First the Disclaimer: This is a thought-provoking article that draws upon real world examples, articles, books and websites that are readily available to the public. This article is not intended to offer investment advice. Any actions that you take in the market place should be the result of your own financial education and consultation with a licensed professional.
This is the conclusion of my 3 part series that began with Home Ownership: The Biggest Financial Scam of the Twentieth Century and was followed up by parts one and two of The Stock Market: The Second Biggest Financial Scam of the Twentieth Century.
What is Cashflow? Cashflow simply put is the flow of money. Positive cashflow is the revenue or income that a person receives from a job, investment or business. The majority of people derive their cashflow from their jobs. To the extent that they come to derive cashflow from investments and or businesses is the extent to which they will become financially free when their working years are over. Negative cashflow is the revenue that a person loses due to an investment or business.
Most people are taught to invest for capital gains rather than positive cashflow. Investment success depends on appreciation of the underlying “asset” rather than income production. This is the basis for “investing” in a primary residence or the stock market for wealth creation. Yet, success of the capital gains investment strategy is by no means assured. No one can guaranty that an asset will appreciate in value, despite the tendency to quote historical gains as justification for an investment today. The current housing and market crises highlight the fallacy of depending on capital gains to create wealth. The housing crisis alone will destroy billions of dollars of personal wealth. From the October 25, 2007 Joint Economic Committee report:
The JEC report found that the subprime catastrophe is likely to accelerate the downward spiral of house prices. Based on state-level data, the report estimates that by 2009:
• 2 million foreclosures will occur by the time the riskiest subprime adjustable rate mortgages (ARMs) reset over the course of this year and next.
• Approximately $71 billion in housing wealth will be directly destroyed because each foreclosure reduces the value of a home.
• More than $32 billion dollars in housing wealth will be indirectly destroyed by the spillover effect of foreclosures, which reduce the value of neighboring properties.
• States will lose more than $917 million in property tax revenue as a result of the destruction of housing wealth caused by subprime foreclosures.
• The ten states with the greatest number of estimated foreclosures are California, Florida, Ohio, New York, Michigan, Texas, Illinois, Arizona and Pennsylvania. But there are several others that are close behind in the rankings.
• On top of the losses due to foreclosures, which this report examines, a 10 percent decline in housing prices would lead to a $2.3 trillion economic loss.
The power of positive cashflow is that it guarantees the value of an investment regardless of the markets. Imagine the difference between a real estate investor who bought a house expecting it to go up in value versus the investor who bought for cashflow. The capital gains investor bought at very high premiums in the market such that the rents received for his investment do not cover the expenses. Now the investor must find a buyer who paid more than he did in order to make a profit. If the market goes down that investor will find that he has no staying power and will likely sustain a substantial loss to liquidate the property and limit his on-going monthly losses. The fate of the cashflow investor is much more secure. The positive cashflow yielded by the property will continue regardless of market activity. Should the market go down, the cashflow will continue, giving the investor staying power and continued profits in a down market. More importantly, most if not all of the positive cashflow will be shielded from taxes by depreciation expenses on the property. In short, the cashflow, not the capital gains, on a property will usually be tax-free. Avoidance of unnecessary taxes is one of the best wealth acceleration strategies you can employ. To quote David Swenson from Unconventional Success, “Taxes impair wealth accumulation.”
Cashflow strategies can also be applied to the stock market.
The trouble with cashflow investing is that it requires having a financial education. Cashflow investing requires the ongoing thirst for financial knowledge specific to your chosen area of cashflow generation.
The capital gains strategy encourages financial ignorance. Tempting the would-be investor to treat their investment as a money-in-money out proposition. Actively seeking financial education is the only way that a cashflow investor will be successful. Yet the odds are against him. Not because financial education is difficult to attain, no. The odds are against him because the financial sales people any would-be investor will encounter are paid commissions based on their ability to sell products and the majority of those products are for capital gains rather than cashflow. I find one or two real estate deals per year that yield sufficient positive cashflow for me to consider the deal, yet I am often encouraged by brokers to ignore my criteria for cashflow and invest instead for capital gains.
The cashflow strategy requires that you learn to work with people to form a team and generate profits for all. A capital gains strategy has people so focused on maximum gain that they ultimately succumb to greed, fail to exit an investment at an appropriate time and experience financial loss.
Even in today’s economy cash in the bank is not a source of solace as savers are seeing their returns destroyed by interest-rate-cutting policies of the Federal Reserve. People who depended on interest from savings to provide retirement income are seeing their incomes dissipate as the Federal Reserve sacrifices their incomes to bail out Wall Street, Banks and the derivatives markets.
The actions of the Fed and the behavior of Banks and Wall Street have proven that it is cashflow, not cash that is king.
Monday, March 17, 2008
The Stock Market: The Second Biggest Financial Scam of the Twentieth Century
First the Disclaimer: This is a thought-provoking article that draws upon real world examples, articles, books and websites that are readily available to the public. This article is not intended to offer investment advice. Any actions that you take in the market place should be the result of your own financial education and consultation with a licensed professional. Financial calculations were accomplished using the savings goal calculator found at Bankrate.com unless otherwise indicated.
When I entered the work force, I was offered a retirement plan, actually I was offered two. My employer was transitioning out of defined benefit plans, i.e. pensions and opting into defined contribution plans, i.e. 401ks. Because I was hired during the transition I was given a choice. I could not see working for any employer for 20 years and since the pension as I understood it was all or none, I opted for the 401K. Little did I know, I became part of a phenomenon initiated by the Federal Government in 1974 when it enacted the Employee Retirement Income Security Act (ERISA).
ERISA was created in the wake of the failure of the Studebaker Corporation in 1963. When Studebaker failed it left a pension that was so badly funded it could not provide benefits for all of its employees. ERISA did two things: 1) It provided regulation of any existing and future pension plans; 2) It provided government insurance of those pension plans in the form of the Pension Benefit Guaranty Corporation. ERISA also did something else, it virtually guaranteed a shift away from corporate-sponsored pensions and toward employee-sponsored savings plans. The 401K, intended to be a tax-advantaged benefit to corporate executives, has become the major savings vehicle for retirement for the average worker in America.
Let’s look at that statement. The 401K, intended to be a portable, tax-advantaged benefit to corporate executives, people whose income is generally north of six figures, has become the major savings vehicle for the average American worker, people whose median income is $46,326. ( This figure for median income comes from the US Census and the General Accounting Office.)
Assume the average retiree will need cash assets of one million dollars. One million dollars invested at 5% will earn an income of $50,000 per year without having to draw down the principle. This goal of one million dollars assumes the $300,000 to $500,000 dollars retirees will have to have set aside to cover health care costs. (CNNMonday February 19, 2008 “Most Americans Unprepared for Retirement”) Even if a worker earning the median income only desires to live on sixty percent of his or her working income, he would still have to save $555,912 invested at 5% to earn an income of $27,796. Add in the amount needed for health care and the goal is still one million dollars. The Savings goal calculator at bankrate.com shows that even if a worker earning the median income managed to save $10,000 per year or 21.6% of his gross income, it would take 100 years to reach the estimated million-dollar target needed for a comfortable retirement. In other words this retiree will die of old age while trying to save for retirement. Using bonds or a “high-yield” savings account with an annual percentage yield of 3.6% will put the average American worker within reach in 77 years 11 months almost beyond the average American’s lifespan. He would still die of old age while trying to save for retirement. Add a 50% employer match and the goal is reached in 34 years and 3 months. Well within the estimated forty year working life of the American worker. But an employer match of 50% is virtually unheard of. A true 50% match of 50 cents per employee dollar invested does not exist. The 401Khelpcenter reviews the common matching plans available to people who save through their 401Ks.
Because amassing the funds necessary for a comfortable retirement is virtually impossible through savings alone, employees must seek vehicles capable of higher returns in order to reach their retirement goals.
In steps the Stock Market, promising higher returns than stodgy old bonds, and money market accounts; hence, the stock market became the destination of choice for retirement savings and Wall Street responded by increasing the offerings to retail consumers through Mutual Funds. Before the year 2000 it was not uncommon to hear that the S&P returned 16% over the previous 10 years. Looking at the returns of one of the best known indexed mutual funds, the Vanguard 500, returns since its 1976 inception are 11.75%, impressive until you look at the 1 year return, -2.41%, the 5 year return, 11.89% and the 10 year return 5.06%. These are average returns not real returns. As an example let’s look at the growth of 1 dollar in the mythical High Fly Fund. High Fly posts a 50% gain in one year and your dollar grows to $1.50. The next year it posts a 25% loss, now your investment is worth $1.125. The average return for High Fly reported by the mutual company is 12.5%, but that is not your actual return. Your actual return or compound annual growth rate (CAGR) is in the neighborhood of 6% per year worse if you factor in inflation.
Is 6% acceptable given the risk that investors take on by investing in the stock market? David F. Swenson, CIO of the Yale Endowment explains investor risk in his book, Unconventional Success, when he states: “Because equity owners get paid after corporations satisfy all other claimants, equity ownership represents a residual interest. As such stockholders occupy a riskier position than, say, corporate lenders who enjoy a superior position in a company’s capital structure.” He goes on to say “the 5.0 percentage point difference between stock and bond returns represents the historical risk premium, defined as the return to equity holders for accepting risk above the level inherent in bond investments.” Mr. Swenson’s comments and calculations of the risk premium were based on a compound annual return of 10.4% in the stock market compared with 5% bond yields. 10.4%-5% equals a risk premium of 5.4%. Unfortunately I have yet to find a calculation of CAGR (compound annual growth rate) that matches Mr. Swenson’s. I found many examples of average returns that match the 10.4% average growth rate but not the CAGR. The reason that this is important is that all other savings vehicles are quoted by the CAGR. Your savings accounts, bonds and money market account are all quoted by the CAGR or its equivalent, the annual percentage yield (APY). In order to determine where to allocate your funds, you must compare apples to apples not apples to oranges. As you might guess the CAGR for the stock market is lower.
A quick look at the CAGR calculator for the stock market on moneychimp.com shows the average return from January 1, 1975 to December 31, 2007 to be 9.71%. You only realized that return if you were invested in the market the entire time. What if you began investing in 1980? The numbers look about the same. If you started in 1985 your returns look a little better. By 1990 the CAGR drops to 8.21%. If you started in 1995 your CAGR jumps to 9.32%. If you began investing in 2000 your CAGR drops to minus 0.06%! If you eliminate the results of the past 7 years from the S&P performance and track performance from January 1, 1975 to December 31, 1999 the CAGR was 13.03%. When the stock market is good it is great, when it is bad, it is pretty darn miserable. For the record, there has been only one 9 year period from January 1, 1950 to December 31, 2007 in which the average return for the S&P was 16.14% and the CAGR was 15.32%: the period from January 1, 1990 thru December 31, 1999.
It should be clear from these numbers that your returns are dependent not only on how long you are invested in the markets but when you started investing. In fact the stodgy old bond investor has outperformed the stock investor over the past 7 years.
The 1990’s investor will have a very different view of market performance than the 2000’s investor.
Mr. Swenson’s book is a must read for anyone investing in mutual funds, he makes a compelling case, explaining why actively managed mutual funds are generally a money losing proposition for investors and why a balanced portfolio based on six solid asset classes constitutes the winning combination for investors.
How can I call the stock market the second biggest financial scam of the twentieth century if I am quoting numbers that are on the face of it pretty good? For four reasons: 1) because the true CAGR going back to 1950 is much lower 7.47%. It will take the average American worker 25 years and one month saving $10,000 per year to accumulate one million dollars in wealth as long as the market achieves CAGR of 9.71% and in 29 years 2 months if forced to accept the longer term returns of the market. These numbers leave very little margin for error for the average American worker. Retirement projections for the most part are based on returns that have existed at only one point in the stock market’s history since 1950; 2) because the same laws that facilitate the transfer of individual investor money into the stock market also mandate its withdrawal at a specific time which is tantamount to what all financial pundits have called a money losing strategy, Market Timing. In other words the laws governing tax-deferred savings mandate that withdrawals begin at age 70 and a half at the latest forcing retirees to time the market to determine their exit; 3) the time horizon for capturing meaningful gains from the market is long indeed, at least 30 years. To quote Mr. Swenson, “Returns of bonds and cash may exceed returns of stocks for years on end. For example from the market peak in October 1929, it took stock investors fully twenty-one years and three months to match returns generated by bond investors.”
Charles Farrell, an adviser with Denver’s Northstar Investment Advisors, used data from Morningstar’s Ibbotson and Associates to analyze 52 rolling 30-year periods, starting with 1926 to 1955 and ending with 1977 to 2006 “But here’s what’s interesting: The Majority of your wealth would almost always have come in the last 10 years. Mr. Farrell calculates that, on average, you would have notched 8% of your final wealth after the first decade and 32% after the second. In other words, 68% of the total sum accumulated was amassed in the last 10 years.” (Wall Street Journal, Jonathan Clements November 21, 2007); 4) because current marketing strategies by financial pundits, gurus and Wall Street treat stock market investing as a money in, money out proposition obscuring the true risks of investing and the true time horizon needed to accumulate wealth. In other words, the money needed for retirement must be invested for an extended period of time, roughly 30 years. It cannot be borrowed against. It cannot be used to buy a home, car, pay for college or a child’s wedding.
It can only be used for retirement 30 years hence. Any other needs must be paid for from an additional source other than retirement savings. Most people lack the financial education to understand this and blindly chase market returns hoping for a big score.
Fortunately there is a simple solution, but like most simple solutions this one requires work and financial education. I will introduce this simple solution in part 3 of this series.
When I entered the work force, I was offered a retirement plan, actually I was offered two. My employer was transitioning out of defined benefit plans, i.e. pensions and opting into defined contribution plans, i.e. 401ks. Because I was hired during the transition I was given a choice. I could not see working for any employer for 20 years and since the pension as I understood it was all or none, I opted for the 401K. Little did I know, I became part of a phenomenon initiated by the Federal Government in 1974 when it enacted the Employee Retirement Income Security Act (ERISA).
ERISA was created in the wake of the failure of the Studebaker Corporation in 1963. When Studebaker failed it left a pension that was so badly funded it could not provide benefits for all of its employees. ERISA did two things: 1) It provided regulation of any existing and future pension plans; 2) It provided government insurance of those pension plans in the form of the Pension Benefit Guaranty Corporation. ERISA also did something else, it virtually guaranteed a shift away from corporate-sponsored pensions and toward employee-sponsored savings plans. The 401K, intended to be a tax-advantaged benefit to corporate executives, has become the major savings vehicle for retirement for the average worker in America.
Let’s look at that statement. The 401K, intended to be a portable, tax-advantaged benefit to corporate executives, people whose income is generally north of six figures, has become the major savings vehicle for the average American worker, people whose median income is $46,326. ( This figure for median income comes from the US Census and the General Accounting Office.)
Assume the average retiree will need cash assets of one million dollars. One million dollars invested at 5% will earn an income of $50,000 per year without having to draw down the principle. This goal of one million dollars assumes the $300,000 to $500,000 dollars retirees will have to have set aside to cover health care costs. (CNNMonday February 19, 2008 “Most Americans Unprepared for Retirement”) Even if a worker earning the median income only desires to live on sixty percent of his or her working income, he would still have to save $555,912 invested at 5% to earn an income of $27,796. Add in the amount needed for health care and the goal is still one million dollars. The Savings goal calculator at bankrate.com shows that even if a worker earning the median income managed to save $10,000 per year or 21.6% of his gross income, it would take 100 years to reach the estimated million-dollar target needed for a comfortable retirement. In other words this retiree will die of old age while trying to save for retirement. Using bonds or a “high-yield” savings account with an annual percentage yield of 3.6% will put the average American worker within reach in 77 years 11 months almost beyond the average American’s lifespan. He would still die of old age while trying to save for retirement. Add a 50% employer match and the goal is reached in 34 years and 3 months. Well within the estimated forty year working life of the American worker. But an employer match of 50% is virtually unheard of. A true 50% match of 50 cents per employee dollar invested does not exist. The 401Khelpcenter reviews the common matching plans available to people who save through their 401Ks.
Because amassing the funds necessary for a comfortable retirement is virtually impossible through savings alone, employees must seek vehicles capable of higher returns in order to reach their retirement goals.
In steps the Stock Market, promising higher returns than stodgy old bonds, and money market accounts; hence, the stock market became the destination of choice for retirement savings and Wall Street responded by increasing the offerings to retail consumers through Mutual Funds. Before the year 2000 it was not uncommon to hear that the S&P returned 16% over the previous 10 years. Looking at the returns of one of the best known indexed mutual funds, the Vanguard 500, returns since its 1976 inception are 11.75%, impressive until you look at the 1 year return, -2.41%, the 5 year return, 11.89% and the 10 year return 5.06%. These are average returns not real returns. As an example let’s look at the growth of 1 dollar in the mythical High Fly Fund. High Fly posts a 50% gain in one year and your dollar grows to $1.50. The next year it posts a 25% loss, now your investment is worth $1.125. The average return for High Fly reported by the mutual company is 12.5%, but that is not your actual return. Your actual return or compound annual growth rate (CAGR) is in the neighborhood of 6% per year worse if you factor in inflation.
Is 6% acceptable given the risk that investors take on by investing in the stock market? David F. Swenson, CIO of the Yale Endowment explains investor risk in his book, Unconventional Success, when he states: “Because equity owners get paid after corporations satisfy all other claimants, equity ownership represents a residual interest. As such stockholders occupy a riskier position than, say, corporate lenders who enjoy a superior position in a company’s capital structure.” He goes on to say “the 5.0 percentage point difference between stock and bond returns represents the historical risk premium, defined as the return to equity holders for accepting risk above the level inherent in bond investments.” Mr. Swenson’s comments and calculations of the risk premium were based on a compound annual return of 10.4% in the stock market compared with 5% bond yields. 10.4%-5% equals a risk premium of 5.4%. Unfortunately I have yet to find a calculation of CAGR (compound annual growth rate) that matches Mr. Swenson’s. I found many examples of average returns that match the 10.4% average growth rate but not the CAGR. The reason that this is important is that all other savings vehicles are quoted by the CAGR. Your savings accounts, bonds and money market account are all quoted by the CAGR or its equivalent, the annual percentage yield (APY). In order to determine where to allocate your funds, you must compare apples to apples not apples to oranges. As you might guess the CAGR for the stock market is lower.
A quick look at the CAGR calculator for the stock market on moneychimp.com shows the average return from January 1, 1975 to December 31, 2007 to be 9.71%. You only realized that return if you were invested in the market the entire time. What if you began investing in 1980? The numbers look about the same. If you started in 1985 your returns look a little better. By 1990 the CAGR drops to 8.21%. If you started in 1995 your CAGR jumps to 9.32%. If you began investing in 2000 your CAGR drops to minus 0.06%! If you eliminate the results of the past 7 years from the S&P performance and track performance from January 1, 1975 to December 31, 1999 the CAGR was 13.03%. When the stock market is good it is great, when it is bad, it is pretty darn miserable. For the record, there has been only one 9 year period from January 1, 1950 to December 31, 2007 in which the average return for the S&P was 16.14% and the CAGR was 15.32%: the period from January 1, 1990 thru December 31, 1999.
It should be clear from these numbers that your returns are dependent not only on how long you are invested in the markets but when you started investing. In fact the stodgy old bond investor has outperformed the stock investor over the past 7 years.
The 1990’s investor will have a very different view of market performance than the 2000’s investor.
Mr. Swenson’s book is a must read for anyone investing in mutual funds, he makes a compelling case, explaining why actively managed mutual funds are generally a money losing proposition for investors and why a balanced portfolio based on six solid asset classes constitutes the winning combination for investors.
How can I call the stock market the second biggest financial scam of the twentieth century if I am quoting numbers that are on the face of it pretty good? For four reasons: 1) because the true CAGR going back to 1950 is much lower 7.47%. It will take the average American worker 25 years and one month saving $10,000 per year to accumulate one million dollars in wealth as long as the market achieves CAGR of 9.71% and in 29 years 2 months if forced to accept the longer term returns of the market. These numbers leave very little margin for error for the average American worker. Retirement projections for the most part are based on returns that have existed at only one point in the stock market’s history since 1950; 2) because the same laws that facilitate the transfer of individual investor money into the stock market also mandate its withdrawal at a specific time which is tantamount to what all financial pundits have called a money losing strategy, Market Timing. In other words the laws governing tax-deferred savings mandate that withdrawals begin at age 70 and a half at the latest forcing retirees to time the market to determine their exit; 3) the time horizon for capturing meaningful gains from the market is long indeed, at least 30 years. To quote Mr. Swenson, “Returns of bonds and cash may exceed returns of stocks for years on end. For example from the market peak in October 1929, it took stock investors fully twenty-one years and three months to match returns generated by bond investors.”
Charles Farrell, an adviser with Denver’s Northstar Investment Advisors, used data from Morningstar’s Ibbotson and Associates to analyze 52 rolling 30-year periods, starting with 1926 to 1955 and ending with 1977 to 2006 “But here’s what’s interesting: The Majority of your wealth would almost always have come in the last 10 years. Mr. Farrell calculates that, on average, you would have notched 8% of your final wealth after the first decade and 32% after the second. In other words, 68% of the total sum accumulated was amassed in the last 10 years.” (Wall Street Journal, Jonathan Clements November 21, 2007); 4) because current marketing strategies by financial pundits, gurus and Wall Street treat stock market investing as a money in, money out proposition obscuring the true risks of investing and the true time horizon needed to accumulate wealth. In other words, the money needed for retirement must be invested for an extended period of time, roughly 30 years. It cannot be borrowed against. It cannot be used to buy a home, car, pay for college or a child’s wedding.
It can only be used for retirement 30 years hence. Any other needs must be paid for from an additional source other than retirement savings. Most people lack the financial education to understand this and blindly chase market returns hoping for a big score.
Fortunately there is a simple solution, but like most simple solutions this one requires work and financial education. I will introduce this simple solution in part 3 of this series.
Home Ownership: The Greatest Financial Scam of the Twentieth Century
Robert Kiyosaki was the first and has been the only financial pundit to suggest that your home is not an asset. As they so often do, Kiyosaki’s statements fly in the face of prevailing financial wisdom.
David Bach, author of Automatic Millionaire, not only says that your home is an asset, he asserts that home ownership is the first wrung on the ladder of wealth creation in America. He encourages everyone to buy a home as soon as possible to begin building their wealth.
CNN Money does their Millionaire in the Making profiles and I am shocked to find that in almost all cases 50-75% of the wealth of the families profiled is locked in their home. Given that people have to have a place to live, this is a problem.
In science, we have a term, “true, true and unrelated.” Does one thing cause another or do they simply occur together in time and space? Does home ownership produce wealth or are wealth and home ownership produced by sound wealth-producing financial habits?
The Economist, tracking real estate over the past decade, has concluded that the economics no longer support home ownership.
I bought my first home in 1991. The housing market in the North East had not recovered. The savings and loan collapse of the mid 1980’s depressed home prices and brought the condo market to a halt. Multiunit condominium properties were vacant. Many of the properties were very cool, but they continued to sit vacant because banks had strict owner occupancy ratios for condominiums. Mortgage money was tight. First-time home buyer programs were coming on the market and the minimum down was ten percent. I was raised to think that a home was an asset, an investment. My mortgage broker sat me down and said, “it is best that you think of your house as a roof over your head, not as an investment.” That was incredible advice. Prices dropped another 10% after I moved into my home. After 3 years of living in my home and 2 years of renting it out, I sold it for what I paid for it. After closing costs and realtor fees, I received a check for 447 dollars, significantly less than the $14,000 dollars that my family gave me for closing costs and the down payment. I always intended to pay them back with the proceeds from the sale. All told the housing market was depressed in the North East for over 10 years.
Even in an appreciating market, home ownership is no bargain. And a home is not an asset.
Most people will try to argue the point, so we will look at some numbers in just a moment.
Let’s tackle the issue of equity as a component of wealth first. Let’s say you buy a $100,000 home and put money down. Let’s say that down payment is 20%. In real terms at the time of closing you have 20% equity in your home. If you had $20,000 dollars in your bank account, you had $20,000 in wealth. If you move that money to your home in the form of a down payment, you may have $20,000 in wealth as long as the market at least stays flat. For this illustration, we will say that is the case. You have $20,000 wealth stored in your home. Now what can you do with that?
If you borrow against your home, you erode your equity and your wealth.
If you sell your home and get your $20,000 back, then what? You have to live somewhere and living somewhere costs money. The equity in your home is essentially dead. You cannot do anything with it. Sell your house and you reinvest that money into a new home, borrow against your equity and you lose it.
In short, the equity in your home, once in your home, will remain there. Useless to you in real terms, but that equity will do something that is quite dangerous. It will cause you to feel wealthy, wealthier in fact than you are and spend money, money that you, in reality don’t have.
It might be helpful if I defined an asset here. Kiyosaki calls an asset anything that retains or appreciates in value that pays you. For Kiyosaki a house does not fit that definition. I define an asset as anything that retains or appreciates in value that I can sell and dance around my house throwing the proceeds of the sale in the air and have a jolly good time. Can’t do that with a house because, once again, I need someplace to live.
Someone might say that they want to downsize. Sell their home, pick up something smaller and bank the rest of the profits.
The numbers don’t support it. One of the columnists for the WSJ wrote that he doubted that he had made much money on his home although it was valued at half a million dollars. He had lived in his home for 10 years and paid just under $300,000 dollars for it. When he factored in taxes, insurance and maintenance, he figured that he broke even. Broke even!
What that means is that he actually spent the $200,000 on his home in other ways and the sale of the home would just result in returning that money to him. Two hundred thousand dollars equity and wealth gone when you actually look at the numbers. So much for great profits! So much for down sizing.
The example on my home is just as concerning. My example is what happens when you refinance or draw equity out. For the amount of time that I have actually lived in my home I have made $82,800 dollars in payments. These payments went primarily to interest so let’s deduct the top tax rate. For tax rates lower than the maximum the numbers don’t look any better, in fact ,the top tax rate is the best-case scenario, so we’ll use that. Deduct $27,324 and get $55,476. Taxes and insurance paid amount to $20,460.
Now the total paid is $55,476 + $20,460 = $75,936. Maintenance, landscaping, updates, repairs total $29,779. Add the two, $75,936 + $29,779 and get $105,714. I refinanced the house in order to take money out and buy my first investment property. Add in the mortgage balance and the total owed, paid and put into the house is $188, 715.
Now this is a critical concept. Improvements on a home don’t necessarily increase the value of that home. Every neighborhood has a trading range. The trading range for an area is based on location, size of the homes in that area and amenities. Homes will trade at the high end or low end of a neighborhood based on those factors. Let’s say my home sold for $170, 000. Based on the difference between the mortgage and the sale price, the financial gurus would say that I have $87,000 dollars of wealth. Because you have seen the numbers you know better. In fact I lost $18,715 dollars. When I take into account the money I borrowed out to buy my first investment property, I broke even. I am assuming that I sell my home myself. Using a realtor would increase my losses by 6% of the sale price.
How can I call home ownership the greatest financial scam of the 20th century? I call it a scam when you buy something (a house) expecting it to lead to something (wealth) when that purchase can in no way produce that result. I call it a scam when the brokers who sell you the house know it won’t.
Sound financial habits will lead to wealth but home ownership in and of itself will not. Home ownership can in fact lead to poverty as people struggle to make payments and find that they are unable to maintain their homes. Sell and they risk owing more than the home is worth. Stay and their standard of living is reduced to pay for the house. Sounds like a winning formula for wealth to me.
While 20% of the homes in this most recent real estate bubble went to investors who were speculating in the markets, 80% of the homes went to people who believed that home ownership, not sound financial habits, were the first wrung on the ladder to wealth creation. They just believed what the gurus, the realtor, the mortgage broker and the banker told them. In a consumer society where everything is reduced to the lowest common denominator, they believed that a home could be purchased for little more than a moderately-priced flat screen TV and that down payments were a nuisance. They did not understand that as a worse case scenario, down payments are actually insurance against downside fluctuations in the housing market. Many people are finding that they don’t have wealth at all. What they have, instead, is a financial nightmare.
Perhaps moving forward into the 21st century, we will decide that sound financial habits and financial education are the first steps on the road to wealth. Maybe we will decide that wealth is created through work and due diligence and not by betting on the financial product of the day.
David Bach, author of Automatic Millionaire, not only says that your home is an asset, he asserts that home ownership is the first wrung on the ladder of wealth creation in America. He encourages everyone to buy a home as soon as possible to begin building their wealth.
CNN Money does their Millionaire in the Making profiles and I am shocked to find that in almost all cases 50-75% of the wealth of the families profiled is locked in their home. Given that people have to have a place to live, this is a problem.
In science, we have a term, “true, true and unrelated.” Does one thing cause another or do they simply occur together in time and space? Does home ownership produce wealth or are wealth and home ownership produced by sound wealth-producing financial habits?
The Economist, tracking real estate over the past decade, has concluded that the economics no longer support home ownership.
I bought my first home in 1991. The housing market in the North East had not recovered. The savings and loan collapse of the mid 1980’s depressed home prices and brought the condo market to a halt. Multiunit condominium properties were vacant. Many of the properties were very cool, but they continued to sit vacant because banks had strict owner occupancy ratios for condominiums. Mortgage money was tight. First-time home buyer programs were coming on the market and the minimum down was ten percent. I was raised to think that a home was an asset, an investment. My mortgage broker sat me down and said, “it is best that you think of your house as a roof over your head, not as an investment.” That was incredible advice. Prices dropped another 10% after I moved into my home. After 3 years of living in my home and 2 years of renting it out, I sold it for what I paid for it. After closing costs and realtor fees, I received a check for 447 dollars, significantly less than the $14,000 dollars that my family gave me for closing costs and the down payment. I always intended to pay them back with the proceeds from the sale. All told the housing market was depressed in the North East for over 10 years.
Even in an appreciating market, home ownership is no bargain. And a home is not an asset.
Most people will try to argue the point, so we will look at some numbers in just a moment.
Let’s tackle the issue of equity as a component of wealth first. Let’s say you buy a $100,000 home and put money down. Let’s say that down payment is 20%. In real terms at the time of closing you have 20% equity in your home. If you had $20,000 dollars in your bank account, you had $20,000 in wealth. If you move that money to your home in the form of a down payment, you may have $20,000 in wealth as long as the market at least stays flat. For this illustration, we will say that is the case. You have $20,000 wealth stored in your home. Now what can you do with that?
If you borrow against your home, you erode your equity and your wealth.
If you sell your home and get your $20,000 back, then what? You have to live somewhere and living somewhere costs money. The equity in your home is essentially dead. You cannot do anything with it. Sell your house and you reinvest that money into a new home, borrow against your equity and you lose it.
In short, the equity in your home, once in your home, will remain there. Useless to you in real terms, but that equity will do something that is quite dangerous. It will cause you to feel wealthy, wealthier in fact than you are and spend money, money that you, in reality don’t have.
It might be helpful if I defined an asset here. Kiyosaki calls an asset anything that retains or appreciates in value that pays you. For Kiyosaki a house does not fit that definition. I define an asset as anything that retains or appreciates in value that I can sell and dance around my house throwing the proceeds of the sale in the air and have a jolly good time. Can’t do that with a house because, once again, I need someplace to live.
Someone might say that they want to downsize. Sell their home, pick up something smaller and bank the rest of the profits.
The numbers don’t support it. One of the columnists for the WSJ wrote that he doubted that he had made much money on his home although it was valued at half a million dollars. He had lived in his home for 10 years and paid just under $300,000 dollars for it. When he factored in taxes, insurance and maintenance, he figured that he broke even. Broke even!
What that means is that he actually spent the $200,000 on his home in other ways and the sale of the home would just result in returning that money to him. Two hundred thousand dollars equity and wealth gone when you actually look at the numbers. So much for great profits! So much for down sizing.
The example on my home is just as concerning. My example is what happens when you refinance or draw equity out. For the amount of time that I have actually lived in my home I have made $82,800 dollars in payments. These payments went primarily to interest so let’s deduct the top tax rate. For tax rates lower than the maximum the numbers don’t look any better, in fact ,the top tax rate is the best-case scenario, so we’ll use that. Deduct $27,324 and get $55,476. Taxes and insurance paid amount to $20,460.
Now the total paid is $55,476 + $20,460 = $75,936. Maintenance, landscaping, updates, repairs total $29,779. Add the two, $75,936 + $29,779 and get $105,714. I refinanced the house in order to take money out and buy my first investment property. Add in the mortgage balance and the total owed, paid and put into the house is $188, 715.
Now this is a critical concept. Improvements on a home don’t necessarily increase the value of that home. Every neighborhood has a trading range. The trading range for an area is based on location, size of the homes in that area and amenities. Homes will trade at the high end or low end of a neighborhood based on those factors. Let’s say my home sold for $170, 000. Based on the difference between the mortgage and the sale price, the financial gurus would say that I have $87,000 dollars of wealth. Because you have seen the numbers you know better. In fact I lost $18,715 dollars. When I take into account the money I borrowed out to buy my first investment property, I broke even. I am assuming that I sell my home myself. Using a realtor would increase my losses by 6% of the sale price.
How can I call home ownership the greatest financial scam of the 20th century? I call it a scam when you buy something (a house) expecting it to lead to something (wealth) when that purchase can in no way produce that result. I call it a scam when the brokers who sell you the house know it won’t.
Sound financial habits will lead to wealth but home ownership in and of itself will not. Home ownership can in fact lead to poverty as people struggle to make payments and find that they are unable to maintain their homes. Sell and they risk owing more than the home is worth. Stay and their standard of living is reduced to pay for the house. Sounds like a winning formula for wealth to me.
While 20% of the homes in this most recent real estate bubble went to investors who were speculating in the markets, 80% of the homes went to people who believed that home ownership, not sound financial habits, were the first wrung on the ladder to wealth creation. They just believed what the gurus, the realtor, the mortgage broker and the banker told them. In a consumer society where everything is reduced to the lowest common denominator, they believed that a home could be purchased for little more than a moderately-priced flat screen TV and that down payments were a nuisance. They did not understand that as a worse case scenario, down payments are actually insurance against downside fluctuations in the housing market. Many people are finding that they don’t have wealth at all. What they have, instead, is a financial nightmare.
Perhaps moving forward into the 21st century, we will decide that sound financial habits and financial education are the first steps on the road to wealth. Maybe we will decide that wealth is created through work and due diligence and not by betting on the financial product of the day.
Saturday, March 15, 2008
The Inconvenient Truth of Success
I was having a conversation with a new member of my organization the other day. He is in management training and hates it. He got started in my business because he wants out and saw an opportunity for himself. I wanted him to work on his vision statement so that we could meet and map out a business plan to turn that vision into reality.
He asked, "Can I make a million dollars in 2 years with this business." I, frankly, told him no, but he could replace his present income in 2 years or less, get out of the job he hates, and free up enough time to go on to make a million dollars.
Monday was his "day off" so he didn't want to meet on his day off. The first stumbling block. He was treating a potentially wealth-generating business like a job with benefits complete with time off.
To quote Jim Rohn on jobs and business: "I work fulltime on my job and part time on my fortune!" He then goes on to say "profits are better than wages. With wages you can make a living, with profits you can make a fortune!"
It only stands to reason: If your daily work does not place you on the path to success, however you define it, then your time away from work must be devoted to the task of success if you are ever going to achieve it.
We all have goals and dreams, but if we peak under the covers of many of those goals and dreams, we have attached so many conditions to achieving them, that we make our goals and dreams little more than wishes.
I will be a millionaire (as long as it doesn't interfere with nights out with the friends or the new episodes of Survivor and as long as I don't have to change my financial habits). I'll get that advanced degree (as long as I don't have to change my schedule or take out student loans.) I'll set up that savings account (when I have money left over). I'll get in shape (as soon as I can find the time.)
All of these conditions underscore the truth of life…so few people achieve high levels of success because success is simply inconvenient. Earl Nightingale defined success as "the progressive realization of a worthy ideal" and therein lies the rub.
Progressive means to consistently move forward. What of life's circumstances does not have the power to halt forward progress? The illness of a family member or pet, an unexpected life event, like job loss, death disability, fire or flood. A school play, the superbowl, doing the dishes, the plumber, the TV repair man, final exams…the list goes on.
Any circumstance that has the power to halt forward progress can also become the impetus for forward progress. A dear friend of mine continued to build her organization while her child was in the hospital with a cancer diagnosis. My friend moved to the town where her child lay in specialty care and continued to build her organization. Her child is in remission and my friend has created a six-figure residual income.
Harry Chapin embodied the fear I often hear expressed in his song… "Cats in the Cradle" The story of the man who loses the thing most precocious to him, time with his family, in the pursuit of his work. What I hear most often is…I won't do this if this takes me away from my family…I spend so little time with them as it is. But that is often the point. We spend so little time with those we love no matter what we do. More often than not, we are living the "Cat's in the Cradle" without ever doing a thing to change our circumstances.
Which brings us back to the Inconvenient Truth about Success. In order to achieve it, progress toward it must be continuous. In order to achieve it that progress must continue through those "precious moments" away from work.
The successful person has the following characteristics
1) A vision that is rooted in the future. Understanding that success is inconvenient, the successful person is always attached to a vision that pulls him or her forward.
2) A desire to find the shortest path forward. The successful person is more likely to partner with other like-minded people. People who may have needed skill sets to keep progress forward.
3) A sense of justice and fair play. The successful person always knows that success demands her price of admission and is eager to pay it.
4) A hunger for new skills. The successful person understands that new knowledge and new skills lay on the path forward.
5) A love of the game. The successful person understands that they are playing a game and as such he or she seeks to define the rules, learn the strategies and develop a team.
The desire for success is a seductive force in our society. More air and media time is devoted to information about success than perhaps any other subject, yet, the inconvenience of it is never discussed. Leaving people to look instead for the elusive new formula for success whenever they hit a stumbling block. There are signposts along the path for those who understand success's Inconvenient Truth. The trick is to walk the path and keep your toes pointed forward.
He asked, "Can I make a million dollars in 2 years with this business." I, frankly, told him no, but he could replace his present income in 2 years or less, get out of the job he hates, and free up enough time to go on to make a million dollars.
Monday was his "day off" so he didn't want to meet on his day off. The first stumbling block. He was treating a potentially wealth-generating business like a job with benefits complete with time off.
To quote Jim Rohn on jobs and business: "I work fulltime on my job and part time on my fortune!" He then goes on to say "profits are better than wages. With wages you can make a living, with profits you can make a fortune!"
It only stands to reason: If your daily work does not place you on the path to success, however you define it, then your time away from work must be devoted to the task of success if you are ever going to achieve it.
We all have goals and dreams, but if we peak under the covers of many of those goals and dreams, we have attached so many conditions to achieving them, that we make our goals and dreams little more than wishes.
I will be a millionaire (as long as it doesn't interfere with nights out with the friends or the new episodes of Survivor and as long as I don't have to change my financial habits). I'll get that advanced degree (as long as I don't have to change my schedule or take out student loans.) I'll set up that savings account (when I have money left over). I'll get in shape (as soon as I can find the time.)
All of these conditions underscore the truth of life…so few people achieve high levels of success because success is simply inconvenient. Earl Nightingale defined success as "the progressive realization of a worthy ideal" and therein lies the rub.
Progressive means to consistently move forward. What of life's circumstances does not have the power to halt forward progress? The illness of a family member or pet, an unexpected life event, like job loss, death disability, fire or flood. A school play, the superbowl, doing the dishes, the plumber, the TV repair man, final exams…the list goes on.
Any circumstance that has the power to halt forward progress can also become the impetus for forward progress. A dear friend of mine continued to build her organization while her child was in the hospital with a cancer diagnosis. My friend moved to the town where her child lay in specialty care and continued to build her organization. Her child is in remission and my friend has created a six-figure residual income.
Harry Chapin embodied the fear I often hear expressed in his song… "Cats in the Cradle" The story of the man who loses the thing most precocious to him, time with his family, in the pursuit of his work. What I hear most often is…I won't do this if this takes me away from my family…I spend so little time with them as it is. But that is often the point. We spend so little time with those we love no matter what we do. More often than not, we are living the "Cat's in the Cradle" without ever doing a thing to change our circumstances.
Which brings us back to the Inconvenient Truth about Success. In order to achieve it, progress toward it must be continuous. In order to achieve it that progress must continue through those "precious moments" away from work.
The successful person has the following characteristics
1) A vision that is rooted in the future. Understanding that success is inconvenient, the successful person is always attached to a vision that pulls him or her forward.
2) A desire to find the shortest path forward. The successful person is more likely to partner with other like-minded people. People who may have needed skill sets to keep progress forward.
3) A sense of justice and fair play. The successful person always knows that success demands her price of admission and is eager to pay it.
4) A hunger for new skills. The successful person understands that new knowledge and new skills lay on the path forward.
5) A love of the game. The successful person understands that they are playing a game and as such he or she seeks to define the rules, learn the strategies and develop a team.
The desire for success is a seductive force in our society. More air and media time is devoted to information about success than perhaps any other subject, yet, the inconvenience of it is never discussed. Leaving people to look instead for the elusive new formula for success whenever they hit a stumbling block. There are signposts along the path for those who understand success's Inconvenient Truth. The trick is to walk the path and keep your toes pointed forward.
Friday, March 14, 2008
Moses, Death and the Entrepreneur's Journey
Well it finally happened…you have gone into business for yourself. Did you get tired of losing a third or more of your employment wages to the IRS? Did you wake up to the reality that you could do "it" better than your boss? Did you develop a better product that will change people's lives? Did you decide you wanted the freedom of making and profiting from your own decisions? Did you decide you simply wanted to leave your mark upon the world?
Whatever motivated you to do it, you set foot on the first brick of the road that will become a lifelong journey. Many people equate the entrepreneurial journey as a journey from slavery to freedom.
What will happen to you on that journey?
Just as "Moses, Business and the 80/20 Rule" discussed how the Book of Numbers illustrates the Prieto Principle; The book of Numbers 13 and 14 also illustrates the entrepreneur's journey. Yes, the story is over 5000 years old; yet, in speaking with entrepreneurs today its principles apply and are as fresh as if the story was written yesterday.
Let's look at the summary of events that brings us to the book of Numbers. The Nation of Israel, laboring under the burden of slavery in Egypt cried out for freedom. They were freed in the most miraculous of ways: 10 plagues were visited upon the Nation of Egypt and when the Israelites were freed they were led, on dry ground, through the Red Sea. A pillar of cloud accompanied them by day and a pillar of fire by night. Their sandals never wore out and they ate manna from heaven.
Yet, when it came time to secure their freedom and take the land promised to them, they were not ready.
After an arduous journey through the desert, the Israelites arrived at the borders of the Promised Land. Finding it already occupied, Moses sent an exploration party, a representative from each of the 12 tribes of Israel, to explore the land and bring back a report. Two brought a positive report and recommended taking possession of the land. Ten of the party members brought a negative report: the land flowed with milk and honey but the current occupants were powerful and their cities were large. They recommended retreat.
Here is what happened next from Numbers 14 NIV: "'That night all the members of the community raised their voices and wept aloud. 2 All the Israelites grumbled against Moses and Aaron, and the whole assembly said to them, "If only we had died in Egypt! Or in this wilderness! 3 Why is the LORD bringing us to this land only to let us fall by the sword? Our wives and children will be taken as plunder. Wouldn't it be better for us to go back to Egypt?" 4 And they said to each other, "We should choose a leader and go back to Egypt." 6 Joshua son of Nun and Caleb son of Jephunneh, who were among those who had explored the land, tore their clothes 7 and said to the entire Israelite assembly, "The land we passed through and explored is exceedingly good. 8 If the LORD is pleased with us, he will lead us into that land, a land flowing with milk and honey, and will give it to us. 9 Only do not rebel against the LORD. And do not be afraid of the people of the land, because we will devour them. Their protection is gone, but the LORD is with us. Do not be afraid of them." 10 But the whole assembly talked about stoning them.
20 The LORD replied…21 Nevertheless, as surely as I live and as surely as the glory of the LORD fills the whole earth, 22 not one of those who saw my glory and the signs I performed in Egypt and in the wilderness but who disobeyed me and tested me ten times- 23 not one of them will ever see the land I promised on oath to their ancestors. No one who has treated me with contempt will ever see it. 24 But because my servant Caleb has a different spirit and follows me wholeheartedly, I will bring him into the land he went to, and his descendants will inherit it. 25 Since the Amalekites and Canaanites are living in the valleys, turn back tomorrow and set out toward the desert along the route to the Red Sea. [a]" 26 The LORD said to Moses and Aaron: 27 29 In this wilderness your bodies will fall-every one of you twenty years old or more who was counted in the census and who has grumbled against me.
30 Not one of you will enter the land I swore with uplifted hand to make your home, except Caleb son of Jephunneh and Joshua son of Nun. 31 As for your children that you said would be taken as plunder, I will bring them in to enjoy the land you have rejected. 32 But you-your bodies will fall in this wilderness. 33 Your children will be shepherds here for forty years, suffering for your unfaithfulness, until the last of your bodies lies in the wilderness. 34 For forty years-one year for each of the forty days you explored the land 36 So the men Moses had sent to explore the land, who returned and made the whole community grumble against him by spreading a bad report about it- 37 these men who were responsible for spreading the bad report about the land were struck down and died of a plague before the LORD. 38 Of the men who went to explore the land, only Joshua son of Nun and Caleb son of Jephunneh survived.'"
What lessons can we learn from this?
1) Many people want freedom but few attain it. The reason for this can be summed up into one word: Uncertainty. The road to freedom requires that one learn to live with uncertainty. From our story, the 40-day journey across the desert from Egypt to the Promised Land was fraught with uncertainty. Uncertainty about the proper direction, the existence of God, the source of food; The inability of the Israelites to deal with that uncertainty led to needless delays and strife. When they finally did reach the promised land, their uncertainty of success caused them to retreat. Uncertainty, that bugaboo of progress. Will stop men in their tracks.
2) The person who makes the decision to journey forward is not the person who will complete the journey. The passage clearly says that Caleb had a different spirit than the majority of the congregation. He and Joshua were the only 2 of their generation who would enter the Promised Land. Developing that different spirit is the subject of the third and final article in this series: The Path to Developing A Different Spirit.
3) There is a certain death required to enter the Promised Land. That death may not be a physical death, but it is a death of old ideas, behaviors and beliefs. The message is quite clear here that unless that death occurs, there will be no entry into the Promised Land.
4) The road to freedom may be paved but it is not trouble free. The Israelites found the Promised Land occupied and realized that they would have to fight to attain what they had cried out for. The road to freedom demands that one be prepared to fight. Without that preparation slavery may appear preferable to freedom.
5) Following and remembering the signs are key. Every entrepreneur will remember moments of synchronicity when it seemed as though all was right with the world. The right contacts were made at the right time business boomed and then something happened. The savvy entrepreneur will remember what lay before as an indicator of what lies ahead. But most will not.
The journey of the entrepreneur is a journey of the spirit and the journey is exacting and uncompromising; yet it need not be a surprise. History as now as always provides clear signposts for the adventurer willing to set foot on the path to freedom.
Like most people I went to school to get an education and learn a profession. When I graduated and began working, I realized something was very wrong. The path that I thought would lead me to freedom was instead leading me into quicksand. I got out of the quicksand when I joined the Free Agent Nation.
Whatever motivated you to do it, you set foot on the first brick of the road that will become a lifelong journey. Many people equate the entrepreneurial journey as a journey from slavery to freedom.
What will happen to you on that journey?
Just as "Moses, Business and the 80/20 Rule" discussed how the Book of Numbers illustrates the Prieto Principle; The book of Numbers 13 and 14 also illustrates the entrepreneur's journey. Yes, the story is over 5000 years old; yet, in speaking with entrepreneurs today its principles apply and are as fresh as if the story was written yesterday.
Let's look at the summary of events that brings us to the book of Numbers. The Nation of Israel, laboring under the burden of slavery in Egypt cried out for freedom. They were freed in the most miraculous of ways: 10 plagues were visited upon the Nation of Egypt and when the Israelites were freed they were led, on dry ground, through the Red Sea. A pillar of cloud accompanied them by day and a pillar of fire by night. Their sandals never wore out and they ate manna from heaven.
Yet, when it came time to secure their freedom and take the land promised to them, they were not ready.
After an arduous journey through the desert, the Israelites arrived at the borders of the Promised Land. Finding it already occupied, Moses sent an exploration party, a representative from each of the 12 tribes of Israel, to explore the land and bring back a report. Two brought a positive report and recommended taking possession of the land. Ten of the party members brought a negative report: the land flowed with milk and honey but the current occupants were powerful and their cities were large. They recommended retreat.
Here is what happened next from Numbers 14 NIV: "'That night all the members of the community raised their voices and wept aloud. 2 All the Israelites grumbled against Moses and Aaron, and the whole assembly said to them, "If only we had died in Egypt! Or in this wilderness! 3 Why is the LORD bringing us to this land only to let us fall by the sword? Our wives and children will be taken as plunder. Wouldn't it be better for us to go back to Egypt?" 4 And they said to each other, "We should choose a leader and go back to Egypt." 6 Joshua son of Nun and Caleb son of Jephunneh, who were among those who had explored the land, tore their clothes 7 and said to the entire Israelite assembly, "The land we passed through and explored is exceedingly good. 8 If the LORD is pleased with us, he will lead us into that land, a land flowing with milk and honey, and will give it to us. 9 Only do not rebel against the LORD. And do not be afraid of the people of the land, because we will devour them. Their protection is gone, but the LORD is with us. Do not be afraid of them." 10 But the whole assembly talked about stoning them.
20 The LORD replied…21 Nevertheless, as surely as I live and as surely as the glory of the LORD fills the whole earth, 22 not one of those who saw my glory and the signs I performed in Egypt and in the wilderness but who disobeyed me and tested me ten times- 23 not one of them will ever see the land I promised on oath to their ancestors. No one who has treated me with contempt will ever see it. 24 But because my servant Caleb has a different spirit and follows me wholeheartedly, I will bring him into the land he went to, and his descendants will inherit it. 25 Since the Amalekites and Canaanites are living in the valleys, turn back tomorrow and set out toward the desert along the route to the Red Sea. [a]" 26 The LORD said to Moses and Aaron: 27 29 In this wilderness your bodies will fall-every one of you twenty years old or more who was counted in the census and who has grumbled against me.
30 Not one of you will enter the land I swore with uplifted hand to make your home, except Caleb son of Jephunneh and Joshua son of Nun. 31 As for your children that you said would be taken as plunder, I will bring them in to enjoy the land you have rejected. 32 But you-your bodies will fall in this wilderness. 33 Your children will be shepherds here for forty years, suffering for your unfaithfulness, until the last of your bodies lies in the wilderness. 34 For forty years-one year for each of the forty days you explored the land 36 So the men Moses had sent to explore the land, who returned and made the whole community grumble against him by spreading a bad report about it- 37 these men who were responsible for spreading the bad report about the land were struck down and died of a plague before the LORD. 38 Of the men who went to explore the land, only Joshua son of Nun and Caleb son of Jephunneh survived.'"
What lessons can we learn from this?
1) Many people want freedom but few attain it. The reason for this can be summed up into one word: Uncertainty. The road to freedom requires that one learn to live with uncertainty. From our story, the 40-day journey across the desert from Egypt to the Promised Land was fraught with uncertainty. Uncertainty about the proper direction, the existence of God, the source of food; The inability of the Israelites to deal with that uncertainty led to needless delays and strife. When they finally did reach the promised land, their uncertainty of success caused them to retreat. Uncertainty, that bugaboo of progress. Will stop men in their tracks.
2) The person who makes the decision to journey forward is not the person who will complete the journey. The passage clearly says that Caleb had a different spirit than the majority of the congregation. He and Joshua were the only 2 of their generation who would enter the Promised Land. Developing that different spirit is the subject of the third and final article in this series: The Path to Developing A Different Spirit.
3) There is a certain death required to enter the Promised Land. That death may not be a physical death, but it is a death of old ideas, behaviors and beliefs. The message is quite clear here that unless that death occurs, there will be no entry into the Promised Land.
4) The road to freedom may be paved but it is not trouble free. The Israelites found the Promised Land occupied and realized that they would have to fight to attain what they had cried out for. The road to freedom demands that one be prepared to fight. Without that preparation slavery may appear preferable to freedom.
5) Following and remembering the signs are key. Every entrepreneur will remember moments of synchronicity when it seemed as though all was right with the world. The right contacts were made at the right time business boomed and then something happened. The savvy entrepreneur will remember what lay before as an indicator of what lies ahead. But most will not.
The journey of the entrepreneur is a journey of the spirit and the journey is exacting and uncompromising; yet it need not be a surprise. History as now as always provides clear signposts for the adventurer willing to set foot on the path to freedom.
Like most people I went to school to get an education and learn a profession. When I graduated and began working, I realized something was very wrong. The path that I thought would lead me to freedom was instead leading me into quicksand. I got out of the quicksand when I joined the Free Agent Nation.
Moses Business and the 80/20 Rule
What is the 80/20 Rule?
More formally the 80/20 rule is also known as the Pareto Principle. To Quote Wikipedia: "The Pareto principle… known as the 80-20 rule, the law of the vital few…Business management thinker Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who observed that 80% of income in Italy went to 20% of the population."
We hear the 80/20 rule as it is applied to business and sales. Twenty percent of your employees produce 80% of a companies problems, 80% percent of your corporate sales are produced by 20% of your sales force and in network marketing, 80% of your profits may come from 20% of your distributors. We hear of it as it relates to wealth and wealth accumulation: 80% of the money is controlled by 20% of the people.
Joseph Duran was born in 1904 and he credited this principle to an economist who lived in the 1800's. Is the Pareto Principle an abstract economics principle or is it a model of human behavior?
Going back an estimated 5000 years we see a beautiful example of the 80/20 rule in the Old Testament: Numbers 13 and 14. After an arduous journey through the desert, the Israelites arrived at the borders of the promised-land. Finding it already occupied, Moses sent an exploration party, a representative from each of the 12 tribes of Israel, to explore the land and bring back a report. Ten of the party members brought a negative report: the land flowed with milk and honey but the current occupants were powerful and their cities were large. They recommended retreat. Two brought a positive report and recommended taking possession of the land. Seventeen percent of the exploring party were in agreement with taking the land and 83% were opposed to taking the land. Two disparate courses of action though they were all members of the same exploration party and saw the same things. A curious thing happened, the 80% then went to the whole of the Israelites and caused them to abandon heart and not take the promised land. The Israelites were not able to take the promised land until the 80% and were gone.
There are 5 lessons here that can be applied to business
1) New Ideas will be Opposed: Business innovation and success are governed by vision. Yet in any corporate structure, the 80/20 rule describes human behavior: 80% of people will oppose a new idea concept or vision and 20% will support it.
2) The majority will seek to garner support for their opinion usually among those people who do not have all the facts, in this case the people who did not have direct experience with the promised land, and disrupt positive moves of the corporate body.
3) Facts alone will not persuade. All members of the exploration party went to the promised land. They all received the same facts, yet 10 of them did one thing with the facts they received and 2 did another. What they each did with the facts they received was colored by their vision and purpose.
4) Movement in any business is governed by vision; in order to move in a given direction, a company may have to shed the part of its work force that does not tap into the overall corporate vision. If 20% of the people at any given time catch the vision, the other 80% will find themselves vulnerable. I explore this concept further in my companion article, "Moses, Death and the Entrepreneur's Journey"
5) Change is inevitable and necessary for growth in any organizational structure. In this story, the Israelites could only possess the land when the 80% who lacked vision had been replaced.
Using this model of human behavior and the lessons it teaches can allow any business owner, whether a free agent or the owner of a traditional business, to focus on the few strategies and the few key individuals that can bring a business success rather than attempt to persuade the majority of the rightness of a course of action.
More formally the 80/20 rule is also known as the Pareto Principle. To Quote Wikipedia: "The Pareto principle… known as the 80-20 rule, the law of the vital few…Business management thinker Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who observed that 80% of income in Italy went to 20% of the population."
We hear the 80/20 rule as it is applied to business and sales. Twenty percent of your employees produce 80% of a companies problems, 80% percent of your corporate sales are produced by 20% of your sales force and in network marketing, 80% of your profits may come from 20% of your distributors. We hear of it as it relates to wealth and wealth accumulation: 80% of the money is controlled by 20% of the people.
Joseph Duran was born in 1904 and he credited this principle to an economist who lived in the 1800's. Is the Pareto Principle an abstract economics principle or is it a model of human behavior?
Going back an estimated 5000 years we see a beautiful example of the 80/20 rule in the Old Testament: Numbers 13 and 14. After an arduous journey through the desert, the Israelites arrived at the borders of the promised-land. Finding it already occupied, Moses sent an exploration party, a representative from each of the 12 tribes of Israel, to explore the land and bring back a report. Ten of the party members brought a negative report: the land flowed with milk and honey but the current occupants were powerful and their cities were large. They recommended retreat. Two brought a positive report and recommended taking possession of the land. Seventeen percent of the exploring party were in agreement with taking the land and 83% were opposed to taking the land. Two disparate courses of action though they were all members of the same exploration party and saw the same things. A curious thing happened, the 80% then went to the whole of the Israelites and caused them to abandon heart and not take the promised land. The Israelites were not able to take the promised land until the 80% and were gone.
There are 5 lessons here that can be applied to business
1) New Ideas will be Opposed: Business innovation and success are governed by vision. Yet in any corporate structure, the 80/20 rule describes human behavior: 80% of people will oppose a new idea concept or vision and 20% will support it.
2) The majority will seek to garner support for their opinion usually among those people who do not have all the facts, in this case the people who did not have direct experience with the promised land, and disrupt positive moves of the corporate body.
3) Facts alone will not persuade. All members of the exploration party went to the promised land. They all received the same facts, yet 10 of them did one thing with the facts they received and 2 did another. What they each did with the facts they received was colored by their vision and purpose.
4) Movement in any business is governed by vision; in order to move in a given direction, a company may have to shed the part of its work force that does not tap into the overall corporate vision. If 20% of the people at any given time catch the vision, the other 80% will find themselves vulnerable. I explore this concept further in my companion article, "Moses, Death and the Entrepreneur's Journey"
5) Change is inevitable and necessary for growth in any organizational structure. In this story, the Israelites could only possess the land when the 80% who lacked vision had been replaced.
Using this model of human behavior and the lessons it teaches can allow any business owner, whether a free agent or the owner of a traditional business, to focus on the few strategies and the few key individuals that can bring a business success rather than attempt to persuade the majority of the rightness of a course of action.
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