Thinking of Money Once Again
By Steve Gillman
I find myself thinking of money often, especially since I
started this website. It is easy to get caught up in the simple
ideas surrounding money. For example, we too easily assume that
it is either not important or is worth almost any effort. Neither
is true, of course, and the truth is always a bit more subtle
than we would like. With that in mind, I want to present a few
ideas and facts that may be new to you.
Investing From Another Perspective
Nassim Taleb, in his book The Black Swan, suggests
that the usual portfolio of stocks and other investments people
buy into with their retirement accounts are not nearly as safe
as we like to think. Of course we know that because of recent
history - but he wrote this book on uncertainty in early 2007.
We also commonly suffer under the illusion that the stock market
must always come back. The idea that real estate always goes
up in value is another of these delusions we have suffered under
But what do we do about the unpredictability of all markets?
How do we invest? One interesting idea that Taleb had in his
book was to put almost everything in the safest possible places,
and get very aggressive with the rest. In other words, you might
put 95% of your money in government paper or even bank CDs, and
then buy super-leveraged options with the rest of the money.
The basic idea here is to expose yourself to the possible
huge returns available from unexpected events (it is reported
by some that Taleb made $40 million dollars in one day when the
stock market crashed in October of 1987), while playing it safe
with most of what you have. Most people think they are playing
safe with mutual funds and blue-chip stocks in their IRAs and
401Ks, but as we have seen, these "safe" investments
can drop by as much as 50% in a short time.
Most people, then, are exposed to huge potential losses in
a short time, while having no opportunity for fast and huge gains.
Stocks can drop dramatically, but there are almost no instances
of market moves that can quickly make you ten times what you've
invested. Meanwhile, Taleb's strategy allows for no great losses
at all (unless governments and banks all fail - a possibility),
while it makes possible the occasional big gain. Don't take this
as my advice, though - and I have not yet tried the strategy
The concept of "revealed preference" is that people's
stated preferences are not as predictive as their past behavior
and choices. For example, if I were to ask a man what he values,
he might list a few things such as being with his children, traveling,
and becoming financially independent. But what if i look at how
he spends his time and money? That might reveal a different set
of priorities. He might spend little time with his children,
work at jobs that don't allow much travel, and never take the
simple steps necessary to start becoming more financially independent.
What do you really value? You might want to look at how you
actually spend time and money. Those expenditures, to some extent,
are a more honest reflection of your preferences.
Who Is To Judge?
We - meaning most of us humans - are quick to judge how others
spend their money. But is that fair? If a man can afford to spend
a million dollars to take a cruise in space, is it right to judge
him harshly just because we might have spent the money differently?
How would we spend the money, and does our answer correspond
with how we are spending what we have now?
For example, you or I might think of the "good"
that could be done with a million dollars. But then virtually
every one reading this lives in a house that is larger than necessary,
indulges in habits that are costly and unhealthy, and spends
money on unnecessary things. If we didn't spend money in these
ways, think of the good that money could do instead. Truly,
we may need more than the "necessary," and there is
no clear line here, so why judge? If we prefer another way to
use money, we are free to start with ourselves.
The Unpredictable Results of Capitalism
The fact that I generally favor capitalism versus other options
does not mean I think it always encourages the best results in
every case. For example, consider one of the ways that businesses
target various price-points with a product. You see, I may be
willing to pay $89 for something, while you might only pay $39
for the same thing. If the cost of production is $9, a manufacturer
would love to sell it at both prices to get the maximum profit.
But how? Here is an excerpt from the "More Secrets"
section of my ebook "You Aren't Supposed To Know,"
a part of the Secrets
184. Pricier Models May Cost Less To Produce
Think products always have higher prices when they cost
more to produce? Not so. Often the cheaper product actually costs
the manufacturer more to produce. For example, a few years ago
IBM sold their higher-priced "LaserWriter" and their
lower-priced LaserWriterE. The latter was simply the former with
a chip added to slow it down. The extra chip meant it cost more
to make, but the resulting slower printer gave customers reason
to buy the higher-priced printer.
This was apparently the most effective way for IBM to "price
target" their customers. Adding a chip to slow one version
down was likely cheaper than actually producing two entirely
different models for high-end and low-end customers.Software
companies sometimes do this, making a "professional"
version of a piece of software, and then modifying it to remove
some of the functionality, to create the cheaper model.
Now, if you understood this, you know that companies sometimes
have to purposely damage a product and make it more costly to
produce in order to sell to buyers who will pay more and those
who are cheap. Making something less useful and less efficient
to produce is not an outcome that economic theorists would predict
for capitalism, but there it is.