Whose money is it anyway? How to Retire Modestly Wealthy

Whose money is it, anyway?

This blog, How to Retire Modestly Wealthy, etc., will include long and short essays regarding money, investing, embezzling, welfare, politics and even politicians who love spending other people’s money. Wherever there are accumulated dollars to be found, waste, fraud and abuse are sure to follow. In other words, fraudsters and politicians are always volunteering to appropriate and spend other people’s money. From time to time this blog will also include comments on the passing scene.

My first essay identifies a guaranteed method to become modestly wealthy.

How to Retire Modestly Wealthy – Guaranteed!

The General Rule

Many people know the assertion that the best way to make a small fortune – is to start with a large one! But that is not the only way, or the best way.

Let’s review the three major categories of investment possibilities that Warren Buffett addresses in a Fortune magazine article, (2/27/2012 issue) then seriously discuss a strategy that absolutely works for amassing modest wealth. The entire exercise of investing, of course, is to delay the gratification of consuming purchasing power today, to obtain greater, after-tax purchasing power, in the future.

Three Categories of Assets

The three broad categories of investment possibility are –

1) Currency-denominated assets such as:

Bonds, Money-market Funds, Bank Deposits, CDs, etc.

2) Unproductive assets such as:

Gold, Silver, Diamonds or even Tulips.

3) Productive assets such as:

Businesses, Farms or Real Estate, etc.

Buffett alleges that currency-denominated assets, though seen as least risky by many, in reality are the most risky, because of government politicians’ tendency to manipulate currency value (the inflation tax) for short-term political purposes.

Soon enough, the return on currency-denominated assets, after subtracting inflation and taxes, is zero, or close to zero. To quote Shelby Davis, “Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.”

The most popular asset among non-productive assets is gold, seen as a safe haven by many today. But unproductive assets like gold never procreate. Please remember that one ounce of gold today is still one ounce of gold a thousand years from now, or even ten thousand years from now.

Both currency-denominated and non-productive assets are mostly popular because of fear, particularly assets like gold. Yes, the price of these types of assets may go up for a while, as the bandwagon for owning one or another particular non-productive or currency-denominated asset grows in popularity, but over time, bubbles always pop and price always fall back to earth.

Neither of these two asset categories ever meets the criteria of the real purpose of investment, which is to grow one’s future purchasing power, long-term. When bubbles burst as they inevitably do, Buffett observes, “investors who required a supportive crowd paid dearly for that comfort.”

The BEST Investing Strategy

May I point out, only investing in productive assets allows one to enjoy the possibility of increasing one’s future purchasing power for the long-term?

Specifically, the vast majority of one’s nest egg ought to be invested in productive assets, whether in owning real estate, and/or owning your own producing company, and/or owning equities (shares of productive companies), etc. Yet almost anyone would be lying if they said they knew exactly which productive assets to buy, when.

Because of this uncertainty, as well as short-term market and investment distortions, some portion of one’s investment pool should be cash, or S-T bonds, or even precious metals, as a hedge against inflation (5%?), yet the vast majority of our investment pool needs to be invested in productive assets.

Lowering Risk

One important key to follow when investing is to diversify widely, thus lowering one’s total risk. Remember, the future is always uncertain and unknown, therefore risky.

May I explain what this might mean? When buying equities, spread investment risk around by investing in many companies and in different industries. Whether your nest egg size is $20,000, $200,000 or $2,000,000, it is far less risky long-term to hold approximately the same dollar-size amounts of 40 or 50 companies in various industries, than investing your nest egg in only two or three firms. Yes, this widely diversified approach puts an artificial ceiling on your short-term gains, but it also constructs a solid floor that keeps away irrecoverable losses, which is much more important.

The same logic applies to real estate. Owning several smaller rental units and/or apartment buildings and/or commercial buildings in different locations is far better than owning just one large piece of real estate in one location.

Though most of us cannot afford to buy entire productive enterprises, like Buffett does, most of us can afford to own many smaller portions of productive companies. By diversifying our holdings, we lower our overall risk – portfolio theory and all that.

Lowering risk ought to be one of the biggest goals of prudent investing. Protecting one’s principal ought to be another. Read Benjamin Graham’s book The Intelligent Investor, (“if you read one book on investing, then read this one”, says the most successful investor who ever lived, Warren Buffett) before you really start investing. Then avoid as much as possible paying for other people to invest for you. Transaction costs often consume too much of the income generated by your wise investments – actually limiting the benefits of compounding interest.

The Nugget of Investing Wisdom

Due to compound interest (procreation working in your favor) following a prudent and diversified investment strategy will avoid catastrophic losses completely, protecting principle, lowering risk and growing your nest egg modestly throughout your life.

Let’s assume you are able to save 10% of your income, from age 25 to age 65. (There are many books written which discuss exactly how to save 10% of your income, which is not my topic today, but may I point out that the FIRST RULE OF INVESTING is to live on less than you earn!!!.) Say your annual income at this time is $48,000 a year. At a modest 7% annual return, your investment pool would grow to over $1 million. If you were able to average a 10% return, instead of 7%, that same $400 a month saved would then become a $2.5 million nest egg over 40 years! And an IRA can grow tax-free!

Over any 40-year period in the 20th century, the return on equities in America averages around 10%. However much purchasing power a million dollars or $2.5 million dollars allows will undoubtedly grant you sufficient purchasing power from ages 65 to 95 to live comfortably, I suspect. Even major medical emergencies near the end of life most likely can be paid for out of your still mostly-compounding nest egg.


If you follow these three simple rules of investing, 1) Live on less than you earn, 2) Diversify widely, and 3) Only Invest in Productive Assets, then I guarantee you will amass a modest fortune. On the other hand, many people behave in ways that are risky indeed and do not invest wisely. Which leads me to one final piece of advice – never play the lottery. Winning the lottery requires overcoming odds of 5 million to 1 or worse. You have a much better chance (perhaps 15 times better) of being struck fatally by lightning, which is a real, but unlikely risk that all of us bear.

Seize the day and choose to invest wisely and prudently in productive assets!


The Wonders of a Free Market #2

A student asks: But can citizens and the free market really fix themselves? A comment from the website of the Department of Justice (2011) states that the competitive process, which is within free markets, only works when competitors set prices honestly and independently. 

I guess I’m partial because I work for a state agency, but they do have their benefits. True, when the government steps in, their intervention never seems to be truly successful, but we as humans are imperfect, therefore an imperfect market exists; when there are such practices as price-fixing and bid-rigging it tells me there are flaws everywhere.

(2011) Price fixing, bid rigging and market allocation schemes.  Retrieved from http://www.justice.gov/atr/public/guidelines/211578.htm

My Response:

Basically, you are pointing out illegal ways that some people try to manipulate price in a free market, and just like you, I agree this illegal behavior calls for government action. It DOES NOT CALL for government price intervention, but rather either putting people in jail or heavily fining them for violating the rules of the game or simply removing them from the marketplace.

Just like you, I too want, and the free market needs, even demands, regular enforcement of a reasonable rule-of-law that fosters competition.

Yet a different take of that DOJ website citation might be that free markets only work when government enforcement reasonably and regularly enforces a reasonable rule-of-law such that competitors feel free to set honest and independent prices.  A meaningful motto might be: Government price intervention – never! Government refereeing, all-the-time!

However, let us look at this DOJ comment more carefully. First of all, the only way free markets really work is that almost all firms participating in a free market are price-takers, not price-makers or price-setters. They run the gamut from imperfect competition at one end of the competitive spectrum like gasoline stations and grocery stores to oligopolistic competition at the other end of the competitive spectrum where we have only a few competitors such as in cell phones or car manufacturing or cola beverages.

But just ask Nokia or Motorola or Research in Motion if the competition in the cell phone market is not bruising and brutal, for instance. Or ask Chrysler or GM about how kind their competitors are.

This observation does not include the rare market structure called ‘monopolies’, (often electricity companies) which are almost all heavily regulated by local, state-wide or regional government regulatory bodies, like corporation commissions. Nor does this observation fit a cartel like OPEC (an oligopoly supported by national governments), which manipulates supply, therefore manipulates price, which entities are outside of the reach of US law enforcement.

But few firms in America have sufficient market power to actually set the market price. So the DOJ is way off base, I think, in their notion. Whether prices are set honestly or dishonestly does not really matter. Practices such as bid-rigging and price-collusion are illegal almost everywhere.

Yes, I agree that someone in the firm sets a price for the firm’s product or service, then the consumers in the marketplace either buy the product or service, on not. But these type of ‘price-setters’ are really only gauging the market and mechanically setting a price at a level they think the market will bear. My I prove my point?

Take bread, for instance. If your neighborhood grocery store started charging eight dollars a loaf for bread that you could drive a bit farther and buy a loaf of bread at a dozen other nearby places for four dollars a loaf, how many of the eight dollar loaves would you buy? None, right? Why?

Because the free market, without government intervention, normally sets the price, based on supply and demand interaction and either your firm follows, or your firm might reap zero revenues.

This is true with almost any product or service, as long as there is a free market. This price mechanism is called the “invisible hand” and is the hallmark of free markets. Conclusion – Imperfect human beings DO NOT create imperfect markets very often, unless and until the government intervenes!

The Wonders of the Free Market

A student asks:

I have considered the future and it scares me a bit. If those people in leadership positions of both corporate America and our government are unable to make and handle the hard choices and correct the real problems, what kind of future do we as individuals and we as a country have to look forward to in the years to come?  

I realize this is a very pessimistic point of view and a very depressing thought as well. I try not to allow such thinking to influence me too much, but I have come to the conclusion that the only course of action would be to protect my investments as much as possible, be cautious when taking on any financial risks in relation to increased burden or investments, and always be aware and prepared for the worst, but try hard to not let that affect my happiness in the present. 

My response:

Your worry, in my opinion, is exactly why the free market can come to the rescue. Increased freedom and liberty in general, are the answer to your future concerns, and truly free markets, in particular. The free market thrives because needs are being met, and there is a free exchange of money for goods or services that rewards the suppliers for knowing what goods and services to provide and rewards the buyers by getting them exactly the goods and services they want and need.

But a free market does not need to be unregulated, rather the most effective market is appropriately and reasonably regulated. Reasonable regulations mean that market regulations are balanced correctly: neither too onerous for the suppliers nor too restrictive for the buyers. There must be true political freedom too, in order for economic freedom to be sustainable for the long-term.

Political freedom means that government:

1)    holds regular elections (we replace useless politicians),

2)    enforces a reasonable rule-of-law, and

3)    protects individual rights, including property rights.

When free markets are accompanied by meaningful individual rights and property rights and a tightly enforced, yet reasonable rule-of-law, then we will have a future worth anticipating. Such a happy prospect is only possible when a government exists based on blind enforcement of the rule-of-law, that is, justice is dispensed without respecting one’s name or station or level of income.

In my opinion, for you and millions of worried American citizens just like you, the best course of actions would be to do all things possible to enlarge the prospects of freedom and liberty in America. Then we citizens can revel in the wonders of the free market, which supply a constant stream of innovation for decades into the future.

For example, consider the music industry. For years, even decades, the music industry tried hard to behave like a cartel, mostly successfully, creating an industry consisting of relatively few choices for music tunes, yet insisting we consumers buy the entire album for $15 or more in order for us to own the single tune we wanted.

Then with the advent of digital offerings, the few firms at the top grew further and further apart from their customers – to such an extent that by the 1990s they were suing their customers in court!

Why? How did this level of disconnect between supplier and consumer happen? In response to the heavy hand of the music cartel, music consumers were illegally downloading ‘free’ music, and not giving the music recording cartel their legal, though usurious cut – therefore something obviously had to be done.

The free market, in the guise of Apple, rode to the rescue. By 2001, Apple created both the iTunes digital store and the iPod and those two innovations made it both possible and easy to download music from the Internet to the iPod for $.99 a tune. Customers loved this option and the music industry was saved, mostly – with a heavy dose of Apple, of course.

Now, music creators also get a cut for being creative and music owners can own loads of relatively inexpensive music and carry the music around with them anywhere. Billions of tunes are purchased each year and owned one-by-one by consumers for less than a dollar each. How many billions of tunes have been downloaded from the iTunes store in the last 12 months? Is there a better example of the free market fixing a large problem?

The government need not intervene in determining price, whether $15 or 99 cents, but ought to enforce a reasonable rule-of-law across the board, thereby maintaining robust competition in the marketplace, allowing the price signal to be clearly heard by both buyers and sellers in the marketplace. Markets can prosper with the light touch of government regulation.

Long story short, for a happy future, you want and need as much freedom and liberty and property rights and free markets thriving as possible. Government intervention such as establishing price ceilings and price floors always mutes the price signal, mucking up the future and killing most of the options available.

Government is best when it acts as the referee of a reasonable rule-of-law, applying justice evenly and blindly, without regard to how much money the offender might contribute to a specific politician’s re-election campaign.

Cash is King, Again

GAAP accounting assumes and insists that there exists within the firm a realistic matching of revenue and expense. This notion makes sense, particularly if someone is looking at the firm’s financial statements and wants to understand the firm’s revenues or expenses during a specific period of time, say for a month, or a quarter or a year. Investors and lenders are especially interested.

Subsequent to this notion, GAAP includes all sorts of accounting rules about inventory valuation methods, that is, FIFO or LIFO, etc. This matching concept likewise affects the inventory movement valuation which becomes part of the cost of sales line item, as a firm must sell inventory on hand in order to have recognized sales.

Let me wax more specific. One client of mine spent $60,000 out-of-pocket to manufacture 15,000 units of an item the firm then sold at a rate of 1,500 to 2,000 units a month at a retail price many times the cost. If the entire $60,000 were recognized as cost of sales expense immediately, then we might have an operating statement loss in the month the $60,000 is spent to buy inventory and a gain in every future month that those items are sold. Instead, this product is inventoried and appropriately parceled out, therefore appropriately matching revenues and expenses per GAAP rules.

The GAAP matching rule helps negate these kinds of distortions. We might wonder though, is there a trade-off? There are also GAAP accounting rules to follow regarding recognizing depreciation expenses in a specific accounting period, because depreciation expenses definitely affect the operating profit or operating loss for a specific period, whether we use straight-line depreciation or some accelerated depreciation method.

Likewise, according to GAAP, payroll expenses paid on a weekly and/or bi-weekly and/or bi-monthly basis, must be matched with accrued vacation, etc. That means payroll expenses, including accrued vacation, must be spread across accounting periods, appropriately, because of the same necessity of matching revenues and expenses to avoid distorting financial statements. There are other cross-period expenses incurred as well.

However, closely following GAAP accounting rules does not necessarily mean that the long-term sustainability and profitability of the firm is enhanced. In fact, somewhat the opposite may happen, especially if the accounting tail is inappropriately wagging the dog. One answer to the trade-off question asked above may be less critical focus on cash flow.

One small business firm client actually reduced their total accounting expenses from 3% of total revenue to less than 2% of total revenue, while overall revenue shrank, becoming more profitable and not missing a beat. This increase in profit is attributed to more than the simplification of accounting software, of course.

The benefit accrued mostly by paying careful attention to actual cash flow together with forecasted cash flow, instead of harboring concern whether there were sufficient accounting personnel on hand to carefully match revenues and expenses according to GAAP.

This is not to denigrate GAAP accounting, but in today’s world where financial institutions in America (2009 – 2011) are typically not lending to small business, why spend money on prettifying the financial statements when a loan from a financial institution may not be forthcoming anyway?

I am not suggesting ignoring GAAP accounting rules at all, nor saying a firm ought not to use a CPA firm to file Tax Form 1120 (or whatever form is appropriate) with the IRS annually, but instead proposing that as most successful business owners know, it is focusing on cash flow that will make or break their firms, not anything else.

If you closely analyze your cash flow forecast and know during which weeks you will likely be light on cash and which weeks you will be more likely to be flush with cash, then a business owner can speak to their vendors with conviction and accuracy, improving his credibility. The same applies to staging and staggering one’s major purchases of inventory.

Purchasing nine to twelve months of inventory at one time requires intimate familiarity with your cash flow. Can you the business owner afford not to know where your cash flow likely will be each week for one month or two months into the future?

Instead of only using accounting personnel to massage past transactions, spending non-essential hours daily complying with GAAP accounting rules, why not re-task these same accounting people to help to create a future of the business owner’s choosing?

A Working Definition of Right-leaning versus Left-leaning

The Problem  

One of my economic students had a problem dealing with the many definitions circulating that attempt to describe what it means to be either right-leaning or left-leaning, in a political sense. She was confused trying to discern among the many voices she was hearing. For instance, many people today label the mainstream media as mostly left-leaning. What does that mean and does it matter?

That student wondered whether or not they should care if a news article is written from a right-leaning or left-leaning perspective, as long as the facts are correct. Bernard Goldberg wrote a good book about this subject, which book I recommend, called Bias. Please read the book, if you want a more detailed explanation as to why Goldberg thinks the journalist’s political perspective matters plenty.

My present intention is simply to distill the various arguments being made into a few useful identifiers that will allow clarity to enter this dialogue.

Left-leaning –

Wants larger government;

Looks for and supports government solutions to social and business problems;

Looks for additional government regulation;

Looks for government intervention in market prices, that is, setting price floors and price ceilings;

Looks for equality of results;

Sees government as the source of “rights”;

Sees government as enforcer;

Prefers the comfort of knowing what to expect;

Right-leaning –

Wants smaller government;

Looks for individual or market solutions to social problems;

Looks for less government regulation;

Likes the price signal sent by prices generated through relatively unfettered market competition and supply and demand interaction;

Looks for equality of opportunity;

Sees government as protector of “rights” that exist without government say so;

Sees government as a referee of a reasonable rule-of-law;

Enjoys the messiness of freedom and uncertainty;


Whatever the arguments espoused by so-called conservative politicians, or progressive politicians, or liberal politicians or ‘tea-party’ politicians, does not make their proposal left-leaning or right-leaning, as the fact is that a left-leaning politician can champion a right-leaning policy and a right-leaning politician can fight for a left-leaning policy.

What is useful to know is whether the policy being pushed is either right-leaning or left-leaning. Policies, not politicians determine the ‘leaning’ nature of the political ideology of the idea under consideration. Using this working definition provides all of us an easy way to measure the political bearing of political arguments and discussions.

Please allow me to differentiate between reasonable government regulation enforced under a reasonable rule-of-law, with government administered justice applied blindly and evenly to all offenders and government price intervention – which government price intervention by definition is a left-leaning policy. This is not the same as the government serving as a referee or an enforcer of a reasonable rule-of-law. The phrase “government intervention” is sometimes inappropriately applied to government regulation.

The founding fathers set up a limited government, which is not necessarily the same as a small government. To ascertain the right-leaning and left-leaning nature of a policy requires we must first look at the facts on the ground today and then choose how we move the American Economy to a different point in the future by implementing policy.

There absolutely must be reasonable government regulations applied appropriately to free market transactions operating with a reasonable rule-of-law and this notion of reasonable regulation is not really a right-leaning or left-leaning issue, per se.

Like Richard Epstein points out, he is not a Libertarian calling for zero government regulation. Instead Epstein and each of us wants to have what each of us judges to be the right level of government regulation, to make free markets work the most efficiently and effectively they can.


Defrauding the Government in Pittsburgh, Pennsylvania

An online MBA candidate related the following fraud story:

In 2008, an employee hoping to hide personal funds from the government hid the money in a company trust fund in order to gain personal government benefits. After ownership of the money would no longer affect receipt of those government benefits, the money was removed from the trust fund and given back to the employee.

The owner of the company was aware of this transaction as was his high-level employee who handled the trust accounts, placed the money, then later retrieved it. The controller was also aware of this fraudulent transaction, but none of them reported anything amiss.