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Friday, September 23 - 5:21pmSanction this postReply
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One criticism that can be made of any book is that it isn't the book I would have liked it to be.  That's not a real fault, but let me describe one of my issues anyway.  The book focuses on predictions, including the psychology and accuracy involved in them.  That's great.  The part he doesn't write about is whether some methodologies are better than others.  The fox is better than the hedgehog because he brings more knowledge to the table, but mostly he doesn't try to describe where a person might have gone wrong when they were making predictions.  Was it simply too complex?  Or was there something fundamentally wrong with their beliefs about how things work.

Take for instance the prediction made by the Obama administration about where unemployment will be if the government doesn't pass the huge stimulus bill.  They presented two numbers, one with and without.  In reality, unemployment shot beyond both predictions, even though the stimulus passed.

Now the book (which I think mentioned this example) would discuss the confidence projected by these predictions, and how they ended up being wrong.  A 'fox' probably would have given a more reserved answer, knowing how complex the prediction is.  And that's interesting if we just take the predictions at face value.  But what if there's something fundamentally wrong with the tools they used for prediction.  What if the inaccuracy wasn't due to a lack of data or unpredictable future, but instead was due to a problem with their theory (i.e., government spending doesn't crowd out private enterprise).

I'm completely willing to accept the main thesis of the book, that predictions are crazy hard and the best you can do is accept the complexity and try to live with it.  Maybe I'm a fox at heart.  But I would still be interested in the reasons why a prediction succeeded or failed.  Successes are trouble, though.  There are so many people making predictions that some are bound to be right, even for the right reasons.  He talks about Peter Schiff, for instance.  Anyone who saw the "Peter Schiff was right" will likely be impressed.  His reasoning was sound, he was confident under attack, and he called it when nobody else seemed to see it.  But the author goes on later to describe many of Schiff's previous predictions over the years, and how far off he was, and the fact that he's been essentially making the same points for decades.  When someone makes an accurate prediction, we tend to think there's something there.  But when tons of people are doing it....well, broken clocks are right sometimes.  So even if someone gets it right, and has sound reasons for it, it doesn't mean that they are good at predicting or the event was really predictable.  The 'hit' is self-selecting, and all the people out there that had sound reasons for their predictions, but missed it, don't get factored in.  There could have been hundreds or thousands or millions of things that could have changed the outcome, and if one had, we'd be looking at someone else as if they were the genius that latched onto the most important factors.

Anyway, as I said, I agree with the author.  But for me, the methodology is important.  What made the failed predictions fail?  Was it simply the difficulty of making predictions when so many things can change the outcome?  Or was there something really wrong with their reasoning.  In many cases, I think it's the reasoning that's unsound.

One reason I bring this up is because economics makes predictions of sorts.  Mainstream economics makes all kinds of concrete claims, like unemployment will be at such and such and GDP will grow by whatever.  The Austrian approach rejects that methodology.  In a way, it is in line with the book.  There are too many factors, including free will, and predictions are necessarily highly speculative.  But that kind of economics is usually based on a faulty statistical approach.  Relationships that don't really exist are measured anyway, and predictions are made assuming the statistical relationship will hold in the future.  These approaches inevitably fail when big changes happen, as those are always unpredictable based on this method of "more of the same".

The Austrians use a different approach.  They point out causal relationships.  They would point that minimum wage increases will mean that marginal employees will no longer be hired or maintained, probably increasing unemployment.  The prediction isn't that unemployment will go up, or by how much.  The theory only points out the causal relationship and would argue against a minimum wage hike because the actual effect, if there is any, is to create unemployment.

So the prediction isn't the same kind as one of these statistical ones.  It accepts that there are many other factors in the economy, and doesn't try to ignore them.  It only shows how this change in minimum wage changes the incentives.  And so for the same reasons that bold, confident (and inaccurate) predictions are preferred, economic approaches that make more concrete predictions are preferred.

This also ties into Objectivist morality as well.  We use principles to make predictions about the future.  Obviously we can't control everything, or know every possible consequence, but we can use causal principles to choose actions that should be preferable.  For instance, we might think that being dishonest will cause several major problems including the fear of being caught, work taken to avoid getting caught, etc.  We might also see the advantages of the truth, such as that it creates trust and allows people to act more optimally because they have accurate information.  We aren't predicting exactly what the outcome is, but we are picking actions that we believe will lead to better results.

So the missing piece in this book, which obviously the author wasn't trying for, was a discussion of whether some methods of prediction are better and why.




Post 1

Friday, September 23 - 7:20pmSanction this postReply
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Joe,

Not exactly pertaining to this book review, but your review has brought one question to my mind... What do you (Joe) think are some good things for people (workers and/or retirees) to invest their time/resources in given the current political environment?

Thanks,
Dean



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Saturday, September 24 - 12:16amSanction this postReply
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Are you talking about financially?  Or hobbies?  Or promoting a better world?

If you meant financially, I really have no idea.  Never been an expert.  Here's my thinking that I've shared with others.  When you have no money, get a good job and work hard to advance.  When you have some money, you have to make a choice.  Either start spending time and effort figuring out what to invest in, or put that time and effort into getting better at your job and making more.  For me and some others, the return on investment is much higher for improving your job skills.  Say I had $100,000.  If I work hard, what can I hope to get as a return in one year?  I'd do great with 10%, especially given how bad things are.  But that's only $10,000.  I can get a salary increase or bonuses of more than that by getting better at my job.  And that rate of return is essentially locked into the next year as well.  Say I get a $10,000 raise.  Sounds good, but it's about even, right?  But next year if I get another $10,000 raise, I'm getting $20,000 a year with essentially the same assets.

Of course, eventually your rate of improvement at work starts diminishing, and your assets grow to the point where it might make more sense learning how to invest and putting the time and effort into that.  That's a judgment call.  But I always found it odd that people who are lower salary brackets and with little assets are spending their time investing!




Post 3

Saturday, September 24 - 7:10amSanction this postReply
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"But I always found it odd that people who are lower salary brackets and with little assets are spending their time investing!"

One explanation for that is found in the RICH DAD, POOR DAD books...the author advises that working for others, as an employee, keeps one on the level of a child, dependent on the employer/parent. (He also advises people, simplistically stated, to "work for free" and "pay yourself first.") Combine that with his promotion of "passive" income (i.e., investing) over being an employee and "working," with the promises of "easy money," and, suddenly, it's not so odd...




Post 4

Saturday, September 24 - 8:30amSanction this postReply
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I think it makes sense to expend the effort needed to become versed in the fundamentals of investing, e.g. understanding what mutual funds are, etc. regardless of income level. This is because it makes sense always to set aside a small percentage of any income into a retirement account that can earn compounded returns without taxation. Start early, fund often.



Post 5

Saturday, September 24 - 11:34amSanction this postReply
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Given the volatility of markets in recent years, those who left their funds in cash - just sitting in a checking account and losing value at the rate of inflation - still beat the markets.

The best advice I heard for a young person starting out was very simple - it was to "pay yourself first" by taking one dollar out of every 10 that you are paid in salary and put it in an account you don't touch. Treat it as if it had never been yours - don't budget for it, don't think of using it for a down payment on a house, or college fund for kids, etc.

That takes no investing expertise, and if someone starts when they are young it will beat nearly anything else. And it will be multiplied by focusing on Joe's advice, which I thought was good. I spent too many years on salary and wish someone had kicked me in the butt to change over to being an independent consultant years earlier. Focusing on getting the most growth in your career would be the best thing to do for most people.

We should be taught to seek out good mentors in key areas, people that will accelerate our development.



Post 6

Sunday, September 25 - 4:52pmSanction this postReply
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I'm not a big fan of the "rich dad" guy for a few reasons.  What I think is the best point in that book is when the author says that buying a house isn't an investment as it doesn't provide you a stream of income and it limits your options.  Some of the rest sounds okay, but usually when compared to a false alternative.  The false alternative is the person who works as an employee his whole life and that's his only source of income.  It's the man who is looking for job security and avoids risks and opportunities.  The "poor dad" is doing his duty and hoping to be rewarded.

But while he says it in different ways, the idea that you should make your money work for you is a very old idea.  Of course you don't have to labor for every cent.  You can utilize all of your assets to make money, and the best kinds are the ones that require no work on your part.  Investment is a great way to increase your income stream.  This is a very old idea.  The part that the book added was a disparagement of salaried income.

There's a reason why younger people tend to focus on career/salary instead of capital/interest.  They have little or no savings.  For years to come, their greatest revenue earning asset is themselves.  And by improving their earning potential, they can earn a lot more for the same effort.  Sure, the alternative of having a ton of savings and living off the interest sounds good.  And if you have what it takes to start some businesses that you can walk away from and continue to earn, that's great too.  The idea of being entrepreneurial about finding ways to make your assets work for you is great.  But rejecting your biggest earning potential is a terrible, terrible idea.

If you approached it from the point of view of trying to maximize your earning potential, there's no doubt that early on your labor is our most efficient path.  And as you develop in your career, your potential continues to increase.  The question always comes down to asking yourself if you were to put in more effort into a task, which task would best increase your income stream?  For a long time, focusing your energy on your own career is the best choice.  But as you earn money, now you have the capability of letting that money work for you.  With little effort, you can invest that money and see some hopefully positive rate of return.  The alternative at that point is whether to spend a bunch of time trying to find just the right place to invest, so you can get a slightly higher rate of interest, or whether you take all that time and keep focusing on your career or other money making ventures.  Which actually pays more?  Studying the market every day, or doing a little extra at work and getting recognized and eventually promoted?

Luke mentions that everyone should familiarize themselves with the basics of investing.  I agree.  But I'm not talking about figuring out what mutual funds are and what diversification involves.  I'm talking about the micro-management of your money, trying to figure out when to pull it from one investment and put it in another, when stocks will go up or down, how gold is doing today, etc.  To do that well, as people who do it well will tell you, it takes a lot of time and effort.  They might enjoy it, but it isn't for free.  Maybe you even prefer that to working as an employee.  Sure.  But if we're talking about how to best increase your income stream, often advancing in your career is way more lucrative.  Obviously it depends on your assets and earning potential.  But if I met people right out of college focusing on this stuff, I'd tell them to forget about it and master whatever field they're working in.  Sure, save money.  Even invest if you want.  But even doing a fantastic job there is not going to earn you a very high rate of return.  Your earning power, especially when you're young, has a significant potential.

I agree with Steve that you should try to save money too.  One thing I've realized that gets missed with that sort of advice is that your earning potential goes up a lot over time.  When I was a kid, I saved a little money.  Whatever I did manage to save was overwhelmed by my first real paycheck after college.  Similarly, I could (and did) save then, but my earning power now makes that savings seem insignificant.  Compound interest is great, especially if you keep feeding into it, so I'm not arguing against it.  But most discussions of compound interest assume little or no variability in your personal earning power.  When you are moving fast in your career, the money that you saved and earned earlier is peanuts.  The most important thing is, as your earning power goes up, don't increase your spending to match!  If people just avoid that, they'd have a lot more money!  The more money you make, the smaller of a percent the fixed costs are and the more potential for savings.  Of course, many people increase their fixed costs until there is no saving then either.




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Post 7

Sunday, September 25 - 5:06pmSanction this postReply
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I agree with Joe about the importance of building a lucrative career around one's core strengths, especially as contrasted against the empty promises of the multi-level marketers (MLM) and their ilk.* (The "Rich Dad" series makes this mistake.) The constantly changing economy makes expanding that core skill set even more important. The days when one could work a single skill in a manufacturing assembly line his whole life are long gone.

EDIT: One nice thing about "investing" in education is that no one can rob you of that knowledge short of bashing your brains. One needs to select the education carefully based on its long-term "return on investment." But the payoffs of education can be tremendous if done rightly.

* While some people have personalities suited to MLM, most do not. The "big lie" of MLM is that "anyone can do it." Wrong! The few companies that actually sell products worth their retail price like Amsoil generally push the product much more than the "business opportunity." This still comes down to having that special "salesman" personality and understanding cash flow well enough to be able to generate a net income greater than a standard career in another field.

(Edited by Luke Setzer on 9/26, 4:57am)




Post 8

Sunday, September 25 - 6:18pmSanction this postReply
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Thanks Joe, you answered half of my question to great satisfaction. I figured that was your strategy, that increasing your own productivity is the best investment for someone who is starting out with little savings.

Your answer to the other half is "I don't know" on what your current strategy is to invest in with your savings. Not too satisfying, oh well. Apparently you are not too interested in saving and investing. :P

Furthermore, I think that right now there isn't much opportunity to gain from savings. I think the current political environment is working very hard to steal existing savings/investments. My best idea for investments is to purchase farms on mortgage, figuring that the mortgage's fixed interest rate is currently lower than the expected future inflation rate.



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Post 9

Wednesday, September 28 - 3:34amSanction this postReply
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Hey Dean, sorry I couldn't help.  But at this point it isn't about my interest level.  It's about the difficulty in making any kind of prediction at this point in time.  Who knows how the election will go, what effect Obamacare will have, when the Chinese will stop buying our debt, whether California will declare bankruptcy, whether any of the cities will, whether there'll be massive inflation, how gold will respond to any of this news, whether the government will outlaw gold again, etc, etc., etc.  No investment looks any good at this point.  But then again, maybe nothing will happen and this was the golden time to buy, buy, buy.

There was a time where the ignorant investor could just throw his money into real estate, index funds, bonds, or even cash.  Sure he might not gain much, might even lose some in the short term, but not worry too much about it.  Right now it seems like any of these could have a massive downside.

People rightly complain about how an unpredictable government can cause uncertainty in the market.  But when the government is predictably insane, like ours is with the current spending, it creates other kinds of unpredictability.  Unfortunately, we have a government that's predictably insane, and insanely unpredictably.




Post 10

Monday, November 7 - 6:58pmSanction this postReply
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One area of investment that is overlooked by many is the commodities markets.
Unlike the stock market it isn't frowned upon to take a short position on a commodity and the rules are not slanted that way.

It definatly isn't for those who want to passively let their brokers do the walking either. There is a lottt of information one needs to know before even trying it.

Also it isn't something that one wants to risk his or her lifes savings over either.

Commodities is something that isn't for the feint of heart however you really can make a crap load of money in regardless of the economy.
During todays economic turmoil one can do extremely well when a commodity is trending up or down.

On the bad side I've noticed that the margins have over the years increased a lot in the last 10 years to enter into a position as well as their maintanence requirements.

On another note its always better to get into a trade that has already started trending strongly, many people mess up trying to predict or get in too early only to have their stop gaps wiped out by the big boys. So look for a strong trend get in and get out before market analyis says it will end. It is better to make a decent amount and play it safe instead of trying to ride that horse to the end of the race.

Also don't get into the markets with money you canttt afford to lose, another thing one can do when learning is to do your trading on paper only..alottttttttt so that you can see how you do before risking anything at all, consider it like homework when studying the markets you are going to be interested in getting into, and for gods sake don't listen to a single word that ken roberts says the guy can't trade to save his life.

The gods sake comment was of course jusssst an expression! Don't be hating! Lol



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