How to get Rich

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The world revolves around money and sex. If we want to achieve happiness, we need to pursue money in the context of optimal living: Too little money and we suffer; too much money and we suffer, too. Getting rich is easy, if we understand the nature of money.

 

Excerpt from Book: "How Life Really Works"

Book III: Sex and Money

Chapter 16: Money and Investments

 

Due to space limitations, sections in Red are accessible only in the Book or CD "How Life Really Works".

 

Money and Investments

QUOTATIONS

Chapter 16.01 THE ELEMENTS OF FINANCIAL SUCCESS

    1. The Nature of Success

    2. Luck

    3. Risk

    4. Energy

    5. Strategy

    6. Conclusion - Financial Success

Chapter 16.02 INVESTMENTS AND PROBABILITY

Chapter 16.03 FUNDAMENTALS OF MONEY AND INVESTMENTS

Chapter 16.04 INVESTMENT STRATEGIES AND RISK MANAGEMENT

    1. Fixed Income Investments

    2. Real Estate: The personal residence as an investment

    3. Real Estate: Income Properties

    4. The Stock Market (See Chapter 16.05, below)

    5. A Business of your Own

    6. An Analysis of Other Investments

    7. Retirement -- How to retire at Age 40

    8. Synopsis of Prudent Investment Vehicles

    9. Fundamental Investment Principles for all Ages

Chapter 16.05 THE STOCK MARKET

    1. Risk vs. Return in the Stock Market

    2. Stock Market Bubbles and Panics

    3. Crowd Psychology of Stock Markets

    4. Ponzi Schemes and other Frauds

    5. Prudent Investments: The P/E Ratio

    6. Conclusion: The Stock Market

Chapter 16.06 MONOPOLIES

    1. Definition

    2. Monopolies and the Free Market System

    3. Monopolies must be Enforced by the State

    4. Temporary Monopolies: Patents and Copyrights

    5. Permanent Monopolies

    6. Monopolies Operated by the Government

    7. Monopolies and the Free Market System

    8. The Future of Monopolies

Chapter 16.07 EXPLOITATION

Chapter 16.08 INFLATION

Chapter 16.09 TAXATION AND INVESTMENT STRATEGY

Chapter 16.10 IMPERATIVES FOR ECONOMIC SUCCESS

Chapter 16.11 ECONOMIC SYSTEMS

    1. The Evolution of Economic Systems

    2. Capitalism: The Free Market System

Chapter 16.12 The Future of Economic Systems

Chapter 16.13 TAXATION AND OTHER NECESSARY EVILS

Chapter 16.14 MONEY AND HAPPINESS

 

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Money is power, freedom, a cushion, the root of all evil, the sum of all blessings

                                        Carl Sandburg, The People

Money is indeed the most important thing in the world, and all sound and successful personal and national morality should have this fact for its basis

                                        George Bernard Shaw, The Irrational Knot

Almost any man knows how to earn money, but not one in a million knows how to spend it. If he had known so much as this, he would never have earned it

                                        Thoreau, Journal

The difference between a little money and no money at all is enormous - and can shatter the world. The difference between a little money and an enormous amount of money is very light.

                                        Thornton Wilder, The Matchmaker

 

 

Chapter 16.01 THE ELEMENTS OF FINANCIAL SUCCESS

    1. The Nature of Success

    2. Luck

    3. Risk

    4. Energy

    5. Strategy

    6. Conclusion

 

1. The Nature of Success

An Epicurean philosopher would define success as the consistent attainment of happiness, based on the absence of discomfort and the presence of tranquility. It is a definition worthy of our consideration.

In today’s hectic world, most people consider the word success synonymous with financial success and financial security. However, they are chasing a chimera, if they then proceed to equate financial success with happiness.

From our experience of life, most of us have long suspected that the mere possession of money has never bestowed happiness on anyone. We have seen many rich but unhappy people and we have seen many relatively poor but happy people. Many persons who have achieved the nirvana of financial success have found that there is only an ephemeral connectivity between money and happiness.

Although money and success can only provide the illusion of happiness, human beings are dependent on monetary resources in order to optimize their living conditions. If we lack sufficient money to sustain life and to provide us with necessities, we will suffer pain, illness or death, conditions that are not conducive to happiness.

Conversely, if our monetary resources far exceed our needs, we will be vulnerable to anxiety about losing them, or we have to expend additional funds to maintain and protect such unneeded resources.

The best way to avoid this conflict between money and happiness rests not in the minimization or maximization of our financial resources. Instead, we need to optimize them in order to ensure that our resources will be in alignment with our innate needs, as programmed into us by human evolution. (See Chapter 17: Optimal Living)

We cannot achieve success, in the context of security and happiness, by relying on monetary resources. We can only derive success from our deeply ingrained knowledge that, no matter what happens to us, we will always land on our feet.

Although monetary resources and financial success do not ensure human happiness, optimized monetary resources can make life more efficient and can thus enhance the opportunity for achieving happiness by eliminating or reducing unnecessary hardships and hazards.

The Essential Ingredients of Financial Success:

1. Timing

The dominating element in financial transaction is the timing of events: When to buy, when to sell, when to do nothing. However, it is inherently difficult or impossible to achieve optimal timing with any degree of consistency. The future is essentially unpredictable because it does not exist yet.

We can only try to anticipate future events by projecting current conditions into the future. It is essential to realize that Chaos Theory and the Uncertainty Principle govern many events in the future. Therefore, the future is inherently unpredictable.

2. Luck

Without an element of plain luck, we cannot achieve financial success, even if the other conditions for success are met. It is inherently impossible to know what the future will bring, because the future does not exist yet. Unbeknownst to us, our future may hold wars, depressions, revolts, the quirks of evolutionary change, natural disasters, cancer, accidents, shifting economics, and many other impediments that interfere with a life free from physical or mental well-being.

We are at the mercy of many unforeseeable events that are completely beyond our control. We can only hope that some of these unpredictable events will enhance our well-being, rather than be destructive.

It has been said "Luck is hard work", implying that we do not need luck if only we work hard enough. However, a phenomenon known as luck actually does exist. Luck is comprised of those occurrences in life that are beyond our control or the possibility of anticipation.

Good luck will work in our favor; bad luck will affect us adversely. When we talk about luck with reference to investments, we are referring to those aspects of investments transactions that are completely beyond our control or anticipation.

If somebody detonates a nuclear device in Washington tomorrow, such an event is unpredictable but it will vitally affect the timing, the outcome, of any investment decisions we have made in the past. Such an event would constitute bad luck.

3. Risk

Without willingness to take risks, luck is immaterial. Luck can only affect us after we have taken a risk, after we have invested some of our resources in an investment vehicle and thus exposed them to risk. Since the future does not exist, future events are not predictable with any degree of consistency.

We must expose our resources to the adversities of life in order to profit, or to suffer a loss. If we take clearly excessive risks at clearly inappropriate times and occasions, if we are gambling against the odds, instead of taking a well-calculated risk, our risk factor will turn out to be negative and we will lose money instead of gaining money. Above-average returns always coincide with above-average risk.

The greater the risk to our resources, the greater the potential reward.

The lower the risk to our resources, the lower the potential reward.

 

4. Energy

The Second Law of Thermodynamics, also known as Entropy, is an all-pervasive Law of Nature. Entropy is the force that constantly, inexorably and insidiously degrades our environment, our investments and even us.

The construction of a house from its basic components requires an input of additional energy in order to offset entropy. Entropy will inevitably cause the house to crumble, unless we constantly supply more energy by maintaining the house and by making repairs when the inevitable decay sets in. Life cannot exist without entropy but entropy is also the ultimate cause of the death of all living organisms, including humans. (See Appendix A: Entropy)

Energy increases the randomness of all forms of energy. In financial matters, too, we must overcome the ubiquitous force of entropy. It requires less effort to spend or to lose money, a process that increases the randomness of money, than to acquire wealth, a decrease in the randomness of money. Entropy, as applied to the financial sphere, is measured in terms of monetary resources that have to be inserted into the markets in order to generate a profit.

 

5. Strategy

Without a reality-based strategy, governing the investment of our resources, the energy we apply to our objectives of creating wealth, is ineffective and the results most often reflect the whims of fate and luck. When we are discussing strategy, we are actually discussing the timing of our investments by the judicious application of empirically derived formulas or systems.

We must realize, however, that empirical rules and stratagems may or may not find applicability in the future. Circumstances change without our knowledge and previously valid stratagems or paradigms may fail to apply.

Due to the combination of quantum-mechanic randomness, the laws of probability and the principle of Chaos, it is inherently impossible to make consistently correct projections or predictions in the financial sphere. However, it is not actually necessary to be infallible in our evaluation of economic processes in order to have some degree of financial success: Our facts, assumptions and predictions must be in alignment with reality slightly more than 50% of the time.

It is somewhat humbling to realize that, if it were possible for us to be consistently correct in only 51% of our investment decisions, we could own vast financial resources within a short period of time. The whole world of gambling and insurance revolves around this 1% factor. Casinos use the laws of probability to achieve guaranteed success. Life insurance companies cannot lose because their casualty departments make sure that they are consistently correct 51% of the time. The keyword in this statement revolves around the term consistently.

An examination of the principles of economics equates with a discussion of the principles of human nature as it has evolved over past millennia. It is most efficacious to base our economic strategy on long-term trends that reflect innate human nature

Monetary inflation represents one of these long-term trends in economics. If we wish to understand the nature of inflation, we need to recognize that all human beings have an innate desire to obtain something of value without risk or without financial contribution.

This human propensity is the driving force behind the monetary inflation inherent in all economic systems. Every ruler and every politician who has ever lived has made every conceivable effort to debase the currency of his domain for his own gain, by inflating it.

Inflation is an economic fact that is as old and persistent as the nature of man. Therefore, we must make inflation an integral part of any long-term investment strategy. The innate rate of inflation, even in the best monetary systems, runs at 6 to 7% per year, regardless of official statistics and protestations by politicians. Paying proper attention to such basic human inclinations must be the cornerstone of any financial strategy.

 

6. Conclusion - Financial Success

We must be aware of the basic principles governing financial success. Finally, we must strive to optimize the contribution that money can make to our happiness by a proper understanding of the interaction between success, money and happiness. The key to human happiness is not to minimize or maximize success, but to optimize it, in compliance with evolutionary human needs and propensities.

 

Chapter 16.02 INVESTMENTS AND PROBABILITY

Chapter 16.03 FUNDAMENTALS OF MONEY AND INVESTMENT

Chapter 16.04 INVESTING STRATEGIES AND RISK MANAGEMENT

1. Fixed Income Investments

2. Real Estate: The Personal Residence as an Investment

3. Real Estate: Income Properties

4. The Stock Market (See Chapter 16.05, below)

5. A Business of your Own

6. An Analysis of Other Investments

7. Retirement -- How to retire at age 40

8. Synopsis of Prudent Investment Vehicles

9. Fundamental Investment Principles for all ages

 

Chapter 16.05 THE STOCK MARKET -- PANACEA OR TRAP

    1. Risk vs. Return in the Stock Market

    2. Stock Market Bubbles and Panics

    3. Crowd Psychology of Stock Markets

    4. Ponzi Schemes and other Frauds

    5. Prudent Investments: The P/E Ratio

    6. Conclusion - The Stock Market

 

Chapter 16.06 MONOPOLIES

    1. Definition

    2. Monopolies and the Free Market System

    3. Monopolies must be Enforced by the State

    4. Temporary Monopolies: Patents and Copyrights

    5. Permanent Monopolies

    6. Monopolies Operated by the Government

    7. Monopolies and the Free Market System

    8. The Future of Monopolies

 

Chapter 16.07 EXPLOITATION

What meaning do we attach to the word exploitation? The dictionary simply explains that we exploit someone if we victimize him, if we take advantage of the predicament of another person.

The term exploitation is one of the favorite demagogic and manipulative expressions of politicians who are inclined towards the liberal, socialistic side of the political/economic spectrum. Exploitation is an emotionally charged slogan for economic illiterates and political manipulators. This expression clearly implies that the exploiter is possessed of inferior morals.

The term exploitation brings to mind a favorite saying of Ann Landers, a psychological columnist. She frequently admonishes her readers: "No one can take advantage of you without your permission. If you choose to remain in a situation that you consider exploitative, and if you fail to walk away from it, there is nobody to blame but yourself"

An accusation of exploitation seemingly defies common sense. In a free society, where persons are not physically restrained, exploitation is impossible. In order to avoid exploitation, a person can merely use his two legs to walk away from someone who tries to take advantage of him by engaging in an uneven exchange of goods or services. It is absurd to suggest that a person would voluntarily hang around and allow himself to be victimized by another person. If another person tries to beat me up, I use my two legs and move out of his way. If a person tries to exploit me, I use my two legs and reduce my degree of involvement with him.

There is always a cogent reason why a person does not walk away from a situation that seems to be adverse to his interests. He may have a different idea of what is actually in his best self-interest, he may actually enjoy being beaten up or he may not have a more agreeable place to walk to. If a person continues to subject himself to abuse of any kind, he obviously prefers this situation to any other arrangement.

Since he cannot find a better deal than the one he is getting, it is obvious that he is getting the best of all possible deals. A person, who is getting the best deal he can possibly get, is obviously not a victim and he obviously does not fall within the definition of exploitation.

It is interesting to look at one of the innumerable examples of alleged exploitation. A great uproar occasionally erupts because women receive less pay than men for apparently doing the same kind of work: Women claim they are underpaid, they are exploited, they have hit the glass ceiling, and they are being discriminated against, merely because they are female.

If a person claims that other people are exploiting her by underpaying her, why does that person not go where she will be paid what he feels her labor is really worth? Instead, the poor, underpaid, exploited person stays right where she is and complains about the unfairness of the world. Instead of moving on to greener pastures, she demands that the world should change and be different from whatever it actually is.

At this point in time, the world obviously cannot be different from whatever it is and the person complaining is merely whining and spinning her wheels. Maybe it will be different in the future, maybe not; maybe she can change her situation, maybe not. In the meantime, this person is engaging in counterproductive behavior: Nobody is going to pay her any more just because she feels underpaid. If she were actually worth more compensation, as she claims, why does she not go where employers will recognize her worth and pay her more money?

The trouble is, there is actually no other person in the free market place that is willing to pay this person a higher wage: She is getting the best possible deal she can get. There are no underpaid or exploited workers, as long as persons are not physically restrained from walking to a better paying job.

Women, who look for jobs in the free market place, are being paid less than men because they are being paid precisely what they are worth to others: Women are paid less by employers because they are worth less to employers.

There are many reasons for this discrepancy in pay, some obvious, some not so obvious. Men are more likely than women to be the primary breadwinner in a family. Therefore, they are apt to be more aggressive in pursuing their career objectives. Men are also less apt to leave their jobs and waste the investment their employer has made in them.

Women are less desirable in the work force because they disrupt operations by taking years out of their careers in order to rear children for their own enjoyment. It is also wasteful for an employer, if a woman employee frequently has to take time off to take her children to various appointments. It is burdensome for the efficient operation of a business if a woman regularly takes time off due to menstrual complaints.

If a woman feels that she is exploited because she is underpaid in an employment situation, why does she not enter a truly competitive field? Real estate is an arena where men and women are paid precisely the same, because their compensation is truly proportional to their actual production, their true value. There are many similar professional fields where a woman is paid precisely what she is worth to an employer.

If a person feels exploited by price gouging, evil oil companies who charge too much for gasoline in a particular city, why does he not take advantage of this tremendous profit potential? One could buy a few tanker-loads of gasoline in a nearby city where it is cheaper. He does not even have to touch the stuff: He can sell the gasoline to an independent service station for a terrific profit. Of course, this scheme does not work because the free market system has already considered all marketing factors. The free market system automatically adjusts prices to market conditions and inherently precludes price gouging, exploitation or monopolies.

If we want to deal with our environment in a successful and efficient manner, we must understand how the world really works; we need to understand clearly that, in a free market system, exploitation is merely a manipulative slogan, without substance. If we do not wish to be exploited, we merely need to go where we will not be exploited, where somebody will pay us what we think we are worth or where we will be treated the way we feel we should be treated.

If child labor is so despicable, why is there so much of it? Surely, no loving parent likes to see his children doing slave labor. Yet, even at the beginning of the third millennium, child labor remains a serious concern in the underdeveloped nations of the world.

In the United States, child labor ended, not when legislators passed laws forbidding it but when the machine had replaced the cheap labor of children. Laws against child labor could not be effective until the need for child labor had ceased, when machine labor was cheaper then child labor. Meaningful child labor laws where not enacted by the United States Government until 1933, when the National Industrial Recovery Act established a minimum age of 16 for workers in most industries. However, the US Supreme Court declared this act unconstitutional in 1935. It was not until 1938 that the Fair Labor Standards Act prohibited child labor.

Some people try to enforce American child labor laws in poor Asian countries with questionable success. If an American importer imposes requirements prohibiting child labor, the work is performed by another factory, possibly in another country. Instead of earning the small wage that allowed them to stay alive, the unemployed children now starve. In the meantime, child labor in another undeveloped country takes up the slack.

Therein lies the impossibility to resolve child labor by passing laws against it. Nobody likes child labor. If one could abolish child labor merely by passing laws, there would never have been any child labor. Child labor stops only when child labor is no longer needed in order to keep a family alive. Families living in abject poverty depend on child labor for their survival. Often, their only alternative lies in prostitution. This outcome is certainly not the anticipated result of the do-gooders in the United States who insist that imported goods are produced at low prices but without child labor.

The child labor problem throughout the world will be resolved only when the educational level of the world population rises and when rapid increases in the population of poor countries cease.

 

Chapter 16.08 INFLATION

    1. Inflation and Human Nature

    2. What is Money?

    3. The Relation of Man, Money and Inflation

    4. The History of Inflation

    5. Inflation: The illusion of Wealth

    6. How to Create Money out of Thin Air

    7. Inflation Price Indexes: Smoke and Mirrors

    8. How to benefit from Inflation

    9. Conclusion - Inflation

 

Chapter 16.09 TAXATION AND INVESTMENT STRATEGY

 

Chapter 16.10 IMPERATIVES FOR ECONOMIC SUCCESS

We gain wisdom and knowledge mostly by making mistakes, by discerning the underlying principle of a mistake, and learning from it. Human behavior follows distinct patterns, imbedded in the innate nature of man. We can apply these basic motivators to our investment objectives and arrive at a number of empirical rules that may prevent us from suffering grievous harm in the future.

Never expect another person to look at an issue from the same perspective as you do. Although all human beings have the same innate traits, they are uniquely different in their views of life and reality, their expectations and goals.

If you expect another person to do something that you would like him to do, you must make it in his best self-interest to do so. Without this incentive, nothing productive is going to happen.

If you separate expectations from your investment decisions, you cannot be disappointed. In other words, if you do not count your chickens until they are hatched, it will save you many distressing emotions.

You win some and you lose some: Try to let your profitable investments ride and do not be afraid to cut your losses. Investing requires some intestinal fortitude. Sometimes we have to cut our losses because it may be getting obvious that our losses will get worse if we do not act.

It is impossible to be successful in all investment decisions. We will get rich if we are consistently correct in merely 51% of our decisions.

Recognize that nobody, absolutely nobody, knows the future because the future does not exist. Do not believe anybody who says that he knows what the future has in store. Nobody can predict interest rates or stock prices consistently.

 

Chapter 16.11 ECONOMIC SYSTEMS - GENERAL

    1. The Evolution of Economic Systems

    2. The Future of Economic Systems

 

Chapter 16.12 ECONOMIC SYSTEMS: THE FREE MARKET SYSTEM

    01. The Free Market Economy: An Overview

    02. Principles of the Free Market Economy

    03. Free Markets and Politics

    04. Recessions and Depressions

    05. The Great Depression

    06. Free Trade and The Global Economy

    07. Public Works Projects

    08. Pork Barrel Projects

    09. Price Controls Cannot Suppress Inflation

    10. Price Controls in Disasters and Wars

    11. Conclusion - The Free Market System

 

Chapter 16.13 TAXATION AND OTHER NECESSARY EVILS

 

Chapter 16.14 MONEY AND HAPPINESS

Money is a storehouse of value. In accordance with the Second law of Thermodynamics, money is hard to accumulate and maintain, but easy to lose. The optimum method for creating and establishing wealth is to follow principles deeply imbedded in human genes because they determine optimum conditions for investments and thus, optimum rates of return for investments. Shortcuts to wealth can be very treacherous.

We can find optimal opportunities for establishing financial success in our home and in sound, long-term stock market investments. These two investments represent the core of a prudent investment scheme. All other investments are tangential.

Money and happiness have only a tenuous connection. Some persons seek happiness in the accumulation of money. However, it is an inescapable fact that money has never provided any human being with lasting happiness, with a feeling of well being free from physical or mental discomfort. Reliance on money as a source of happiness is a delusion, a dangerous mirage.

It is very much desirable to have enough money to provide the minimum financial resources needed to sustain life: Food, shelter and security. On the other side of the spectrum is the ostentations consumption of money for purposes that merely substitute for healthy human behavior, such as over-eating or living in vast palaces. If we want to achieve happiness, we need to pursue money in the context of optimal living: Too little money and we suffer; too much money and we suffer, too. The solution rests in an optimal supply of money, commensurate with innate human needs. (See Chapter 17, Optimal Living).

 

Due to space limitations, sections in Red are accessible only in the Book or CD "How Life Really Works".

 

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