A Missed Chance to Change American Healthcare History


Regular readers to the blog will remember the “Parable of the Pipeline,” which was created by Burke Hedges.  This is an excellent analogy to show how the rich become wealthy and why the “normal” person doesn’t.  (You can buy your own copy by clicking on the book cover below.)

To paraphrase:

Once in a town in Spain there were two brothers who were paid for each bucket of water they carried from the spring to the village.  They each worked hard and made a reasonable living.

One brother went out at night and had big meals and wine with friends, spending any money he had left after paying for his basic needs.  He saw a lot of money go through his hands with little to show for it, but he was not concerned because he was young and healthy.  Whenever he needed more money he simply worked harder, carrying more buckets.

The other brother also worked hard, but he spent his nights building a pipeline from the spring.  He spent any surplus money he had on materials for the pipeline.  While his brother was spending his money on fancy meals and good wine, he was eating a simple dinner he brought from home in the field.  While this brother was buying fancy clothes, he was content to buy durable, functional clothes that would last a long time.

The Parable of the Pipeline: How Anyone Can Build a Pipeline of Ongoing Residual Income in the New Economy – Get your copy of the original!

The first brother ridiculed the second brother, saying that he was wasting his time and not enjoying life.  He and the other men and women in town laughed at his simple clothes and pipe dream.  “We have always carried buckets from that well,” they would say.  “Our parents were bucket carriers, and their parents before them.  Quit wasting your time on this fancy.”

But the second brother continued to work on his pipeline each chance that he got.  Finally, he completed the pipeline all the way to town.  The second brother was now able to bring as much water to the village as he ever could in his youngest days simply by turning a valve.  If he also carried buckets, how could easily sell twice as many buckets as his brother could. 

When he was sick, his income did not decline.  He would travel and still have the same steady income.  He could now buy nicer clothes, using the income from his pipeline, and still have his whole salary to pay for his needs and materials.

Because he did not need to work as hard to provide for his needs, the second brother could now spend more time working on his pipelines.  Because he had even more surplus money, he could also hire others to help.  As time passed he used his wealth to build more pipelines, eventually becoming very wealthy.

As they grew older, the number of buckets each brother could carry each day decreased.  The first brother, no longer able to work, saw his income decline, making it tough to pay for necessities.    The second brother, however, was able to live comfortably on his income from the pipelines.

Note in this parable no one was cheated.  The second brother did not build his fortune by taking advantage of his workers – he paid them what they considered a fair wage for their efforts.  It is true that he worked harder for his income when carrying buckets than when he was using the pipeline he built, but he certainly worked very hard when building the pipelines and he delayed using the fruits of his labor in order to build them.  He was using his income in a smarter way than the first brother was using his – something the first brother could have done had he chosen to do so.

There is currently an assault on those who have built their pipelines and are now receiving the fruits of their efforts.  Jealousy and envy are being used as tools to divide.  So that people will not notice the political promises that have not been kept (because the economics made it impossible to do so), the blame is being placed on those who saved and invested.

Other books by Burke Hedges that you should read:

This nation is great because of those who have built the pipelines.  Henry Ford created a way that would allow average people to own an automobile and in doing so created the factory, employing thousands.  Sam Walton filled the need for a greater selection of products at prices the average person in rural communities could afford and in doing so raised the standard of living for thousands.

Even those who did not found multibillion dollar corporations, but who did save and invest so that they had a few million dollars by their 50’s benefit society.  They ensure that they will not be a burden on others as they age.  They also have the means to help individuals and organizations in their communities (as many do).

If we are all bucket carriers who spend every dime we will not be able to take care of ourselves in old age.  If we tear down all of the pipelines out of envy there will be less for everyone.  Less money, less taxes, fewer jobs, and fewer goods.

We will be like a lake full of frogs who find that the pond is dry.  As an old Texan once told me, when the pond runs dry, frogs eat frogs.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Picture Credits:  Kevin Abbott , downloaded from stock.xchng.

Don’t Fall for the Safe Position Fallacy


People like to win and hate to lose.  Basic in the psychology of people who are investing is the idea that if you make money on a position, you have won, but if you lose money, you have lost.  You also see silly ideas like “You don’t lose money until you sell.”

“You don’t lose money until you sell.”  Bad advice.

I’ve found that I’m subject to the same impulses.  When I was younger, I used to sell a stock if I made a certain gain.  For example, I would sell if I made $1,000 so that I could “take a safe position or  “lock in the gain” and eliminate the risk of the position turning south and turning into a loss.  Because I was taking a gain, I had “won,” but if I let the money ride and the stock went back down, I would have “lost.”  Chock one up for the “w” column.  Nevermind that I had to put the money somewhere else and possibly take a loss there.  I was a winner.  This behavior meant that I sold my gainers and held onto my losers.

Because I didn’t want to take a loss, which would then mean that I would “lose,” I held onto the losers, waiting for them to at least get back to the price at which I bought them.   Sometimes I’d hold them and they’d continue on down until I finally sold them in despair or just stopped looking since they weren’t worth enough to sell and pay the commission. Sometimes they would go back up to where I bought in eventually after a year or two of waiting.  Then I would quickly sell because, according to my ludicrous logic, that way I didn’t lose any money.  I didn’t “lose” since I got out what I put into the stock.  Now, in reality, while I had the same amount of money, perhaps a year or three had passed. Those dollars didn’t buy as much as they did when I invested them, so I was still losing money. Even worse than the loss to inflation, however, was the loss of time. I lost the ability to grow my money over those two or three years in a good stock because I refused to sell a loser.  I just ended up even after that time period instead of seeing gains.

After a few years of doing this, selling winners and holding losers, I ended up with a portfolio of stocks I didn’t really want.  I’d sold the stocks that were doing well and probably continued to climb.  I held the bad ideas and the poorly run companies, selling them if they actually turned around just as they started doing well.

In investing, there is nothing as important as time.

If you’re a serious chess player, you know about something called “tempo.”  Controlling the tempo means that you get to choose your moves and your opponent needs to react to what you do.  This keeps him or her from being able to do things that you don’t like.  Someone set back on their heels all of the time can’t throw an effective punch.

Time in investing is important as well.  Investments grow with time, and you make the most during the years at the end when you have the most money.  Each year at the end can mean hundreds of thousands or even millions of dollars in additional wealth.  At the beginning, when you first start investing, it may seem like you have all of the time in the world, so waiting for a stock to turn around doesn’t matter.  Waiting to start investing is even worse.   When you’re young and have fifty years ahead of you, you’ll figure it won’t matter if you wait five years to start investing.  You’re wrong.  At the end, you’ll wish you had just five more years before retirement.

Selling your winners early costs time.  Plus, you’ll still need to put that money somewhere, so you really aren’t reducing risk

When you sell, you need somewhere to put that money.  If you leave it sitting on the sidelines, you are losing time.  You never know when the next huge run-up in stocks will come, and you don’t want to be sitting on the sidelines in cash when that happens.  Selling just because you have a gain may mean getting out of a great company just when they are starting a big climb and putting your money into a stock you don’t like as much.  You might also be buying a stock ready for a fall because it has just completed a big climb and become overbought.

Another strategy is to take a “safe position.”  Here you sell a few of your shares so that you now have gotten out all of the money you invested, leaving a little in case the stock continues to climb.  That leaves you needing to move the money you made “safe” somewhere else, putting it at risk again.  The other choice is to leave the money in cash and be losing money to inflation each year it is not invested.  Why leave a company that is doing well and perhaps you really like to buy into another one that you don’t like so much?

Holding your losers costs time.

Every year you sit holding onto losing positions for them to go back up to where you bought them is a year you could have invested in something that was growing.  There are times when a great stock will go through a sell-off, or a company will drop in price as they reorganize and wait for their industry to recover.  There are also times when the whole industry or the whole economy declines, causing some great stocks to go down in price. Oil producers are in just this position right now, the good and the bad.  These stocks should be held and perhaps your positions added to during the downturn.  This is different, however, than holding stock in a company that is performing poorly and will continue to perform badly, waiting for it to recover.

I did this with Cisco stock, holding from about the year 2000 through about 2012, waiting for it to recover and grow.  I eventually sold the stock I had bought for about $20 at $30 or so.  True, I made a 50% profit, but I should have seen my money double or even quadruple in that period of time.   I lost all of that time when I could have been invested in a growing company instead of an old, tired, bureaucratic company whose time has passed.

Churning is costly.

When you sell a winner, you need to pay brokerage commissions (both for the sale and for the purchase of something else).  You also need to pay taxes on the gain, perhaps at a rate of 25-40% when you include federal, state, and local taxes.  If you stay invested, the money rides tax deferred until you sell.  This means your money, even the money that would have been paid out in taxes, compounds.  Over a lifetime, this could be hundreds of thousands or millions of dollars.  (I use that phase a lot, don’t I.  This is a costly thing to get wrong.)

Got a question or comment about personal finance or investing?  Please leave a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Why No One Ever Won Deal or No Deal Revisited

Space Capsule

Without a doubt my most popular post of all time is:  “Why No One Will Every Win A Million Dollars on ‘Deal, or No Deal.'”  I get thirty or forty views of this post per day, although I’m not sure why.  Part of me wonders if some sort of scam is involved, but I can’t see how.  I guess there are just a lot of people searching for “Deal, or no Deal” and the post comes up high on the search engines for some reason.  One of the oddest things is that the post has been rated 2 1/2 stars, which is between poor and average.  I’m not sure why so many people are reading a post they don’t like.

In any case, some people seem to be missing the whole point of the post.  The important thing is not the rules for Deal, or No Deal, or whether someone actually won the $1 Million.  (Two people did win the $1 Million in 2008, but those were in games where there were five $1 Million prizes instead of just one, increasing the chances and changing the psychology of the game since there was a chance of having two or more million dollar cases remaining near the end.)  One person even commented that the show was off the air by the time I wrote the post, so of course no one would ever win.  This is not really important for the message I was trying to convey.

The way that the game was designed was ingenious because it would be extremely unlikely that anyone would ever actually win the million dollars. Even winning $500,000 was very unlikely. That is because it combined a very low chance of selecting the right case as “your case” with the psychological factor of people not wanting to give up something valuable, like a $250,000 offer from the banker, for the possibility of a something better, like a million dollar case, since the consequences of being wrong would be severe.  The reason is that they calculate how much they will lose if they don’t get the better thing and that weighs on them more psychologically than does the calculation of the increased benefit if they win.  The humiliation of being wrong in front of a lot of people then adds to the stress.

It would be a whole different show if people were just selecting cases randomly and getting whatever was in them.  By the odds, someone would win the million dollars within a couple of seasons.  Having the banker there, throwing out offers, is what makes it so unlikely for someone to win the $1 Million.  It would take both a person who was really lucky and selected the $1 M case at chances of 1/30, and who was willing to risk losing a lot of money for the chance to increase their winnings modestly.  Once the banker makes the offer, that money is in their pockets and they need to give it up if they want to continue.  How many people, given a sure $300,000, would decide to go for the million when they would only win $200 if they were wrong?

This same psychology comes into play in investing for retirement and helps explain why most people get nowhere near the final 401k account balances you can calculate they’ll get when they’re 20 years-old assuming a 10-15% return from stocks over their whole investing career.   Most people from moderate incomes don’t retire with $8 M even though those are the kinds of outcomes you see when you punch the numbers into an interest rate calculator.

The reason is that once they have $500,000 or so, they start to do things to preserve that money that are smart from a risk-reduction standpoint, like shift into bonds and cash, but which reduce their returns.  They may also do foolish things that go against all of the proven studies like pull out of the markets when they get worried that stocks are overpriced and then miss the big rallies.  If you’re not there for the big rallies in the stock market, your returns will go from 15% to 2% in a hurry.  Most of the money is made over short periods of time.

Because with compounding you make most of your money in the last few years, which is right when people tend to get skittish and shift out of stocks or start trying to time the markets, most people end up with far less than they should statistically.  For example, someone who is 50 years-old and has $500,000 in a 401k may start to worry about a market downturn and shift into cash or bonds.  This is a reasonable move since the stock market can fall by 50% or more at times, turning that half a million dollars into a quarter million dollars in the span of a month or less.  Left alone after a downturn, however, the account would regain its value within a year or two during all of the market crashes we’ve seen for the last thirty years and then continue to gain enough value to provide the 10-15% returns cited.  $500,000 will double three times between age 50 and age 70 at about an average 10% return, turning into $4 M.  If the investor at age 50 went half into bonds with a return of around 5-6% and continued to reduce her exposure until retiring at 70, the account might well be worth $1 M or less.

My point is that to give yourself a chance at making the high returns you really should, and get over the reasonable fear of a market downturn, is to save and invest more when you’re young so that you can put enough money aside for retirement in ways to preserve it to be safe, yet still have a lot invested in stocks to get the superior returns that come with equities.  You certainly don’t want to have everything riding on the stock market when you’re close to retirement since a market downturn can then result in a delay of retirement or, even worse, retirement in poverty should you lose your job or get ill and not be able to continue to work.  If you have $2 M in your 401k when you’re fifty-five years-old, however, you can diversify $1 M as you would if that were the only money you had and needed to preserve it (assuming that you needed about $1 M to cover your expenses in retirement), and then let the other $1 M be fully invested in stocks for the better returns.

In this case you might have $1.5 M in a diversified set of stocks (half of the $1 M you were preserving as if it were your only money plus the extra $1 M you had), with the other half million in bonds and cash investments.  If the market takes a 50% decline at age 56, you would still have $1.3 M or so.  You could then wait for the market to recover, which it most likely would and then some well before you reached 65.  You would have a good chance of seeing that $1.5 M in stocks double at least once before you reached 65, so you could retire with about $4 M, including your returns from bonds.

Once you were in retirement, you could continue the strategy with keeping as much of the account in wealth-preservation, modest growth mode as needed to cover your needs and leave the rest invested.  When the stock market did well, you could use a portion of returns from the stock portfolio to do extra things like travel or fund college accounts for grandchildren.  When there were market downturns, you could just adjust the wealth preservation portion as needed and leave the rest invested, waiting for the recovery.  With a little extra savings, you can take the banker’s offer and be able to go for the million dollar case too!

Got and investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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