Experts Pointing Fingers...

“The Experts Are Wrong” by Richard Lehmann – from Forbes.com
http://www.forbes.com/personalfinance/forbes/2008/0901/112.html?fc_c=1228466x2367036x117806771

Ok, there is always room for debate about what the government should or should not do. But I think Mr. Lehmann has clearly passed that point and entered into a whole other discussion. I mean, the word "hubris" is still in the English language? Right?

According to Mr. Lehmann
"We don't allow countries to fail; that's why we created the International Monetary Fund."

Now, perhaps you are wondering why I mentioned "hubris". Let me explain. According to dictionary.com, this is the definition of hubris: “excessive pride or self-confidence; arrogance.” If that is as far as you read, you still may not understand my comments, so let me give you something else from the definitions provided at dictionary.com. "Hubris - 1884, from Gk. hybris "wanton violence, insolence, outrage," originally "presumption toward the gods," of unknown origin.

You see, to someone like Mr. Lehmann, the government and this amorphous thing called "the taxpayers" are able to part the waters of the Red Sea, walk on water, and prevent entire nations from being destroyed by their own self-destructive behaviors. It is hubris to presume that “the government” can act like a god, and prevent the natural consequences of a particular behavior.
According to Mr. Lehmann:
"A second issue, closely related to the first, is the concept that capital owners who take excess risk should face "moral hazard." This concept seems to have religious rather than economic roots, since it requires that those who fail be made to suffer and not be rescued by taxpayers. The concept is admirable, but in reality it doesn't work. Ownership of capital in today's markets is divorced from the management of it. "

Ummm.... for those who missed it, there are 2 nuggets I want to work on from this part of the paragraph.

Nugget #1:
"Ownership of capital in today's markets is divorced from the management of it."
No, not really. You see the owners are indeed mostly made up of pension or mutual funds. However, each individual with money in a 401K or Mutual Fund has a choice to be in an aggressive growth fund or a less aggressive " income" type of account or fund. If you are close to retirement age or are living off your retirement funds already, and you have more than 1/4 of your "retirement" in an aggressive growth fund - you deserve to lose your capital. Feel free to disagree with me, but this is how I see investment.

Pension funds are a bit more complicated and vary greatly, but even this issue comes back to a very simple point. Before the government changed the law, traditional pension plans were forbidden from investing in the stock market. Therefore, it is because the government changed the law that the ownership of capital or stocks is divorced from the management of it for traditional pensioners.

Nugget #2:
"...since it requires that those who fail be made to suffer and not be rescued by taxpayers."

Pardon my language - Why the HELL are the TAXPAYERS made to suffer so they can rescue those who fail?

I give you Bastiat: "When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." --Frédéric Bastiat

I have one more definition for today's thoughts - risky: "Accompanied by or involving risk or danger; hazardous:"

Investing money in emerging markets is risky. It makes no difference if the emerging market is India, China or a Telecommunications company. It is a new market, people might buy the product from India, China or the technology of Telecom, but they may not. That is the risk you take when you put your money into such “emerging markets.” You expect the market to grow, and you want to make money by owning part of the businesses that will grow in these markets. Notice that the word “grow” is used to describe how you make money in this market. That is why most Mutual Funds call their funds with these kinds of stocks “Growth Stock Mutual Funds.” There is reward, but there is also risk.

This is why I feel that if you are about to retire or already living on your retirement funds, and you have more than ¼ of your retirement principle invested in aggressive growth funds, you deserve to lose your money. It is very simple, the higher the risk the greater the reward. That is why the old nag running in the race pays out “50 to 1,” and the prize stallion pays out “1.5 to 1” or “2 to 1” if you are lucky. In horse racing or any other form of gambling, you look at the odds. To bring this back to the Mutual Fund / 401K discussion, if your money is in an aggressive growth fund, the payout or rate of return is pretty high, but the risk is also high.

What Mr. Lehmann is proposing is really as simple as passing a law that requires the horse racetrack to pay out the “50 to 1” bets on the old nag even if she loses the race. Because to do otherwise, “seems to have religious rather than economic roots, since it requires that those who fail be made to suffer and not be rescued by taxpayers.”

Again, you may disagree with me about these ideas. But if you don’t understand where your money is going, or why it is paying off such large returns, how are you any different than the person at the race tracking putting $100 down on the old nag? It is YOUR MONEY! If you do not understand where it is going and why it is going to pay… you should not put your money in that investment. I don’t care how nice the salesman is about telling you this is a good deal. He is still telling you, “don’t worry about how this works, you stupid, backwoods redneck – just give me your money & I’ll make you rich!”