Sunday, March 20, 2011


Hey campers,

I am still working on finishing my cash flow analysis.  It has become something epic in scale, being that I was trying to be all-encompassing for beginners and advanced value investors alike.  I need to reflect on it a bit to trim it down because it seems currently like too much information in one, and yet it remains incomplete.  This past week has been incredibly busy and next week stands to be busy as well, so I hope you'll bear with me.  The schedule should lighten for a bit soon.

Today I wanted to talk about money.  What is money and how do we see money?  More importantly, what is the difference between the way a rich person sees money and the way a poor person sees it?  Is there something in our attitudes that compels us to grow richer?

I think so.  I think for many people, say 95% of the people in the world, money is their master.  Money dictates and controls most of their actions.  Someone living paycheck to paycheck is not truly free.  If they stop, the lack of money will destroy them.  And yet, too, there are people with quite a bit of money that are still controlled by it.  If you peer into the nearest investment bank, you will undoubtedly find very rich people completely under the control of money.  They work 18 hour shifts, weekends, they go unseen by family and friends.  Each of these people are part of this 95%.  This 95% includes pretty much everyone from a grocery cashier to a lawyer.

And then there is the other 5%.  Those that understand what money is and what money can do.  So how do these people see money?

Money used to be a certificate that allowed a redemption in a certain amount of a particular yellow rock.  Then this certificate was changed to reflect a certain amount of a gray rock.  Nowadays, the underlying value of our money certificate has changed.  Please note, if you think I am gearing up for an argument for why we should go back on the gold standard, you are going to be surprised.  Fiat currency is no dirty word to me.  It is quite clever, in fact.  When a corporation wishes to finance activity, it can do so based on its potential revenues.  When a country wants to do the same, it does so based on its tax revenues.  The U.S. dollar, for example, may be stronger than another currency because it has a stronger ability to generate tax receipts.  This is actually a better system, in my opinion, than attempting to value it in terms of a physical intermediary with little utility like gold.  Let gold be a commodity, as it is, and let currencies have their own value just the way that stocks have their own value.

But yet, there is a circular logic here that causes much confusion.  If dollars are valuable because of their ability to obtain other dollars, then why do they have any value more so than the paper they are printed on?  Well, like the stock that has underlying assets that make it not just a piece of paper,  so too does currency have an underlying decree:  That paper is legally declared tender, and that debts are reinforced by legal measures.

Here is the key factor.  Money would be completely useless if debts were not enforced.  Imagine:  You go to the grocery store, buy everything on credit, and simply not pay it.  The entire structure of the currency hinges on this aspect.  Money is, in essence, debt.

Because debtors are obliged to make every effort to pay their creditors, the creditor's money is, in essence, his ability to command a portion of the labor from the debtor.  The creditor's money has become the debtor's obligation.

In essence, every dollar, euro, or yen you have in your pocket is your claim on the labor of others.  The world owes you for something you've done.

Now, let's look at the 95% and the 5% again.

The 95% have a limited understanding of what money is and what it does.  Money, they presume, lets one buy a new haircut, get a new car, move into a bigger house, or buy a vacation home.  They provide only one thing-  Their labor.  It should not be surprising that most people sell their labor.  If one feels like it, they could give away their time and labor for free.  There is no cost, except of course the cost of not being able to sit around and watch television, that is exacted for the sale of labor.  An unwanted side effect of this is that most people sell their labor at a very low price.  The 5% are on the buying end of this labor.  They are using their money and often getting a really good deal on the 95%'s time.  As you become richer, and I know that you shall if you continue to read this blog, dear reader, you will begin to realize that your time is extremely valuable.  Using other people's time, then, will begin to become worth the cost.

The 5% of people that truly understand money use it to use other's labor.

This is not to say that if you are doing bugger all, it is time to hire a butler.  No, that will not serve anyone very well.  However, if you find yourself completely enslaved by money with little time to reflect or come up with a strategy, you are beginning to slip into the 95% of people controlled by money.  Learn how to hire a good person and how to delegate.  The people in the 5% know their time is too valuable to be spent on every single task.

Also, you may be frowning right now and shaking your head.  "That's all well and good for the 5%," you may say, "but where are we supposed to get the money to do this?"  Well, that is the other secret.  So let's review: Money is a coupon that gives us a claim on the world's labor.  This means that we have earned it because we, in turn, have provided something of value to the world.  It stands to reason that money should not flow to those who want it the most, or to those who think they deserve it, or to those who are extremely talented, but it flows to those who provide the greatest service to the world.  Even in the case of some of the most truly agitating heirs and heiresses, at some point their parents (or grandparents) provided something great to the world that the world really wanted.

It is in this mentality that you need to think while going about your daily business.  Business is about what other people want.  This will be pivotal in trying to assess the viability of companies, and it is not something that can have a numerical value attached.

My point here is that it is not you that will cause money to flow in.  It is your valuable contribution to society.  A plan of real value will attract the necessary capital to create it.  In this way, many of the 5% were able to start businesses with very little capital of their own.  This is where some knowledge of finance can be useful, but all finance really is, in essence, is a set of added tools to facilitate negotiations between investors and enterprises.

So, in summation, those that I am asserting truly understand money not only often use the capital of others to make themselves money, but they also use the labor of others to make themselves money.

There is something, some might say, immoral about this behavior-  we are, I think, as a species coded to honor and believe in the power of hard work.  And yet, economies do not exist to reward the virtuous.  As long as people require goods to function in a world of goods scarcity, the 95% to 5% dynamic will stick around.  I would like to think that additional education should be taught in school, but unfortunately all of the teachers in school are labor-sellers themselves!  The silver lining, here, is that we may eventually advance to the point where abundance will be created by technology and we will all want for nothing.

Until that arrives, though, it is important to understand how to make this world work to make you want for nothing.  And this world functions on demand.  You either need to fill it, or become very good at identifying others who can fill it.

At any rate, I know that this post is a bit rambling, but I hope it is interesting as well.  I will leave you with this thought:  Money feels very real to everyone, but there is very little that is real about it except a promise.  To truly control money, you have to detach yourself from the seriousness of money.  No, I'm not insane, bear with me-  I know that if I have no money I may not be able to eat, my house might get foreclosed on or my landlord might evict me, but to truly get in the right frame of mind you need to disregard all that.  You can deal with that shit if it comes, but if you're constantly thinking about that money will still control your emotions.  I highly recommend thinking of the acquisition of investments and ultimately money as a game.  Again, no I'm not insane.  What is a game, really, other than the ability to test your clever thoughts in a situation where you have no pressure on you?  Treat life like a game.  You will function just as well as before, even better, and you won't have to suffer the stress of investing.

Because if you are emotionally involved, hoo boy, let me tell you, investing is fucking stressful.  I don't know anybody that has ever survived investing or trading without simultaneously finding a way to shut down their emotions.  And by treating it like a game, I have revealed to you the way that I do it.  It works very well for me and it might work for you too!

Best regards, more to come.

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