on to your personal real estate and rent it to tenants after you move out. Exercising this option gives you the opportunity to turn your personal real estate into investment real estate. Of course, exercising this option might not make sense given your personal interests or financial situation at the time of your move, but it is an option you would not have had if you were simply renting the roof over your head. When moving out of a rental unit, despite all the monthly payments you made to your landlord, you walk away with no ownership in any real estate asset whatsoever. The advantage goes to personal real estate ownership.

You Don’t Really Own Real Estate If It Can Be Taken Away From You

The differences among investment, speculative, and personal real estate ownership are clear. However, you don’t really own real estate. You only think you own it. Even if you have paid off your mortgage in full, a county, city, or local public school district can still take your property away from you. Just stop paying the tax bills these governments send you each year and you will quickly discover who really owns your real estate.

Paying property taxes is all you need to do to keep your real estate out of government hands, right? Sorry, but no. You could pay property tax bills in full year in, year out for decades and still lose your property to eminent domain, whereby a government expropriates your real estate to use it for what it claims to be society’s “greater good” – your personal property rights be damned.

Clearly, while many Americans believe that real estate can do no wrong as a way to build wealth, it sure is hard to build wealth with real estate when, in so many different ways, you don’t own real estate, real estate owns you.

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Tags: building wealth cash flow eminent domain financial freedom income taxes investment real estate speculation

Change The Game: Replace Your Credit Score with Your Debit Score™

July 2nd, 2007 No comments »

By Logan Flatt, CFA

In addition to their income and material possessions, many Americans use their credit scores as a way to evaluate and judge their financial success in life. Through decades of marketing, product innovation, and the passing of personal finance myths from one consumer generation to the next, America’s financial services industry has most of us conditioned to focus our attention on improving the credit scores computed and maintained for each of us by America’s four major credit bureaus, Experian, Equifax, Innovis, and Transunion. Such effective conditioning comes as no surprise – it is, after all, the financial services industry that profits handsomely from us taking out mortgages, using credit cards, obtaining car loans, and otherwise borrowing money for just about anything we want to buy or do to enhance our lifestyles.

Your Credit Score Helps the Financial Services Industry, Not You

Alas, the more we consumers borrow cash from the financial services industry, the wealthier the industry becomes and the poorer we become. This can readily be seen in the simplest definition of your wealth, which is determined by your net worth:

Your Net Worth = What You Own – What You Owe

The more you borrow from the financial services industry, the more debts you owe. The more you owe, the lower your net worth sinks toward zero, or even into negative territory. The financial services industry has a net worth too. But, what is true for your net worth is exactly the opposite for the financial services industry’s net worth – the loan you must repay to the industry is an asset the industry owns. The more the industry lends cash to you and other consumers, the more assets the industry owns. The more the industry owns, the higher the industry’s net worth rises.

From the financial services industry’s perspective, your focus on your credit score is a great thing. Your behavior helps the industry grow wealthier over time. The financial services industry has it good – the product it sells is cash, the price of its product is a given interest rate, the interest payments we make are the industry’s revenues, and thanks to the industry’s unique ability to scale by simply recycling our interest payments into still more revenue-generating product, the industry’s profits are hefty. The industry has made the rules of the game, and the ball used to “win” in that game is your credit score. So, as conditioned, you focus on the ball, trying to move it up the field toward the goal. But, clearly, your behavior – your focus on your credit score – is not such a great thing for you and your family’s wealth. While having ready access to cheap credit can be a good situation in which to be, obsessing about your credit score so that you can borrow more and more from the financial services industry could ultimately preclude you and your family from achieving true financial freedom and security in your lifetime.

Rolling a New Ball into the Game – the Debit Score™

I submit to you that you and your family don’t have to play the financial service industry’s game. You have a choice. You can change the game. You can freely elect to change your behavior. You can remove your focus on your credit score and, instead, focus your attention and effort on a new score with which you can better evaluate and judge your financial success in life. Herewith, I roll a new ball into the financial service industry’s game: the Debit Score™.

As you know, your credit score is an indicator of your ability to borrow, and borrowing can be damaging to your wealth. In contrast, your Debit Score is an indicator of your ability to lend, and as you understand from the activities of the financial services industry, lending creates assets – loans – that you can own and use to increase your wealth over time. If one of your goals in life is to build enough wealth for you and your family to achieve true financial freedom and security, doesn’t it just make sense to place more of your focus, time, and effort on improving your Debit Score than on improving your credit score?

Calculating and Interpreting Your Debit Score™

So, how do you calculate your Debit Score? The proprietary Debit Score™ formula below shows you how:

For a given month, quarter, year, or other period:

Debit Score™ = 1,000 × (Your Free Cash Flow ÷ Your Total Income),

where Your Free Cash Flow ≥ $0.

You can use your calculated Debit Score to fully evaluate and judge your ability to lend cash to others for profit and wealth building. For example, let’s assume that your household’s Total Income is $85,000 per year, and your Free Cash Flow is $8,500 per year (don’t worry – Free Cash Flow is defined in detail below). Using the formula above, your Debit Score would be a 100. Likewise, let’s assume that your monthly Total Income is $4,000, and your Free Cash Flow in a given month is $500; here, your Debit Score for the month would be a 125. Note that if you have no Free Cash Flow or your Free Cash Flow is actually negative (i.e., below $0), your Debit Score is simply a 0.

Now let’s interpret your Debit Score. Whenever your calculated Debit Score is a 0, your ability to lend money to others is non-existent — you are not in a good position to be creating loan assets that you can own and use to increase your wealth over time. However, any positive Debit Score suggests that you are in a good position to be creating loan assets to increase your wealth. Furthermore, the higher your Debit Score, the greater your ability to lend money for profit and wealth building. Any Debit Score above a 0 is good. Any score above a 200 is outstanding!

The Critical Role of Free Cash Flow

Clearly, the key driver to your Debit Score is your Free Cash Flow. As part and parcel to the proprietary Debit Score™ formula above, your Free Cash Flow can be calculated as follows:

For a given month, quarter, year, or other period:

	Your Total Income
−	Your Retirement Account Contribution*
−	Your Health, Life, & Disability Insurance Premium Payments
−	Your Federal & State Income Tax Payments
−	Your Emergency Savings Account Contribution*
−	Your Regular Payments on Mortgages, Loans, and Credit Cards
−	Your Basic Living and Lifestyle Expenses
=	Your Free Cash Flow

*Your contributions to your Retirement Account and your Emergency Savings Account should be made according to how your personal financial adviser has advised you to contribute to these important financial planning accounts.

Ultimately, your Free Cash Flow can be used for a variety of wealth-building activities, not just for creating loan assets by lending money to others. Other important uses of your Free Cash Flow include paying off credit cards in full, making extra principal payments on mortgages and car loans, fully funding your Retirement Account and Emergency Savings Account, and making equity investments. Each of these other important uses of Free Cash Flow can increase your net worth by reducing what you owe or by increasing what you own, thus helping you build financial freedom and security for your family over time.

Clearly, using your Free Cash Flow to create loan assets by lending money to others is but one option out of many good ones available to you. A positive Debit Score simply tells you when you have the luxury of taking one or more of these options to pursue an opportunity that could increase your wealth.

Use the Debit Score™ Right Now and Change the Game

Why not go ahead and start using the Debit Score today? It is a great way to help you evaluate and judge your own financial success. By electing to focus on your Debit Score in lieu of (or, perhaps, in addition to) your credit score, you open up far more opportunities to increase your wealth over time precisely because you are focused on building your wealth rather than on playing the credit game that America’s financial services industry wants you to play. Take action now and change the game – you’ll be glad you did.

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Tags: borrow credit report credit score debit debit score financial services lending loan loans wealth

Stop, Thief!: 9 Tips To Stop You From Picking Your Own Pockets.

June 18th, 2007 3 comments »

By Logan Flatt, CFA

Got money problems? Need help controlling your desire to spend, spend, spend? There are many different ways to insert financial self control into your life. One way that you may not have thought of is to take control of the power that America’s marketers have over you and your desire to spend your hard-earned money needlessly.

Some of the most talented marketers in the world ply their trade in America every day, crafting TV commercials, radio spots, print ads, billboards, Web ads, direct mail pieces, telemarketing scripts, and other forms of marketing communications to “inform” you about various products and services they want you to buy. If a talented marketer can attract and hold your attention for just a few precious seconds, that marketer can use powerful techniques to tempt you to voluntarily hand over your hard-earned money in exchange for the product or service the marketer has to sell to you. Unfortunately for you, most marketers are really, really good at what they do. They know how to attract your attention and then work their marketing magic on you – possibly without you even realizing it!

Nonetheless, you are not completely powerless in the marketing game. You can take specific actions to significantly reduce the power that marketers have over you and your desire to spend needlessly. Here are nine tips – some easy, some hard – that can help you insert financial self control into your life by holding America’s extremely talented marketers at bay.

Tip #1: Hide Your Telephone Number

The best way to put a stop to unwanted telemarketing calls at your home is to pay your local phone company a few extra dollars a month to make your telephone number unlisted and/or unpublished. You can’t receive unwanted telemarketing calls if telemarketers cannot get access to your telephone number.

Tip #2: Register Your Telephone Number

You can also place your telephone numbers on the Federal Trade Commission’s National Do Not Call Registry. By law, telemarketers must remove your telephone number from their call lists if you are on the federal registry list. If the telemarketers call you anyway, they could be subject to federal penalties. To add your telephone numbers to the Do Not Call Registry, call 1-888-382-1222 or go to www.donotcall.gov.

Tip #3: Mask Your Telephone Number

Do not give out your real phone number when filling out forms on a company’s website unless you already know in advance that you would like for the company to contact you in an emergency (e.g., so an airline can let you know your flight has been canceled) or to tell you more about a product or service you are considering but want to talk to a company representative about it first (e.g., a used car you saw at a car dealer’s website). Sometimes, an online form will require you to put in a phone number before you can submit the form. What to do? Simply enter your area code and then 555-5555.

Tip #4: Opt-Out Your Credit Report

If you wish to reduce U.S. Mail solicitations for credit card and insurance offers by companies that target you based on the information contained in your credit reports, there is an opt-out program operated by the four major credit reporting agencies, Equifax, Experian, Innovis, and TransUnion. Once you opt-out, your name stays on a “do not contact” list for five years. There is also a permanent option. For more information, call 1-888-5OPT-OUT or go to www.optoutprescreen.com.

Tip #5: Let Your Preference Be Known

The Direct Marketing Association also maintains a database of consumers who prefer not to receive U.S. Mail solicitations. DMA members must remove those consumers from their mailing lists. Once registered, your name stays on the list for five years. Send your name, address, and a request that the DMA add you to the opt-out list to:

Mail Preference Service
Direct Marketing Association
P.O. Box 643
Carmel, NY 10512

Or, for added convenience, you can pay a small fee and do it online at www.dmaconsumers.org.

Tip #6: Flag Your Account

Do you already do business with a company that continuously sends you offer after offer by U.S. Mail each week – or worse, several times a week? There are many credit card companies out there that do this all the time, sending out credit card offers, convenience checks, and short-term loan offers by the millions each and every week. The easiest way to get them to stop sending offer after offer is to mail a polite letter to the company’s Customer Service or Consumer Relations department simply asking them to put you on a “do not mail” list, if they have one. Be sure to include your account number in the letter so that they know you are an existing customer and can flag your account as being on a “do not mail list.” Do this once, being sure to make a photocopy or two of the signed letter before you mail it. Then, wait at least two months to see if the offers from the company reduce in volume or stop altogether.

If after two full months the company’s offers keep coming to you at the same rate as before, make your request more serious by writing a new letter addressed to the company’s General Counsel, the attorney the company keeps on staff or on retainer to handle its legal matters. You might be able to find his or her name on the company’s website. If not, just address it to “General Counsel” at the company’s headquarters address. Again, be polite in your letter to the General Counsel, and simply repeat your original request. Be sure to let the General Counsel know that you wrote the company about the request at least two months ago and experienced no change in the number of offers you received each week. For the General Counsel’s convenience, attach a photocopy of your original letter to the new letter. Getting the attention of the company’s attorney should help get you on an internal “do not mail” list at the company.

Tip #7: Monetize Your TV

You probably think your TV exists primarily to entertain you with your favorite TV shows, but you’re wrong. Your TV exists primarily to allow America’s marketers into your home where they can market products and services to you and your family while you are relaxed, in a safe place, and mentally open to a quick sales pitch. It is no surprise that TV has been the American marketer’s most effective marketing tool for over 50 years.

How best to cripple the marketing power of TV in your own home and render it useless to marketers? Simply turn off, unplug, and sell your TV sets for cash on craigslist.com, at a pawn shop, or at a local thrift store. Then, add the cash to your savings account or use it to pay down your debts – that’s an instant increase in your financial security. With all your TV sets out of your home, you will never even see all those pesky TV commercials “informing” you about new products and services you don’t really need and tempting you to go out and buy them.

Yes, at first you will miss your favorite TV shows, but not for long. You’ll soon forget that TV shows even exist because the principle of “out of sight, out of mind” really works. You’ll soon rediscover that there is so much more to life than sitting around on the couch watching the “boob tube.” Yes, your friends, family, and colleagues might think you’re a little strange for not having a TV set in your home and not knowing all the little details about all the latest TV shows they want to talk about, but so what? While they will possess useless TV knowledge and be tempted by hundreds of TV commercials every week, you will soon discover that TV ignorance is wealth-building bliss!

Tip #8: Turn Your Radio Off

What works for TV also works for radio. The morning drive shows on most major radio stations are designed to hold your attention while the on-air personalities talk about companies’ products and services in a clever, casual way. Take control by turning off the radio and putting in a CD or using an iPod containing your favorite music, audio books, or podcasts. You’ll arrive at work fully entertained and informed, yet none the wiser about what marketers want you to learn from their radio commercials and on-air plugs about products and services you probably don’t really need.

Tip #9: Put Down That Magazine

Mass media magazines like Cosmopolitan, Men’s Health, People, InStyle, Time, Esquire, Vogue, US Weekly, Money, Sports Illustrated, and others are designed to be helpful to you and the lifestyle you lead. But, they can also leave you feeling insecure or inadequate about yourself as if something were missing from your life. Conveniently, within their very pages are advertisements – designed and paid for by marketers – that feature slick, high-quality photography showing happy, attractive people seemingly without a care in the world enjoying some great product or service that they supposedly just spent hundreds of dollars, maybe even thousands of dollars, to own or experience. Of course, the people in the advertisements are just actors and models, not real people like you, but the advertisements seem to tell your brain that you could be transformed to look and feel just like these shiny, happy people if only you were to plop down hundreds or thousands of your own hard-earned dollars for the same product or service the actors and models are enjoying.

How can you take control of the power that marketers have over your brain through their picture perfect advertisements? You guessed it – simply choose to not read mass media magazines. “But what about all the great content in those magazines?” you ask. Sure, the content may be fun, informative, and of interest to you. But, think about it: the content is only there to act as bait to get you to spend time with the marketers’ slick advertisements and be tempted to buy products and services that you probably don’t really need in the first place. So, decide which is more important to you: the content in mass media magazines or the contentment that you and your family will enjoy from knowing that you are well on your way to being financially secure thanks to you no longer being tempted by marketers’ slick advertisements in mass media magazines.

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A Simple, 3-Step Program

June 14th, 2007 1 comment »

By Logan Flatt, CFA

How would you like to live in crushing, abject poverty? Does the idea of living and sleeping on the streets of a major American city sound appealing to you? Would you like to grow old and penniless, spending your final days on this Earth barely getting by on the meager checks sent to you by some large government bureaucracy? Well, my friend, do I have the program for you.

I call my program “Live to Fail Always.” It is a simple, three-step program even you can follow. It is fast and effective. Plus, it is easy to learn. Best of all, you can start applying the program in your own life today! So, are you ready? Are you excited? Alright then, let’s get started by taking a look at the first step of this amazing program.

Step #1: Live A Life You Cannot Yet Afford to Live

This step is so easy. Simply fail to save any money. That’s right, spend every penny you earn on living the good life – today. Do you want to own something you just have to have right now? Well, what are you waiting for? Go buy it! After all, it is yours to be had, so why not just have it? The important thing here is to stay in line with the average American who currently saves less than 1% of his or her personal disposable income. Any money you save above 1% is money that you could have spent. So, go spend it.

Now, to do Step #1 the right way, let me let you in on a little secret: Once you have spent all your income such that you have saved next to nothing, simply borrow money from others so that you can spend even more. At first, borrowing money from others might sound a little challenging. After all, the average American is out there in the economy spending almost every last dime he or she has, so they have no money to lend to you. Well, thankfully, there are companies out there that will give you a little plastic card called a “credit card” that allows you to borrow money from them whenever and wherever you want to spend their money. Just take that little card everywhere you go and charge it up. Don’t worry too much about paying back what you borrowed — you’ve got all the time in the world to do that.

If you are lucky, some credit card companies will allow you to borrow money from them for only 18.9% interest and an $85 fee per year. Importantly, be sure to allow the interest charges to roll over from month to month, year after year after year. Let those compounding interest charges work their magic on you. Still, be careful. You only want to charge up your credit card on things that have little to no lasting value after you have paid for them. Services like restaurant dining, airplane travel and professional dry cleaning are safe bets here. You do not want to buy anything that might increase your personal wealth – the value of what you own minus the value of what you owe. Buying and accumulating items that increase your wealth only delays your reaching the pinnacle of this very special program: bankruptcy.

Bankruptcy occurs when you borrow so much money from others that you cannot go out and earn enough money or pawn enough things you own to pay it all back. In 2006, over 2.0 million Americans reached this pinnacle by filing personal bankruptcy. That is what you and Step #1 are all about: doing exactly what many Americans do, spending all the income you earn plus spending the money you borrow from credit card companies to maintain a certain lifestyle you want to live before you can truly afford to live it. It is an excellent way to fail financially.

Step #2: Fail to Maximize Your Earning Potential

Be sure to keep your income low. Earning too large of an income only delays your need to borrow from others to outspend your own means. After all, if you make too much money, you might run out of month to spend it all. In that case, you would have to put the remaining money into savings and defer the gratification of spending it all today. This behavior runs counter to the spirit and intent of the program.

To keep your income low, avoid asking for raises at work or switching jobs to land a higher salary. If you must ask for a raise, try to give your boss little reason for doing so. For example, do not go into your boss’ office with a list of new responsibilities that you would be willing to take on to the benefit of the company in exchange for a higher salary. Instead, go into your employee performance review with clear evidence that you merely did what you agreed you would do as part of your employment agreement when you joined the company. Then, defiantly demand a raise without offering to contribute anything beyond what you are currently doing for the company. That should keep the raise to a modest level.

Whatever you do, don’t go off and start to generate a second income from your own business that you start in your spare time. The last thing you want to do is have your own business on the side grow so large that you are making more money from it than you are from your current job. After all, why try to make extra money on the side when you can just borrow the money you need from the credit card companies?

Step #3: Always Pay the U.S. Federal Government First

Another counter-productive aspect to starting your own business is that it only reduces and delays your income tax payments to the U.S. federal government. When you own your own business, you only pay income taxes on your profits – the amount left over from your sales after you have paid out all of your expenses related to running your business. Since your business’ profits will always be less than its sales, you will always pay income taxes based on a smaller dollar amount.

In contrast, when you work as an employee, you pay income taxes directly on your full salary or wages – in effect, your “sales” from selling your personal time to your employer — before any related expenses reduce what you pay in income taxes. That way, you will always pay income taxes based on a larger dollar amount. Plus, the U.S. federal government requires your employer to take out your income taxes from your pay check before you can get your hands on your own hard-earned money. Now, that is convenience!

Finally, as an employee, more of the money you earn goes to the politicians in Washington, D.C. This makes sense: career politicians earning six-figure salaries in our nation’s capitol can spend your money much faster than you could ever spend it yourself. It is simply more efficient to give these politicians your money up front. Otherwise, you might be tempted to go out and spend your money on things to improve your own life instead of giving your money to federal politicians for society’s “greater good”. After all, the politicians in Washington, D.C. feel confident that they know how to spend your hard-earned dollars better than you do. Some examples include, but are not limited to, the failed “War on Poverty”, the failed “War on Drugs”, the perpetually bankrupt Amtrak rail service, and other pork barrel projects and federal bureaucracies of little or no value to American society.

Yes, You Can Live to Fail Always!

Even you can follow this easy, three-step program. In fact, if you think about it, you may be following this program already. How can you tell? Check your savings account balance – how much money do you have tucked away for emergencies and investing? Count the number of credit cards you have – when will you have the balance on each of them paid off? Take a look at your job – when was the last time you asked for an increase in your salary or wages in exchange for an increase in responsibility? Finally, look at your most recent pay stub – do the politicians and government programs in Washington, D.C. really deserve so large a chunk of the money you rightfully earn each month before you can even get your hands on it? If your answers to these questions lead you to feel that you are living a life that you cannot yet afford to live, that you are failing to maximize your earning potential, and that you always seem to be paying the U.S. federal government first, you may have stumbled upon my get-poor-quick program already.

Nevertheless, is my program right for you? Indeed, it is not for everyone. Some people do not like being poor. Others simply wish they had a lot more money than they do now. How about you? Would you prefer to have more money than you do now? Would you like to be rich beyond your wildest dreams? If so, you are in luck — you live in the United States of America, the richest country in the history of the world. Unlike in most other countries, opportunities for the average person to get rich are plentiful in America. Real-life, rags-to-riches stories abound. Moreover, financial freedom is a marvelous reality for literally millions of people in America. It could be your reality too.

Yes, You Can Enjoy Financial Freedom!

Do you want to create a reality of financial freedom for you and those you love? Well then, here is a tip: stop following my get-poor-quick program immediately. Stop living a lifestyle you cannot yet afford to live – cut back on your expenses; save the difference; pay off your debts; invest and hold your money in sound, reasonable investments for the long term. Stop failing to maximize your earning potential – ask for more responsibility at work in exchange for higher pay. Do what it takes to increase the amount of money you bring into your household every month. Try to avoid paying the politicians in Washington, D.C. first – contribute to your 401(k) or comparable retirement program at work that reduces your taxable income today and builds up a portfolio of investments on which you can live later in life. Start that small, profitable business on the side that, unlike a job, enables you to pay taxes on net profits, not gross sales. Write your state’s elected officials in the U.S. Senate and the U.S. House of Representatives and tell them you want them to stop wasting so much taxpayer money on unnecessary federal programs so that the budget necessary to run a smaller federal government and the significant taxes they take out of your paycheck every pay period can go down — way, way down. After all, your elected officials in Washington, D.C. are there to serve you, not the other way around.

As you stop following my get-poor-quick program, you will see and feel changes in your financial situation. You will see less and less of your hard-earned money going out of your pockets and checking account to be spent on frivolous services and items of little long-term value. You will see more money coming into your household from better pay at work and from the profits of your small, on-the-side business. You will see your credit card balances and car loan balances decrease quickly, all the way down to zero. You will see less and less of your hard-earned money separated from you in the form of federal income taxes. You will see your savings and investment account balances grow nicely, bringing you long-term wealth, stability, and comfort. You will feel infinitely more confident and secure about your financial station in life. You will feel happy and extremely proud of what you have accomplished financially for you and those you love. Moreover, you will be rich — a little older perhaps – but rich all the same.

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Want To Get Rich? Stop Escaping from Reality.

June 2nd, 2007 1 comment »

By Logan Flatt, CFA

Whether they consciously recognize it or not, many people in America today actively try to avoid dealing with reality. Reality is real life. Oftentimes, real life can be harsh, relentless, and unforgiving. Not surprisingly, many Americans do what they can to escape from reality. Millions of Americans spend many hours each day focused on man-made distractions that take them into an imaginary world far away from reality. Television. Cable. Movie theatres. DVDs. Magazines. Tabloids. Romance novels. Science fiction. Celebrity gossip. Video games. Bingo halls. Casinos. All of these are man-made distractions. All of these figure prominently in the typical American lifestyle. All of these help us make our escape from everyday reality.

No doubt, slipping off into the distractions of an imaginary world is necessary sometimes. We all need a break. We all need entertainment. We all need to just stop sometimes, sit back, and let imaginary experiences wash over us. So we do. It’s a healthy thing to do. However, like many things in life, too much of a good thing isn’t always good for you. Too much time in Fantasyland causes us to fail to see real life going on around us.

Building wealth is inextricably linked to reality. One of the reasons so many Americans fail to get ahead financially – despite living in the wealthiest country in the history of the world – is that their minds are not focused enough on the realities of life. Business opportunities, investment opportunities, and pretty much all money making opportunities in America exist because of gaps between the demand for and the supply of real world products and/or services in our free market economy. To take advantage of these opportunities, you have to “be there”, where the action is – in reality.

The clock is ticking. It never stops. Whenever we elect to hang out in Fantasyland, other people’s minds are working, thinking critically, making breakthroughs, and discovering new methods. Their bodies are active, participating in the real world, responding to actual events, changing with the ebb and flow of reality. In short, while you allow yourself to be seduced by man-made distractions, others in America and around the world are pulling ahead, finding new ways to improve themselves and the lives of those around them. Many of these folks are focused on building wealth and they are out there doing it and getting richer.

If you want to build wealth in America so that you can achieve financial freedom for you and those you love, you must avoid getting swept up in our National Escape from Reality. Going forward, cut back on the precious time you spend escaping real life: watch less television, watch fewer movies, decide not to care about celebrities and their phony lives, throw away all your mass market magazines, avoid casinos, sell your video game console on eBay, and replace your fiction reading with non-fiction books that will teach you something new and improve your skills. If you will just spend more time appreciating what real life brings to all of us, you’ll be surprised — wealth will find you.

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To Consume, Save, Invest, or Speculate? That Is The Question.

May 1st, 2007 No comments »

By Logan Flatt, CFA

I believe it was Shakespeare who once mused:

Many Americans know not where their money goes

To consume, save, invest, or speculate?

That is the question to be posed

Before thy money is gone

To question early in life is to see thy freedom grow

Save a nickel, a penny more

To consume, save, invest, or speculate?

That is the question to explore

Before thy breath is gone

To question later in life is to depart ‘mid the poor

Okay, perhaps Shakespeare never penned such awful poetry, but the message is sound. To consume, save, invest, or speculate? It is an excellent question. Before you answer, consider your options.

You CONSUME when you choose to exchange your money for something of little lasting value.

We are all consumers. We must buy products and services just to get by. However, consuming destroys our wealth. When we buy a product or service, we shift a bit of our wealth into the pocket of the seller by handing him more dollars than he spent on the product or service he hands over to us. The difference in dollars is the seller’s profit. In exchange, we end up with a product or service worth less than what we just paid the seller for it. Worse, its value falls rather quickly – even down to zero if we consume the product or service in full.

Profit is not a bad thing. Sellers deserve a profit for providing value to consumers. A bad thing is consumers consuming excessively. Too many Americans today give too many dollars – even dollars borrowed from banks – over to sellers in exchange for products and services of little lasting value. Across billions of transactions each year, sellers collect mounting slices of our wealth. Consumers, in turn, collect mounting piles of worthless objects and wistful memories.

You SAVE when you choose to avoid, reduce, or delay exchanging your money for products and services.

Many of us are savers. We save money when we keep a little – or a lot – of our cash income in our bank accounts by taking control of our exchanges with sellers. Just because sellers offer us cool, fun, or interesting things doesn’t mean we must possess or experience these things to live a fulfilling life. How many times have you rushed out to see the latest Hollywood movie only to leave the theater thinking, “Well, that was a waste of time and money”? Yet, the time is lost forever and your money is in the pocket of the ticket seller.

Time and money are essential ingredients to building wealth. While many Americans seek to “get rich quick” with “no money down,” financial freedom begins with our own cash savings and a large dose of patience. Compounding interest, dividends, earnings, and gains from wise investments will, over time, offer us a greater chance at financial freedom than years of playing the lottery ever will.

You INVEST when you choose to exchange your savings for an asset you know is worth far more than its price.

Some of us are investors. We invest when we exchange our savings for assets worth significantly more than the price we pay for them. Why would someone want to exchange his valuable assets for our smaller cash savings? Time and money. The assets may be valuable because, over time, they are expected to put significant cash flows – dividends, interest payments, royalties, net rental fees, etc. – into the pockets of their owner. However, the owner may not want to wait for time to pass before he can pocket the cash flows himself. Instead, he prefers to pocket our smaller cash savings right now.

Think of it as paying $10 for a $20 bill. No doubt the $20 bill is worth $20, but the seller’s price is only $10. We pay the seller’s $10 asking price and instantly own an asset worth $20. Such an exchange is how we wisely invest our savings in assets like stocks, royalty trusts, small businesses, and rental properties. If we repeat these exchanges over and over again, we become wealthy. This is how the world’s wealthiest investor, Warren Buffett, invests his billions. How does he find such great deals? Speculators hand them to him.

You SPECULATE when you choose to exchange your savings for an asset you have not reasoned its worth.

Many of us are speculators. We speculate when we willingly exchange our cash savings for assets the worth of which we do not know. Speculators do not take the time to study an asset and determine its worth. Instead, they just pay the seller’s price and hope that the price will be higher later. Some speculators speculate and make millions. Many, however, lose their shirts by hoping that luck – the gambler’s unreliable friend – will save them from total loss.

Ironically, speculators make America a great place to invest. The speculator soon forgets the valuable assets he owns when he jealously watches an asset he does not own increase dramatically in price. To quickly raise the cash he needs to buy the increasingly expensive asset he covets, the speculator willingly sells his valuable assets at discounted prices. Always on the lookout for a bargain, the investor stands ready to scoop up the speculator’s valuable assets at prices well below their worth. This is how speculators transfer their wealth to investors like Warren Buffett, who patiently grows wealthier every year.

If you consume in moderation, you create cash savings, which you can invest in assets sold to you at bargain prices by those who speculate. To consume, save, invest, or speculate? How you answer the question is up to you. May I suggest you leave the poetry to Shakespeare?

———————

NOTE: This article first appeared in the Winter 2007 issue (Volume 5 Issue 1) of The Swan, a publication of the Lake Forest Community Association, Inc., a nonprofit Texas corporation (www.lfhoa.com).

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