August 22, 2009
Yesterday (8/21) afternoon, I watched part of Oprah Winfrey's daily talk show featuring Suze Orman giving financial advice to families and significant others. She went on to deny a young man his leisure-filled lifestyle that his young woman wife objected to, then she denied a middle-aged couple's planning to send their school aged daughters to future private colleges, then she denied a young engaged couple their plan to have a nice wedding, while on the other hand, she approved a middle-aged woman's divorce from her live-in, half-estranged ex with their child or children caught in the middle.
I disagreed with the assumptions and premises behind Suze Orman's financial decisions to deny the dreams of families and significant others. The reason why I disagree with Suze Orman is because while she adds and subtracts dollar figures to come to her decision on other peoples' lives, she does not factor into the equation the aggregate economic unit that produces financial returns.
I equate economics and finance to the post-World War 2 movie: "It's a Wonderful Life". The reason why this movie makes sense to me is because the protaganist character George Bailey played by actor James Stewart invested his time, business and faith in the people of his fictional town of Bedford Falls. Bailey believed that his town would prosper by people living in accordance to their dreams. Unlike Suze Orman, Bailey approved mortgages and loans to families and small businesses that families shopped at. (There was no Wal Mart back then to undermine George Bailey and his Buildings and Loans institution). People were the end product in George Bailey's view of the World, while finance was the means to that end. Bedford Falls was a nice community, George Bailey had a loving wife and children, neighbors cared about him during his time of crisis, and the World was a better place because a good man cared about good people.
There are 2 sides to an economic and financial coin. George Bailey represents the tails' side, which is that small business needs customers in order to succeed. Therefore, a small business or community should invest in people and see them as the end product in order to stay in business and grow. Because, without customers, there is no business for the small business or community. Small businesses go out of business and community's wither into ghost towns. Any Mayor or Town Manager worth his salt knows that his or her city residents or town folk are to be invested in with good schools, safe streets, nice homes, and community spirit. The people will then return on the city or town's investment with educated, well adjusted, and happy people who will stay, live and work in and around where they live.
The heads side of the economic and financial coin is represented by the famous former CEO of General Electric (GE) Company Jack Welch. This is someone Suze Orman would approve of. To Jack Welch and Suze Orman, people are seen as an input into an economic and/or financial formula to produce optimal efficiencies and profits for either themselves or their shareholders. To illustrate, the following is a graph of Jack Welch's tenure as CEO at GE:
To break down CEO Jack Welch's economic and financial outcome in the context of Suze Orman's analysis, Jack Welch made a lot of money for both himself and his shareholders! On April 4, 1981, if I invested $10,000 (1981 dollars) in GE, and then cashed out my investment about 2 decades later on September 7, 2001, I would have netted myself approximately +$406,000 pre-tax, nominal (non-inflation adjusted dollars) plus the additional $10,000 I invested.
I came to these numbers by using the envelope financial formula: The rule of 72. To ballpark approximate how much time it takes for one's money to double via the Annual Percentage Yield (APY), one uses the # "72" and divides the long-term average yield -- in this case 19.6%. 72/19.6 = 3.7-years for my money to double. I then take the $10,000 and double it 5.3 times for Jack Welch's 20-year tenure as CEO of GE. Because of compounding interest (or reverse amoritization for debt such as one's mortgage, student loans, car loans, credit car bills, etcetera), I doubled the $10,000 to $20,000 for the first of 5 times. Then, I doubled the $20,000 to $40,000 for the second of 5 times, Then, I doubled the $40,000 to $80,000 for the third of 5 times. Then, I doubled the $80,000 to $160,000 for the fourth of of 5 times. Then, I doubled the $160,000 to $320,000 for the fifth of 5 times. Then I took 30% of $320,000, which is $96,000, for the .3 in 5.3 and added $96,000 to $320,000 to come up with the approximation of +$406,000 net return on my $10,000 investment for a total pay check of +$416,000.
I know that "the envelope rule of 72" does not apply to everyday business practice and is only used a broad gauge in finance. There are many other complex formulas and spreadsheet designs that I am untrained in to give a much more exact and accurate forecase and statement of return.
In heads side of business, economics and finance, people are seen as liabilities to be limited and, if possible, eliminated. The rule goes that over the long term, all fixed costs (or people, i.e. children) become variable costs (or people, i.e. adults) and a good businessman finds ways to reduce and eventually eliminate, if possible, any and all variable costs. When costs are reduced and limited, earnings are optimized, and stock prices are maximized. The focus of a good businessman like Jack Welch is to see people, in this case GE Workers and plants, as costs to be limited and, if possible, eliminated, so that his corporation he is running will report more in earnings, and his corporation's stock prices will sell at a high or maximized p/e ratio. Money, NOT people, makes more money, and GE becomes a financial superpower among its competitors, which GE buys up, building their economy of scale, sells, shedding costs while making a profit, and building more capital for its future business growth.
So there we have the paradoxical economic and financial coin. On the heads' side, people are costs to be reduced and eliminated for economic and financial benefit. On the tails' side, people are to be invested in and products for economic and financial benefit. The mistake people, such as Suze Orman, make is that they only see the heads' side of the financial coin. That is like only looking at the "man on the Moon" side of the moon. One misses the entire beauty of our nearest neighbor in space that keeps Earth's 4 seasons and climate steady, thereby allowing us to harvest food and live bountiful lives.
Suze Orman does not add up because she is myopic when it comes to the dreams of people, their respective partners, children, and communities. What may seem like a "waste", "inefficiency", or "impractical" to someone with Suze Orman's view of life via economics and finance, is really what keeps micro-economic units in place. By spending money on one's significant other instead of planning for what casket one will lie in for eternity decades from now, that person is investing in another person and building a life where they will share resources, finances and a home together. By spending money on a community's public school, a Town is investing in families, especially children, who will want to stay in that community and continue to re-invest there. By spending money on safe street, people will be able to enjoy their community, shop at small businesses (even Wal Mart) that serves family units, and make their Town look attractive with nice homes with gardens, trees, flowers, and art. The tails' side of economics and finance is that it benefits an economic unit such as family, small business, Town, community, and people to invest in each other. That was the economic and financial point of the aforementioned movie: "It's A Wonderful Life"! The people are the foundation or base upon which the top of the coin rests.
In my life, the biggest economic and financial decision that I will ever make is deciding if I will marry a nice woman. That decision is greater than all of the income, assets, wealth, or lack thereof, that I will ever have put together. I estimate the cost of marriage over the entirety of my life to be $2 million. If my future wife and I decide to have children, I would add another $1 million to that figure. If I stay single and along my entire life, I estimate my adult costs to be $1 million dollars. If I was Suze Orman, I would say to myself, by being alone and denying people their dreams, I will save myself $1.5 million - $ 2 million! When I die alone and lie in my cold gold-plated casket, I will be a millionaire. That is a scary thought, and Suze Orman is a scary person!
- Jonathan Melle
"Say it ain't so, Suze!"
By Charles Wilbanks / CBS News MoneyWatch / January 25, 2013
In Helaine Olen's new book, "Pound Foolish," personal finance luminaries are taken down a few notches. It's a juicy read, but also something more: Olen provides an analysis that should make many people in the financial services industry deeply uncomfortable.
Olen, a former personal finance writer herself, delivers a scathing critique of the gurus who urge personal austerity on the one hand and stock tips on the other to make us the millionaires next door. It's a nice story they sell -- that by skipping the morning visit to Starbucks, finding a smart stock trade or investing in the right piece of real estate, people can catapult themselves into the 1 percent. Or at least arrange a comfortable retirement nest egg.
The trouble is, Olen says, these swamis often don't practice what they preach, their systems don't work as advertised, and they tend to benefit Wall Street more than the Average Joe. Consider for a moment that Orman, who commands $80,000 per speaking engagement and likes to fly in private jets, has had debt problems herself and has flip-flopped from urging people to avoid stocks to forming a partnership with a stock broker that pushed her typically unsophisticated readers into high-risk investments.
"Orman might claim the mantle of anti-poverty crusader, but she puts the onus for our financial security on us and us alone," Olen writes.
There's also Dave Ramsey, a "preacher of the fiscally righteous life," as Olen calls him, who thunders against debt in any form as moral failure. Ramsey, who before he found religion and began railing against the evils of mortgages ran up such a huge tab himself that he sought the refuge of personal bankruptcy, sells people on the notion that if they just work hard enough they can (and should) avoid bankruptcy themselves. Never mind that bankruptcy sometimes can be the least odious solution to a family's financial woes.
Or take best-selling author David Bach's admonition against indulging in the luxuries of life big and small -- foregoing a daily latte is his vivid example of wasteful living. Instead, he urges saving that money and investing in the stock market. Olen points out that Bach, who has been touted by Oprah Winfrey, had a lucrative sponsor for his message: mutual fund company Van Kampen Investments.
Meanwhile, Orman and others who have echoed Bach's theory of frugality tend to wildly overestimate the potential gains that can be had from investing all that latte money. In her book "The Courage to be Rich," Orman took up the coffee cudgel, extrapolating from saving the $2.75 a day for a cup of Starbucks for 20 years "and investing at 10 percent" to calculate that a person could emerge with $57,504.
There's a problem with that, though. In comparison to her ordinary investors, even in the currently surging stock market, few hedge funds have been returning 10 percent.
Olen's basic message is this: The American mythology of flinty self-reliance is largely a corporate-funded scam. The reality is that we are living in a world in which it is increasingly hard for responsible people to make ends meet. Working people face income stagnation, while at the same time they must account for inflation in healthcare, education, housing, food and other necessities. Throw in a job loss, an illness -- any of the unexpected crises that can drain a bank account -- and people can find themselves in a situation that no amount of frugality and saving could have accounted for.
"We do not live in an economic environment that will permit mass personal financial progress, no matter how well meant the guidance or advice," her book says. "As a result, the success stories offered up by the gurus of personal finance were individual victories in a society sliding economically downward."
In a recent interview with CBS MoneyWatch, Olen noted that "50 percent of the population is living paycheck to paycheck. That's a lot of people who are deliberately messing up, or are so stupid they are messing up. It just doesn't make any sense. "
Olen said that at one of Ramsey's tent revival-like seminars, she pulled people in the audience aside and got their stories. "I would ask them where their debt was from and I would hear about a son who had had a car accident, about job losses, about a health care crises. These weren't people who had lived beyond their means and screwed up -- but they thought they had."
Other chapters in the book should also make Wall Street uncomfortable. These include the problems people face planning for retirement, from annuities that are complicated and unwise, to a reliance on the stock market and all its turbulence in retirement accounts. There is the idea propagated that women are particularly unschooled and ill-suited to financial decision-making ("Both sexes are abysmally financially ignorant," Olen said).
But the theme that runs throughout the book is one that is deeply political and rooted in a morality that is a sharp departure from the libertarian ethos drilled into Americans since the Reagan years.
"It's not that we shouldn't live within our means, " she said. "We should. But what I realized writing this book is that we get sold this idea that we can do it ourselves. This tough, tough talk -- 'You're on our own and you can do everything' -- is an attempt to say that we're not responsible for each other. We've forgotten about the quality of mercy."
As she takes down the faith healers of personal finance, Olen provides a small dose of her own advice. But it isn't the sort that promises a clear and easy alternative. She urges people to discuss their money and money problems openly, both individually and as a country. One possible byproduct of such a discourse: political changes that would leave the deck less stacked against the middle class.
"If honesty about our personal prospects helps us as individuals, imagine what such a thing could do for us collectively," Olen writes. "It could empower us to insist on changes that will benefit us all."
- Jonathan Melle
- Amherst, NH, United States
- I am a citizen defending the people against corrupt Pols who only serve their Corporate Elite masters, not the people! / My 2 political enemies are Andrea F. Nuciforo, Jr., nicknamed "Luciforo" and former Berkshire County Sheriff Carmen C. Massimiano, Jr. / I have also pasted many of my political essays on "The Berkshire Blog": berkshireeagle.blogspot.com / I AM THE ANTI-FRANK GUINTA! / Please contact me at firstname.lastname@example.org
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