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Taking on the Herd! July 15, 2008

Posted by shaferfinancial in Uncategorized.
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Once a month I go out into cyberspace to see what is out there of interest.  You get a real good understanding of how the herd is created, maintained, and led to slaughter doing this.  So I thought I would post today about the underlying assumptions that engender the herd creation.  Of course the uniformity of opinion on the net/blogs is truly amazing given the supposed openness of the medium.

The first assumption is the hatred of debt.  Now, all these assumptions have an strong emotional component to them, but debt has perhaps the strongest emotional tug to it.  Mainly aimed at those folks who carry large credit card debts and have no self control over purchasing consumer items, “financial experts” have created careers by telling people how bad debt is and making them feel really bad about themselves for having it and paying interest.  There is very little discussion on how debt functions, other than as a way for banks to make money off of people.  It is usually the first thing these experts say to do, get rid of credit card debt and then start paying down that mortgage.

Here is what the experts don’t tell you.  Rarely does a person build any substantial wealth without the use of debt.  Mortgage debt has produced more wealth for folks than mutual funds, bonds, or any other financial instrument.  In fact, the more wealth a person accumulates, the more debt, at least in the accumulation stage.  Debt is pretty simple to understand.  If the cost of the debt is less than the appreciation or value created by incurring that debt then the debt creates positive net worth.  The trick of course is to make sure you can service your debt while this appreciation or value is created.  Without the use of debt there is few if any folks who could create wealth.  So by creating a fear/dislike of debt, these experts are conditioning folks to fail and to fall into the next assumption.

You can create wealth by making small monthly inputs into mutual funds.  Sold as a risk-free way of building wealth, mutual funds have a soiled history and data indicates that again rare is the person who builds real wealth through mutual funds.  The latest permutations are the low expense index funds and exchange traded funds (ETFs).  Taking on one of worst abuses of the mutual fund industry (high expenses and fees) these folks encourage the concentration on fees and expenses correctly arguing that by limiting these and foregoing active trading one can decrease risk (variability) and approximate the market return.  This view is especially popular among the young.  Not surprising, because its hard to imagine the challenges of keeping dropping money into an account that come later with children, lay offs,  sickness, etc.  Its pretty easy to drop a little money into a 401K when you are young even if this means being a little more frugal than your peers, but wait to the kids need new shoes for school or that latest computer game, or you need to fly across country to take care of an ailing parent!  History has demonstrated how hard it is to have 35 years of uninterrupted inputs into a retirement account.  And if you have some interruptions, then that 8% rate of return you thought was adequate, disappears into smoke.  The fact remains that people who acquire wealth, need to gain double digit rates of returns because of intervening life events.  And if you start late in life, forget about creating wealth or even a decent retirement getting only 8% on your investments.  And if you retire into a poor return environment you are doubly screwed.  Simply put, that risk free investment has demonstrated to be almost a guarantee of a poor retirement.

The final assumption, and probably the hardest one for people to get over is that you can create a decent retirement by being an employee.  This is demonstratably false under today’s environment, but was at least partially true in the last three generations.  When defined benefit pensions were the norm, companies honored a pact with their workers for mutual advancement, lay offs were unheard of and social security and medicare were solvent into the foreseeable future people retired comfortable if they were willing to work hard at a job.  But that is not the environment now, unless you work for the government.  And even local governments are starting to balk at the defined benefit retirement plans that are driving them into bankruptcy. In essence we are all free agents now, dependent on ourselves to produce, save, and invest.  So why be an life-time employee, if you are really a free agent, only of temporary use to your employer?  Now I am not saying quit your job.  But you have to start thinking like an employer at all times.  Usually, this ends up with making plans and implementing a strategy that includes running your own business during periods of your life and using your built up capital to leverage into creating value of some sort.

I conclude with some words from conservative commentator Paul Poirot, writing in 1950.  Not that I ascribe to all his words, but believe that he describes the world we now live in:

“The only security any person can have lies within himself.  Unless he is free to act as an individual, free to be productive, free to determine what part of the production he will consume now, and what part he will save, and free to protect his savings, there is no chance he can find security anywhere….In an industrial societey of specialist, who exchange products, the process of saving involves the investment of money in productive tools which will return income to their owner to whatever extent those savings might be useful to a new generation of productive and thrifty men….Government gifts to the aged [pensions] cultivate a robber instinct among men who are in search of security.  In a society of free men the aged will find protection, have always found it, by their own efforts or by those younger men and women who look to their elders for instruction and guidance in the ways of truth.”



1. Joshua - July 16, 2008

Wow, now THAT is a powerful post! I really enjoyed reading this one and it reminds me of why I’m getting into real estate with Jeff over at BalwdGuy Talking.

Our country is nothing like it was when it was founded. Instead of most, if not all, of us running our own businesses (back then it would have been something like a farmer, blacksmith, etc..) and the government had very little involvement in any of our matters.

Now, the government has it’s thumb so far up our *BEEP* we can’t even cough without coins falling out of our mouths and into their coffers. Today most of us are working for “The Man” and giving larger and larger portions of what we get from him to our Uncle Sam.

All of us should listen to smart people like Mr. Shafer and Mr. Brown and open our eyes and take action. Stop telling ourselves that things will get better and continue riding the sinking ship. Bail out now and swim to the shores of Financial Freedom where Jeff and Mr. Shafer will be to haul you ashore. I know I am!

2. shaferfinancial - July 16, 2008

Thanks, it was fun to write and incorporates the philosophy of the Shafer Wealth Academy!

3. Sue - July 16, 2008

Really good, informative post David. I landed here from Bloodhound…glad that I did. Thanks.

4. shaferfinancial - July 16, 2008

Thanks, Sue

Hope you look around and read some of the others. The paradigm shift series is a great place to start!

5. investmentblogger - July 17, 2008

A great post filled with lots of crucial information & reminders that people should never forget! I could not agree with you more!

6. bankruptcy financing mortgage - August 9, 2008

bankruptcy financing mortgage…

After reading this post, I am not sure I understand what you are trying to relate. Please expand on your thoughts a little more. Thanks…

7. shaferfinancial - August 11, 2008


First let me identify my audience. Folks that are generally, financially responsible and have jobs and/or marketable skills. People who spend more than they make and/or use credit cards and home equity to attempt to purchase consumer items they can’t really afford aren’t ready for what I have to say.

The generally accepted financial advice offered by most is great advice for the middle of the 20th century, not the year 2008. Back when jobs were secure, pensions guaranteed, and retirement relatively short this normative advice could work for the middle class. Now, however, it doesn’t work. Since folks are generally having to deal with the risk of being “free economic agents,” it makes little sense to search for the non-existent security and fool yourself that employers or the government is going to take care of you. The risk is already there, so it makes more sense to become an investor/entrepreneur, a way proven to produce the financial environment to financial independence.

Hope that helps!

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