A Painful Example of Short-Term Thinking

Two weeks ago, I offered some alternative views on volatility. One of them was from Nassim Taleb, a guest on my radio show and author of the recent best-seller, The Black Swan. A wonderful example from his previous book, Fooled by Randomness, illustrates the cost of focusing on short term results.

 

Imagine you are retired and spend all your time tending to your nest egg. Let's assume two things about your portfolio performance:

 

1. You will earn 15% ; and
2. The variance will be ± 10% from this average.

 

Based on the information above, we know the long-term result of your portfolio will be around 15%; but in any given year, the 10% variance means the return could vary significantly from that number.

 

The question is: How much will the short-term results differ from the long-term certainty?

 

Suppose we use a Monte Carlo simulation to generate 100 possible futures. We would expect the results, when plotted, to resemble a standard bell curve. In other words, 68 of the 100 different possible results would lie within one standard deviation of 15%, or somewhere between 5% and 25%.

 

Moreover, all but 5 sample years would be within two standard deviations, falling somewhere between -5% and 35%. So even though the long-term return is 15%, the variance from year to year can be hefty.

 

Given the normal distribution within our bell curve, we know that the probability of your portfolio being positive, in any given year, is 93%. Those are pretty good odds, wouldn't you say?

 

Now here is where people lose the game. If you focus on the short-term results, randomness has some "unexpected scaling properties" (see the table below). At any given second, your portfolio has basically a 50/50 chance of being positive! If you check it every day, you will be distressed just slightly less than half the time. If you read only your monthly statements, however, you'll be pleasantly surprised two-thirds of the time. And if you calculate your net worth only once a year, you will be tickled pink 19 years out of every 20!

 

 

Now consider this. Psychologists tell us the pain of loss is felt far more than the pleasure of equivalent gains. Given that, imagine the effect your constant monitoring of short term performance will have. You can see how shorter term monitoring causes emotional responses.

 

Of course, if the volatility were higher than 10%, the swings would be even greater. Needless to say, your discomfort is likely to be magnified accordingly, right?

 

What we have here is confusion. When looking at your portfolio, you are confusing signal with noise, something I have written about previously. We can calculate the noise-to-signal ratio of your hypothetical portfolio I described above.

 

According to the chart in Nassim's book, if you check your investments every year, then for every true reading you will encounter 0.7 misleading ones. If you check performance once a month, the noise-to-ratio is 2.32 to 1. And if you are checking streaming real-time quotes by the second, the noise-to-signal is a completely ridiculous 1,796 to 1!

 

Investors must choose their investments based on how well they match up to their lifetime objectives, risk tolerance, time horizon and temperament. Once determined, the investments should not change unless one of these factors change and that shouldn't be very often. To look at a portfolio at any point in time and make a change based on your perception of performance in that moment is death by a thousand cuts.

 

SOURCE:

 

1. Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life by Nassim Nicholas Taleb; second edition (Texere, 2004)

http://www.amazon.com/exec/obidos/ASIN/158799190X/financialsu0f-20

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

Podcast for 5/29/07: Interview with Jay Zagorsky

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Kim interviews Jay Zagorsky, a researcher at The Ohio State University, about his research finding no correlation between intelligence and building wealth.

MP3 Download: Hi (128k) | Lo (24k)

Length: 10:58

Notes:
2:26  Jay Zagorsky explains where the data for his research came from. The Ohio State Center of Human Resource Research runs a longitudinal survey -- they track people from the time they're teenagers until they die. This group started in 1979.
4:10  Zagorsky says there's a strong relationship between intelligence and income, but not between intelligence and net worth. There was a non-linear relationship between financial difficulty and intelligence.
5:55  People who were least in financial difficulty had an I.Q. of about 115 -- slightly higher than average.
6:26  Zagorsky says this research finds that anyone can rule the financial world; I.Q. has no impact.
6:55  Zagorsky describes the difference between this study and others. This study looked particularly at Baby Boomers, while others haven't.
8:15  Intelligence didn't seem to have an impact in any particular areas of financial distress. In other words, there was no evidence linking higher IQ's to, say, missing credit card payments.
8:42  This research didn't account for various risk factors or people's desire for gratification. I need to have it now vs. I'm willing to defer my satisfaction until the future.
9:33  Zagorsky says he wants to examine the drive to become wealthy and the ability to delay gratification.

Resources:
Ohio State - Center for Human Resource Research

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

The Psychology of Financial Success

The hardest of the three functions of a Family CFO is managing behavior. Have you ever noticed how easy it is to know what you should do with your money but how hard it is to actually do it? That is because our relationship with money is very complex.

 

At one point in my life, I made my living as an options trader. I had three mentors who taught me how to be successful as a trader and what they taught me about trading also influences the way I invest, and how I teach others to invest. In case you are wondering about the distinction, trading and investing are not the same thing. Trading is hunting. Investing is farming.

 

One of those mentors was a psychologist who had spent much of his career working for hedge funds, specialist companies and the proprietary trading desks of the big Wall Street firms counseling their traders on how to control their behavior. This is not dissimilar to the function of a sports psychologist, or others who specialize in the psychology of performance.

 

Of course, today we have the recognized fields of behavioral finance, neuroeconomics and socionomics. But back then, if these areas of study existed, they did not have a name. Still, even today, many people don't realize there are these psychologists working up and down Wall Street and most of you are only vaguely aware of the behavioral aspects of investing.

 

One of the first things my mentor said to me when we started working together was, "What ever issues you have will play themselves out in your trading."

 

My immediate thought was, "What issues? I don't have any issues. What kind of psychobabble is this? I want to learn how to trade, not be psycho-analyzed!" It was years later that I would allow myself to see that he was right. Boy did I have issues!

 

My parents divorced when I was very young. My father had a lot of money. My mother and stepfather - not so much. I had a very contentious relationship with my father for as long as he lived. I desperately wanted his love and approval, but on my terms - not his.

 

The way my father showed love and approval was with his money. The way he showed disapproval was by withholding it. This felt conditional and controlling to me. I resented it and fought him every step of the way - eventually driving him away for good. We did not speak for the last seven years of his life.

 

Somehow, along the way, I got money and love confused. My daddy left. He must not love me. My daddy is unhappy with me. He withholds his money. Money must be love. Since my daddy doesn't love me, I must not be deserving of love. If I am not deserving of love, I must not be deserving of money since money is love.

 

I know it is pretty convoluted looking back at it now. But that is how my little kid brain interpreted it.

 

I am not bragging when I say I am reasonably smart, well-educated, ambitious, entrepreneurial and therefore have always earned a nice living, even before I graduated college. But this created a real problem for me. It meant I always had money. At some points along the way, I had a lot of money.

 

One thing I have learned is that our brain cannot tolerate inconsistency. It needs our outside world to match our inside world. Our subconscious is capable of amazing things to make it so. Looking back at my life, I can see a pattern where every time I achieved financial success, I sabotaged it. So I have this recurring pattern of lots of money, broke, lots of money, broke.

 

From the outside, it was easy to say that each time I hit a broke phase, it was someone else's doing. Some external event beyond my control wiped me out. But once I understood the issues I had around money, and why, I could clearly see that my behavior - some action I took, no matter how easily justified at the time - set me up for failure over and over again because I couldn't tolerate financial success.

 

Weird, huh?

 

So my mentor was right. And a funny thing happened. When I understood it, I could deal with it. Now I know I am deserving of both love and money. I understand they aren't the same thing. As a result, I have plenty of both. This was the big Aha! Whatever you believe you deserve is exactly what you will get.

 

So my question to you is this: If you are not as financially successful as you want to be, what issue do you have that is getting in the way? Like me, you may initially write the question off as a bunch of hocus-pocus. But I promise you, if you are not financially successful, it has nothing to do with how much money you make. I can show you many "Millionaires Next Door" who accumulated small fortunes on relatively modest earnings.

 

No. Financial success has nothing to do with how much you make and everything to do with what is going on inside your head.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

The Courageous Investor

Mike was a caller on my radio show Saturday afternoon. Four or five years ago, he had gotten very aggressive in his allocations in his 401(k). Now that the market had been going up for awhile, he was nervous and wanted to know should he change his allocations to something more conservative?

 

What Mike was suggesting is called market timing and it is doomed to failure. Stock picking and market timing are by-products of an obsession with day-to-day performance which is a sure way to get the opposite result.

 

One of the lessons I teach is that most of us are getting the cart before the horse. We pick our investments based on their performance and hope they will meet our objectives.

 

The path to successful investing lies in doing it the other way around. First, you must decide what your objectives are. What is your money's higher purpose? Why are you putting it to work? What do you want it to help you achieve?

 

This is not about numbers. Your objective isn't an 8% return or $1 million dollars in the bank. This is about what you are able to do. This is about being able to do what you want, when you want, without worrying how you are going to pay for it. And most likely, it isn't just one thing. It may be several.

 

I have one client in his mid-50's, his peak earning years, who took two years off to do missionary work in Africa. I have another client who left his job to take care of his two sons full time. Now he is getting his teaching certificate so he can be on the same schedule as his boys as they grow older.

 

Maybe your goals are a little bit more mundane. You just want to have enough money to be able to quit working some time before you die. That's OK. But I would encourage you to allow yourself to get creative and think big. What really lights your fire? What is the one thing you secretly want to do if you had enough money and enough courage? That one thing is your money's higher purpose.

 

	"In the long run, you only hit what you aim at." - Henry David Thoreau   "Aim at heaven and you will get earth thrown in. Aim at earth and you get neither." - C.S. Lewis

 

The cool thing about approaching money this way - even if you don't hit what you aim at - if you aim high enough, even a miss will put you in a pretty good position. So why not aim high?

 

Once you understand your money's higher purpose, then you have two other factors to consider before you can even begin to think about which investments to put your money to work in. You must also consider where you fall on the risk/reward continuum and your temperament.

 

Investments stretch along a risk-reward continuum, from those that produce a guaranteed return to those that offer the chance, but not the promise, of a return. Generally, the higher the return, the higher the risk, although it should be noted that risk can take many different forms. It is not always the loss of capital. That is where your temperament comes in.

 

What sort of investor are you? Are you patient or impatient? Do you stick with an idea that makes sense or do you change philosophy every time what you are doing begins to feel the slightest bit uncomfortable? How hands on are you? How much time do you want to spend managing your investments? These are all questions of temperament.

 

Only when you are crystal clear on these three things can you begin to choose the investment philosophy that is best suited to your specific needs. And yet, when I ask a room full of investors how many can tell me what their money's higher purpose is, only 1 in 10 typically raise their hand.

 

When you get clear about these things before choosing an investment, questions like Mike's go away. Investment strategies and specific investment vehicles are chosen based on their ability to achieve your objectives with the appropriate amount of risk and no more, while be mindful of the fact that your investment strategy must fit your temperament.

 

When you take this top-down approach, your investments - in other words, your money's place of employment - should only change when your money's higher purpose changes. And that, I shouldn't need to tell you, should occur very infrequently.

 

	"Courage is never to let your actions be influenced by your fears." - Arthur Koestler

 

An investor who takes this approach is a courageous investor. A courageous investor never changes course based on fits of fear or greed. The beauty is, the level of commitment to the investment approach matches the level of commitment to the objective. Provided you are committed to your money's highest purpose, the rest becomes a moot point.

 

In the new movie release, Georgia Rule, Lindsay Lohan's character, Rachel, has an exchange with Simon (Dermot Mulroney) about the difference between right and wrong and a lie and the truth. She turns to him and asks sarcastically, "How does it feel to be so sure of yourself?" Without missing a beat, he shrugs his shoulder and replies with complete sincerity, "Yeah, it's pretty good."

 

That is the feeling you get when your investments are based on a higher purpose instead of something facile like growth, income or capital preservation or base like a millions of dollars or 50% return. Wouldn't you like to feel that sure of yourself on a topic that makes some of the smartest people feel so uncertain?

 

Learn more about how to put your money to work consistent with its highest purpose in my upcoming class, "The Family CFO's Guide to Investing." I am offering this class in June only - once in Frisco, once in Fort Worth and once in Dallas. The best part is, like this article, it is free. Check the dates and get registered at kimsnider.com.

 

And as always, feel free to leave your thoughts and comments below.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Investor or speculator?

Many of Wall Street's most colorful metaphors and fables come, unwittingly for most, from a book originally published in 1940 by Fred Schwed, Jr. (yes, that was his real name) called "Where Are the Customers' Yachts?" Schwed went to work on Wall Street in 1920 and wrote one of the enduring investment classics about his time there.

 

The book is simultaneously eye-opening and hilariously funny. More amazing is that many of its truisms seem prophetic given the passage of almost 70 years. It just goes to show, that for all the changes we have experienced in the investment business, not much has changed at all. Everything old becomes new again.

 

One of the passages in this book which caught my attention was the following description of investing in comparison to speculation:

 

Speculation is an effort, probably unsuccessful, to turn a little money into a lot.

 

Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.

 

If you take a thousand dollars down to Wall Street and attempt to run it up to $25,000 in the course of a year, you are speculating. If you take $25,000 down there and attempt to earn a thousand dollars a year with it (by buying twenty-five four-percent bonds) you are investing. The odds against your being successful in the first venture are roughly 25 - 1. The odds against the success of the second venture are "odds on", or something like 1 -25.

 

Jason Zweig correctly points out in the foreword, "Today, as in Schwed's time, people who try to get rich quick still insist on calling themselves 'investors' - even though they are clearly speculators."

 

I believe in investing, not speculation. I believe this because my goal is to make money, not lose it. But the difference between investing and speculation is, as Schwed himself points out, only a matter of degree. So where do you draw the line? How do you define which is which? What criteria do you use?

 

I would love to know your thoughts on the topic. Do you see a difference? Which are you? Did you set out to consciously do one or the other? Let us know by posting your comments below.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

.2(S) + .8(M) = FS

There are two formulas that I apply to financial success. One is E + S + I = FS and the other is .2(S) + .8(M) = FS. For those of you who don't like math, I can picture your eyes starting to glaze over now, but stick with me. I am not about to get all nerdy on you.

 

The first is a formulaic expression of something you have heard me say many times before. Financial success comes from thinking like an entrepreneur (E), saving prodigiously (S), and investing wisely (I). Hence, E + S + I = FS. This basic formula for financial success is the subject of my first book, which I have finally started to make headway on after three years of swearing I was going to get it done!

 

The second refers to my belief that financial success is only 20% skill-set (S) and 80% mindset (M). That is true at the broad level and it applies to each of the three areas of financial success mentioned above.

 

When I say think like an entrepreneur, you don't have to have years of management experience to benefit from that perspective. You just need to be educated on some basic management tools, like personal financial statements. That is the easy part. Anyone can learn those. The hard part is the mind set side of the equation.

 

The traits of successful entrepreneurs are the same traits you should bring to your personal finances in order to be successful. Those are 1) commitment and determination; 2) creativity, self-reliance and the ability to adapt; and 3) believing in yourself and that you are worthy of financial success.

 

Saving money doesn't take all that much knowledge. I think it is fair to say anyone can do it. With proper financial literacy education, like that provided by Money Camp, even kids can grasp the concept of saving for what you want and different wallets for spending, saving and charitable contributions.

 

Having the discipline to save is another matter altogether. It has been said, "The reason most people fail instead of succeed is they trade what they want most for what they want at that moment."

 

I know in my own life, if left to my unconscious, I tend to be a spender rather than a saver. I didn't really become a saver until I met my husband, who is a natural saver. But once I started doing it, I realized I got a lot of satisfaction from seeing my net worth grow. Who knew the number on the bottom of personal balance sheet could bring more deep and lasting satisfaction than some gee-gaw I bought?

 

Don’t get me wrong. I still like nice things. But now whether I spend or save is a very conscious decision rather than an unconscious one.

 

Finally, you have investing. No where is my 80%/20% formula more pronounced than here. When it comes to skill set, it helps to understand that many of the most powerful concepts in investing are the simplest ones. It does not take complex investment strategies to build wealth through investing. In fact, the opposite is true. The more time you spend on it, and the more complicated your investment schemes, the less likely you are to get your desired result.

 

For years now, women who have just completed the Snider Investment Method™ workshop come up to me with incredulous voices and say, "I can do this!" In my mind I think, "Well, duh!"

 

Often they will say something like, "My husband has always taken care of our money", or "I am an artist. I didn't think I would understand investing", or "I didn't know anything about investing when I walked in and I was sure I would be totally lost."

 

(By the way - I am pretty sure there are men who think the same thing but I just don't think they are as willing to admit it to me!)

 

Anyone can learn to invest. It has nothing to do with whether you are an artist or an engineer. In fact, academic research says it has nothing to do with how smart you are.

 

Jay Zagorsky, a researcher from Ohio State University has studied the relationship between IQ and wealth. "Smarter people tend to get paid more on the job, but there's no relationship between intelligence and net worth when holding other factors constant," says Zagorsky, whose report was published in the journal, Intelligence.

 

(Just as another aside, we have scheduled an interview with Jay Zagorsky. So listen for my interview with him in the coming weeks on my radio show, Saturdays at noon CT on 1080 AM KRLD in the Dallas Fort Worth area and in our Financial Success Coaching podcast available from iTunes, Odeo and right here on the Kimmunications blog.)

 

So what does account for your ability to build net worth through investing? It is your ability to control your emotional responses to meaningless, short term price movements. It is your ability to avoid extreme states of fear or greed. It is your ability to do the right thing every single day even though it often feels wrong.

 

In short, investing is almost totally a mind game. That is why hedge funds hire psychologists to work with their traders in the same way professional sports team hire sports psychologists to work with athletes. I know because one of them was one of my mentors. Investing is 20% skill and 80% in your head. That is one of the very first things he said to me when we started working together and I know it is as true as the sky is blue.

 

That is why the way I invest my own money is a system that tells me what to do in every single circumstance. It leaves nothing to my discretion because I worked it all out based on probabilities beforehand. Then I follow it religiously to take the game out of my head and make it all about knowledge. That is a game I can win and in my opinion the only way you can win it.

 

So follow my convoluted algebra here. If E + S + I = FS and .2(S) + .8(M) = FS then E + S + I = .2(S) + .8(M). In other words, in order to achieve financial success, you must be educated on the nuts and bolts. That is important. But more important is your mental approach to money.

 

If that is true, then doesn't it also follow that the people you need to surround yourself with are not just salesmen who make their living by selling you annuities and mutual funds, but rather a mentor who will help you with both sides of the equation?

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Are You Navigating or Just Drifting?

I've been reading a management book titled "Mastering the Rockefeller Habits" by Verne Harnish. The central premise is how to create alignment in an organization. Alignment can best be understood as everyone and everything working together toward a defined objective.

 

I am attracted to the Rockefeller Habits because Harnish has created a step-by-step system for managing a small but rapidly growing business, much like the Snider Investment Method™ is a complete system for managing your investments. Like the Snider Method, there are steps to be followed, one after the other and always in the same sequence. Also like the Snider Method, there are worksheets to keep up with all the data and metrics to track performance.

 

As I was reading, I quickly realized that my company is suffering from a lack of alignment. We have 20 people all doing stuff every day - stuff that "feels" important, or at the very least urgent. But a lot of it has nothing to do with meeting our most important goals. We are all rowing very hard but all to a different cadence. We are moving, but not in a straight line and not with the efficiency we could be.

 

I also realized that I am much more successful at achieving goals in my personal life than in my business life. Maybe it's because there are fewer people to get onboard. In my personal life, it's just Jim and me. The dogs don't put up much resistance - or provide much input for that matter!

 

Our dream is to build a polo farm in Aiken, SC. Everything we have done for the last few years has been about making that a reality.

 

First, we had a vision that we were absolutely 100% committed to. Next, we had to ensure we had enough money put away to support us for the rest of our lives - not lavishly, but at least comfortably. In other words, take care of retirement savings first, then the dream.

 

Then we had to figure out what it would take to make the dream a reality. The first thing we realized is we needed to build the company into one that was not so dependent on Jim and I on a daily basis. In others words, we had to build a business. We are working on that.

 

It also meant quantifying the dollars involved. How much would it take to build our dream? Yikes! Polo farms don't come cheaply, at least not the one I see in my dreams. So we did that too.

 

Then we started working towards those goals. Everything else has taken a back seat because that is what we decided was most important. When we wanted to take a vacation, we measured it against the dream. "For the cost of a trip to Sun Valley, we could buy an acre of land." or "Is that worth a polo pony?" Sometimes we would say yes. Most of the time we decide it isn't worth it.

 

Our actions are generally in alignment with our goals. As a result, we have bought the land and hope to start moving dirt some time next year.

 

I have always believed that our lives, especially our financial lives, are just micro businesses, to which business principles apply. That is why I always stress the concept of the Family CFO. I believe it is a useful metaphor.

 

I realize now that my personal life is better aligned with my personal goals than my business is with its business goals. We aren't as focused, in the business, as I would like us to be. That is my fault as the CEO and I have determined to fix that.

 

But what can you learn from my experience? Well, here is my question - are YOUR actions aligned with YOUR goals or are you allowing YOURSELF to drift day-to-day without getting any closer to your dreams? And if you are drifting, what do you need to do to take hold of the helm and start creating an intentional course? If you'd like to share, your thoughts and comments are welcome below.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Do You Deserve Financial Success?

I saw an article in MarketWatch the other day that made me sad. Apparently, 50% of Americans believe a secure retirement is an impossible dream. It makes me sad because self-defeating beliefs like this become self-fulfilling prophecies. There is absolutely no reason this has to be true.

 

Financial success requires three things: save prodigiously, invest wisely, and act like an entrepreneur. These things are simple. They are doable. But they are obviously not easy or we would all be millionaires.

 

In The Millionaire Next Door, Drs. Thomas Stanley and William Danko tackle the question of quantifying how wealthy you should be. They use a formula I have find quite useful. Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.

 

If your net worth is more than twice this number, you are a PAW - a prodigious accumulator of wealth. If it is less than 50% of this number, you are a UAW - an under-accumulator of wealth. In between and you are average - an AAW.

 

At the age of 28, I was wealthy, by any measure. I didn't inherit it. But it was a stroke of luck. The company I worked for went public and my stock options were suddenly worth a lot of money.

 

By age 30, I was dead broke. I didn't have a penny to my name and I was in debt up to my eyeballs. All my cool toys were re-possessed. I sold my beautiful Uptown condo at a terrible loss just to stay out of foreclosure. My credit was wrecked and I had no job.

 

Today I am 43 - I'll turn 44 in May. I am again wealthy - by any measure. This time it wasn't a stroke of luck. It was damn hard work. And let me tell you something. It is far more gratifying than the first time.

 

There are many lessons to be learned in how and why I lost all that money the first go around. I'll save that for another day. I prefer to focus on how I got from the there to here - and to ask you a question? What can you learn from my experience?

 

One of the most useful exercises for me has been finding people who had what I wanted, figuring out what they were doing that got them the result I was after and then doing the same thing. That is why I found the Millionaire Next Door to be so helpful. It gave me a shortcut. I didn't have to talk with all these people, the author's already had.

 

Financial success starts with a simple principle. If you earn $100 and spend $110 you will always be poor - it doesn't matter how much money you earn. If you earn $100 and spend $90, you will always have money - it doesn't matter how little you earn. If you want to be financially successful, you must spend less than you earn.

 

Once you have put away enough to cover emergencies start investing your savings. The key to investing wisely is knowledge. I believe a financial education is one of the best investments you can possibly make.

 

Investing is simply a trade-off between risk and reward. You cannot have one without the other. That law is as fundamental as gravity - it cannot be suspended. The investor who manages that trade-off well will do well. If you don't, you won't. Too much risk or too little can be equally detrimental to achieving financial success. Your job is to always maintain a happy medium.

 

Risk is connected with financial success in many ways. For example, two-thirds of high net worth (HNW) individuals are entrepreneurs even though the self-employed only make up 20% of the workers in America. That makes sense given that profit is the reward for risk. The entrepreneur takes the risk to start and sustain a business and therefore makes more, when successful, than the person who works for someone else and has less risk. But he or she also stands to lose more if the business fails, which it often does.

 

So it is not surprising that HNW individuals are predominantly entrepreneurs. I am an entrepreneur. Not because I set out to make a lot of money but because I have a passion that burns deep inside my core - to make a profound difference in the financial lives of others by teaching them what I had to learn the hard way.

 

But the good news is that you don't have to be an entrepreneur to be financially successful - you just have to act like one. Most successful entrepreneurs I know have three traits you need to be financially successful: 1) commitment and determination; 2) creativity, self-reliance and ability to adapt; and 3) believing in yourself.

 

People sometimes ask me how I went from broke, to not, in thirteen years. I tell them I decided to. That is the truth. Without commitment and determination, you probably won't get there, because financial success requires making hard choices - usually involving giving up what you want now for the opportunity to have something better down the road. That is hard.

 

It is also hard not to get caught up in what everyone else is doing or to not keep doing the same thing over and over and expecting a different result. When the traditional Wall Street offering didn't meet my objectives, I created my own. If what you're doing isn't working, change what you're doing. Otherwise, you shouldn't be surprised when you keep getting what you've always gotten.

 

50% of Americans don't believe they can create a secure retirement. Sadly, they are right. Because if you don't believe you will, then you most assuredly won't.

 

Why do so many people doubt their ability to achieve financial success? Is it because they are afraid to try? Is it because too many people have told them they can't do it? Is it because we are a gluttonous, consumer goods oriented society where no one knows the value of delayed gratification any more? Maybe.

 

I saw an old beater car driving down Stemmons Freeway yesterday with a big screen plasma TV tied in the trunk. The driver was pretty obviously on the lowest rungs of the economic ladder. Yet there he was with his big screen, which by the looks of it, was worth more than the car!

 

But maybe, just maybe, it is because we do not believe we are deserving of financial success. One thing I know for sure, anything I believe I am unworthy of - love, money, respect, friendship - will elude me until I can say with certainty, "I deserve this!". Do you deserve financial success?

 

	TAKEAWAYS:   1. To be financially successful you must: save prodigiously, invest wisely, and act like an entrepreneur.   2. If you don't believe you are capable of financial success, figure out why.

 

So now you know what I think. How about you? What do you think? Feel free to leave your thoughts and comments below.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

The Road to Financial Success Is Well Marked

Do you ever look at people who are more financially successful than you are and wonder how they got there? There are only three ways to become rich: inherit it, marry it, or earn it.

 

Most of us aren't heirs to a fortune and unless your parents are in the minority, they are going to need all they have just to live out their power years. Some may be fortunate enough to marry into wealth but I certainly wouldn't recommend it as a wealth-building strategy. It reminds me of the line in Pretty Woman, "Meet the Olson sisters. They have made marrying well an art form."

 

So that leaves earning it. The good news is the road to financial success is well-travelled and those who have gone before you have left it pretty well marked. The only thing required from you is the discipline to make it happen. Here's how:

 

Forget about appearances. I bet you know someone who makes a lot of money, lives in a fancy house, drives fancy cars, and lives paycheck to paycheck. I know a lot of people like that. But I bet you also know someone who lives in an average house, drives the same paid-for car for ten years, and has a net worth of several million dollars. Thomas Stanley and William Danko call these people "The Millionaire Next Door." If you haven't read the book, get it.

 

Don't buy things you cannot afford. My grandmother is 88 years old. She was ten years old, living on a farm in East Texas in 1929 when the stock market crashed. She grew up, like so many of her generation, believing that you didn't buy something you couldn't pay cash for. When you have the discipline to save for the things you want, it gives you the time to decide if they are really important. If they are, they'll mean more for having saved to buy them.

 

Kick your bad habits. Do you smoke, drink, gamble or live on junk food? Our bad habits rob us in many ways. Let's take the difference between eating breakfast at home or grabbing a McDonalds on your way to work each morning. My breakfast every morning is a bowl of oatmeal and Crystal Light. I am guessing that meal probably costs me about $0.75. Compare that to $3.00 for an Egg McMuffin, hash browns and a soda (I don't drink coffee). Do that five days a week, 52 weeks a year, that's almost $600 a year. $600 compounded at 10% for twenty years is $4000. Do that every year for ten years and you have cost yourself a years worth of living expenses. That doesn't take into consideration the extra cost of insurance and healthcare if you are a high risk.

 

I am not suggesting you have to live in abject poverty or deny yourself a splurge once in awhile. I like a Whataburger as much as anyone. But you have to admit bad habits are expensive. If financial success is a priority for you, then kicking bad habits is one way to get there.

 

Visualize your goals. There is a tendency to become what you imagine yourself as being. So how do you attain your goals in life? By having a goal and knowing what it is! I, for example, have had a goal for almost ten years of owning a polo farm in Aiken, SC. Not a day has gone by that I didn't picture in my mind what the house would look like, how the barns and pastures would be laid out, and me playing polo on my own field. Today, that goal is a reality.

 

It is not enough to say I have a goal. The trick is to imagine exactly what that looks like, in excruciating detail, and hold that thought doggedly in your mind. The one thing we know is that our minds can't stand to have the inside not match the outside. If you are persistent with the visualization, and you have full faith in you ability to achieve your goal, your mind will, over time, make your outside world congruent with your inside world. I don't know why it works that way. I only know that it does.

 

Manage risk. Shit happens. Make sure you have six months of living expenses in a bank account. Insure any risk you cannot afford and update your insurance as your situation changes. The paradox is, the more at risk we are, the more likely we are to skip this step. When money is tight, it is easy to raid the emergency fund or cancel the insurance policy and hope lightening doesn't strike. But Murphy's law says that is just when it will and if it does, the financial setback may be too drastic for you to ever recover from.

 

Abolish get rich quick fantasies. Wealth is built one dollar at a time. I like the quote by Theodore Roosevelt. He said, "The things that will destroy America are prosperity-at-any-price, peace-at-any-price, safety-first instead of duty-first, the love of soft living, and the get-rich-quick theory of life."

 

Manage your own money. Imagine a broker has two mutual funds he can sell you. One is a low cost index fund that will match the market's performance exactly but pays him no commission. The other will under-perform the market two-thirds of the time but will pay him all sorts of money. Which do you think he is going to recommend? The only person who has no conflict of interest when it comes to taking care of your money is you. That makes you uniquely qualified to manage your own financial affairs.

 

Stop chasing the herd. The person who chases the latest hot idea, whether it is internet stocks, real estate, or commodities, is condemned to repeatedly buy high and sell low. The key to wealth is to buy when everyone else is irrationally selling and sell when others are irrationally buying.

 

Think of your money as a tool. Your money is no different than a carpenter's hammer or a truck driver's truck. It is a tool. Every day you put its little coveralls on, hand it its lunch pail and send it off to work. If, at the end of the day, it doesn't come back with four buddies in tow, your money isn't working hard enough. You need to find it a different job.

 

Be the Family CFO. You are your family’s chief financial officer and it is arguably the most important job you will ever hold. The CFO of a company is responsible for that company’s financial health. You are responsible for the financial health of your family. What separates the good CFO’s from the bad is knowledge. A good CFO works to be as educated about financial matters as possible. The more you know, the better you’re able to distinguish between a great investment opportunity and a cleverly disguised sales pitch.

 

	TAKEAWAYS:   1. There are only three ways to become wealthy: inherit it, marry it, or earn it. The last one is the most reliable.   2. Get started today. Tackle the items on this list one at a time. Make a plan for implementing these ideas. Let us know how you are doing.

 

Care to share? Which of these needs to be your highest priority? Leave your thoughts and comments below.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Jim Cramer on Market Manipulation

I suspect many of you have seen this video because several people emailed me the link. If you invest money in the stock market and you haven't seen it yet, you MUST.

 

It is approximately ten minutes in length and it is the most candid conversation I have ever seen recorded about the manipulation of stock prices. I have heard these conversations over dinner but never in front of a microphone or video camera.

 

 

UPDATE (3/23/2007): YouTube has taken down the video but you can still view it on TheSteet.com. Thanks James for tracking that down.

 

Amateur investors want to believe that stock prices are a function of the fundamental value and future prospects of a company. They are not - at least not in the short run.

 

Amateur investors believe the news they read on the companies they own and think it means something. It does not.

 

Amateur investors desperately want to believe you can look at historical price, fundamentals and news and figure out which way a stock is going to go.

 

If this video doesn't fundamentally disabuse you of this notion, I don't know what will. And this is just talking about one tactic used by one group - hedge funds. There are many others, like window dressing and marking the close, all going on simultaneously.

 

Amateur investors, meaning people like you and me who do not run billions of dollars of institutional money, have only two choices. The first is to try to play the trading game against the pros. I am here to tell you it can't be done profitably over long periods of time - no matter how many seminars you take, newsletters you subscribe to, or pieces of software you buy.

 

The movement in prices is random. There is no ability to predict what is going to happen next. If you don't have the financial ability to move the price, you don't have a chance as a trader over the long run.

 

The other option is to take the VERY long view. You buy companies that you would be happy to own for many, many years because over the long run, the market machinations don't matter. While you own them you generate income from them, let them sit, whatever. If your investment premise is correct, and you are buying financially sound companies with good long-term prospects, the long time horizon cancels the noise and leaves you with nothing but signal.

 

The hard part, of course, is that while you own the stock, you have to train your brain to ignore the noise. It is easy to let our emotions take over and assign some meaning to the short term movements in price. But a reaction based on noise is, by definition, going to result in a poor decision.

 

	TAKEAWAYS:   1. The stock price does not reflect the fundamental value of a company in the short run.   2. News has no predictive value either.   3. Unless you have the ability to move markets, your only rational choice is to take a long-term approach to investing and ignore what happens in the short run.

 

I would love to hear your thoughts on this topic. Specifically, what are your takeaways from it? Does this change your approach to investing in any way? Does it clear things up or muddy the waters? Leave your thoughts and comments below.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.