Unfair Advantage -The Power of Financial Education (3 page)

School loans are different from home loans. School loans can never be forgiven. This means a person can walk away from a mortgage but not a school loan. If the student cannot find a job, the interest on their school loan accrues unpaid interest. In a few years, the debt explodes due to compounding interest, and the student is trapped like a monkey for life.

8. “I need job security.”

In this book you will learn the differences between security and freedom. Security and freedom are exactly opposite. The more security you desire, the less freedom you have. That is why inmates in maximum-security prisons have the least freedom.

Monkeys are trapped because they cling to security.

This book is for those who want freedom and security.

9. “I need to invest for the long term in a well-diversified portfolio of stocks, bonds, and mutual funds.”

This could be the worst financial advice of all. Just look at the past decade, often referred to as the “lost decade” for those who invested in stocks, bonds, and mutual funds.

At the start of 2000, the DJIA (Dow Jones Industrial Average) was at 11,357. At the close of 2010, the Dow was 11,577.

Up only a couple hundred points in 10 years. Talk about long-term losers. A 0.2 percent gain in 10 years is a joke, a tragic joke for those who followed this poor advice.

As you already know, gold went from $282 to $1,405 in the same 10 years, a 398 percent gain in 10 years.

If the DJIA had performed as well as gold, in 2010 the DJIA would have been over 45,000.

In spite of these horrible statistics, millions still follow this advice.

Does this mean you should invest in gold?

Absolutely not. This means it is best to gain real-world financial education. If you are like most people and not interested in your financial education, then do as the experts tell you to do, which is to turn your money over to them.

Remember, gold is not a good investment if you are a bad investor. Nothing is a good investment if you are a bad investor.

In this book you will find that the more financial education you have, the more money you make, the less you will pay in taxes, and your returns will go up as your risk goes down.

One day I asked my rich dad, “Do you think real estate is a good investment?”

His reply was, “I don’t know. Are you a good investor?”

I then asked, “What advice do you have for the average investor?”

His reply, “Don’t be average. Average investors make smart investors rich.”

What you invest in—whether it’s business, real estate, paper assets, or commodities—is not as important as your investment in yourself. If you are a fool, you will probably lose no matter what you invest in.

This book is about investing in your financial education.

10. “I didn’t do well in school. How can I be rich?”

While you do have to go to school to become a doctor or lawyer, you do not have to go to school to be rich or an entrepreneur.

Some of the richest people in the world did not graduate from school. Examples are Henry Ford, founder of Ford; Thomas Edison, founder of General Electric; Bill Gates, founder of Microsoft; Mark Zuckerberg, founder of Facebook; Richard Branson, founder of Virgin; Walt Disney, founder of Disney World; and my hero, Steve Jobs, founder of Apple.

Many people are trapped like a monkey today because they went to school and were trained to be workers in the E and S quadrants.

This book is for people who want to know what life is like in the B and I quadrants and what kind of education it takes to get there.

Final Word

On January 24, 2011, on the
Today
show, the following advice from
Consumer Reports
and Jean Chatsky, their resident financial expert, was offered. It is the same advice they been dishing out for years:

1. Live modestly.
   

2. Have a budget and open a 401(k) retirement plan.
   

3. Catch up. (In other words, save, save, save.)
   

4. Pay off debt.
   

5. Work longer; retire later.
   

I would never follow this advice. Not only is it bad advice, but it is also depressing advice. Who looks forward to living modestly and saving? On top of being depressing, this advice terrifies me. While this may sound like great advice, especially for the financially uneducated, I believe this is terrible advice.

In this book you will find out why a retirement plan, such as a 401(k), is the worst way to invest.
TIME
magazine in an article entitled “Why It’s Time to Retire the 401(k)” in 2009 showed why the 401(k) is a disgrace due to the way it destroys people’s wealth.

In the coming decade, the years between 2010 and 2020, the people following this advice from the
Today
show will be hurt the most. They will be whipsawed by ups and downs in the global economy and crushed by higher taxes. They will find life very expensive as inflation goes through the roof. A majority will wind up poorer as their investments in the stock market are lost to market crashes.

The greatest tragedy of all is that people who follow this old advice will miss out on the greatest opportunities in history. Tremendous wealth will be generated in the next 10 years, but not for those following that obsolete advice. Those following the old advice will watch in frustration as the rich become even richer, while life becomes tougher for them.

In chapter one of this book, I go into detail about how the crash that began in 2007 was the best financial opportunity in my lifetime. I expect the next 10 years to be even better.

Time to Let Go

A monkey cannot find freedom until the monkey lets go. The same is true for humans. Humans cannot find freedom until they let go of old, obsolete ideas.

As the old saying goes: The definition of insanity is doing the same thing over and over and expecting a different result. Yet that is what people are doing. They listen to obsolete experts dishing out obsolete financial advice, advice that has not worked. Yet, they continue to cling to those obsolete ideas.

I know it is hard to change old ideas. As they say: You can’t teach an old dog new tricks. With humans, it is difficult to change a person who clings tightly to old ideas.

This book is about the unfair advantage a sound financial education can afford anyone, rich or poor, smart or not so smart, living in a rich country or a poor country. With the World Wide Web, anyone living anywhere can gain enormous wealth in the world economy. All they have to do is adopt new ideas, be serious about their financial education, and take action.

Taking action is important because we learn by our mistakes. The idea that mistakes are bad is a bad idea. If people do not make mistakes, they fail to learn, which is why my poor dad remained poor. Rather than look at the loss of his job, the election, and his ice cream business as blessings, he looked at his failures just as a schoolteacher would and punished himself for making mistakes. He died a poor man, not realizing that his failures were his biggest opportunities to learn and to grow.

You see, in school, students who make the most mistakes are labeled stupid. In the real world, people who make the most mistakes and learn from them, become smarter people.

I am happy to report that today I make much more money than my classmates who were the “A” students and became doctors and lawyers. I make more money simply because I made more mistakes and learned from them.

I am not saying this book has the best advice for you. As Warren Buffett says, “Fortunately, there are many ways to financial heaven.” I found my way to financial heaven. It is up to you to find your way. This book is merely a guide, not an answer book, because in the real world there are no right answers. There are only answers that work for you.

The primary reason for this book is to offer you new ideas, new ways of looking at the subject of money.

There are many things that I write about that might cause you to say, “This is too good to be true.” And they are too good to be true if a person is limited in financial education and real-life experience. Yet for me they are true and can be true for those willing to dedicate more time to their real-life financial education.

Everything in this book is about real life. This book is filled with thoughts, actions, and experiences used every day in my life. This book is about the unfair advantages available to all of us if we are willing to invest in our financial education and learn. I offer these ideas with the intent of challenging old ideas and opening your mind to new ideas.

Remember, you cannot fit two cars in a one-car garage.

Just as a monkey cannot find freedom unless it lets go, human beings cannot change until they let go of old ideas. With the financial challenges up ahead, adopting new ideas is better than clinging to old ideas.

As the Industrial Age and Information Age collide, a massive transfer of wealth is under way. Those who were rich yesterday may not be rich tomorrow. Many who are middle class today, will be poor tomorrow. Just because you were an “A” student yesterday does not mean you know much today.

This book is about letting go of the past and moving into a brave new world of wealth, opportunity, and abundance.

Lessons from Sunday School

I am not very religious, yet I learned very important lessons in Sunday school. Two lessons applicable today are:

1. “Blessed are the meek for they shall inherit the earth.” The meek does not mean the weak. The meek are those who are humble enough to know they need to reduce their arrogance and be willing to learn anew.
   

2. “My people perish from a lack of knowledge.”
   

The real financial crisis is a crisis of an educational system that is old, obsolete, and out of touch with the real world. The financial crisis will not go away until our schools inform students about the truths behind jobs, work, taxes, and investing. It is time our schools stop training students to become monkeys with their fist stuck in a tree.

If we don’t teach people about money, we will have many more people like my poor dad, a very good, well-educated, hard-working, and honest man, but a man who died angry at the rich and expecting the government to take care of him.

It is time we set people free. Financial education can do that.

Good luck reading this book, and may you gain more knowledge, because knowledge is real money.

Chapter One - UNFAIR ADVANTAGE #1: KNOWLEDGE

What Should I Do with My Money?

FAQ (Frequently Asked Question)

I have $10,000. What should I do with it? What should I invest in?

Short Answer

If you do not know what to do with your money, the best thing to do is not tell anyone.

Explanation

If you do not know what to do with your money, there are many people who will tell you what to do, which is, “Turn your money over to me. I’ll take care of it for you.”

The biggest losers during the latest financial crisis were people who turned their money over to people they trusted.

Longer Answer

Your level of financial education determines what you do with your money and how you invest.

Explanation

Without financial education
, your risks go up, your taxes go up, your returns go down. People without financial education traditionally invest in a home, stocks, bonds, mutual funds, and savings in a bank. These are the riskiest of all investments.

With financial education
,
your risks go down, returns go up, and taxes go down. In other words, you can make more money with less risk and pay less in taxes. The problem is that you cannot follow traditional financial advice or invest in traditional investments.

What This Book Is About:
With very high-quality financial education,
money flows in rather than out. You can pay zero in taxes and earn millions with very low risk by using other people’s money in good or bad economies. This is an extreme unfair advantage.

Who Do You Call for Financial Advice?

In 2007, the world awoke to a new word: subprime. As the financial world began to shake, once-respected financial giants began to wobble. Some collapsed into a pile of rubble.

On September 15, 2008, the Lehman Brothers investment bank declared bankruptcy, the largest bankruptcy filing in U.S. history.

Also in 2008, Merrill Lynch, the largest stock brokerage firm in the United States, went bankrupt and sold itself to Bank of America. The irony is that Merrill Lynch was the firm millions trusted with their wealth, the firm millions looked to for financial advice.

In 2011, all is well at Merrill again. On their website, they promote contacting “a financial advisor to help you rebuild your assets today.” Notice the word “rebuild.” An intelligent question might be, “Why would anyone have to rebuild?” If you lost money, why would you give them more money?

AIG, Fannie Mae, and Freddie Mac are still in serious trouble. Even Warren Buffett, reportedly the world’s richest and smartest investor, and his firm Berkshire Hathaway took substantial losses in the crisis. In fact, it was the Moody’s ratings agency, an agency he controls, that issued AAA ratings to subprime mortgages and sold these toxic mortgages, aka derivatives, to governments, pension funds, and investors throughout the world. Selling subprime debt packaged as AAA prime debt is also known as fraud. Buffett’s firm was instrumental in triggering this global crisis, yet the world still looks to Warren for fatherly investment advice. On top of that, the companies he controls (Wells Fargo, American Express, General Electric, and Goldman Sachs) received billions in taxpayer bailout money after the crash. Is this Warren Buffett’s real secret to being the world’s smartest investor?

Also during this crisis, millions of people lost their homes to foreclosures. Millions more are upside down, which means their homes are now worth less than their mortgages.

In 2010, Boston College released a report stating that Americans are $6.6 trillion short in their retirement funds. Their study claims that losses in retirement accounts and home values will leave Americans short of money for retirement. If they cannot afford to retire, what will they do when they can no longer work? Push a shopping cart and live under a bridge? What happens if their health fails? Who takes care of them?

Milliman, Inc., a Seattle-based consulting firm, reported that defined-benefit pension plans of the 100 largest corporations lost $108 billion in August 2010. That is a huge loss in just one month. This means Americans who felt safe because they worked for a company that had a DB plan, a defined-benefit pension plan are in trouble. They might not receive that guaranteed paycheck for life.

Most workers in the United States have a DC plan, a defined-contribution benefit plan, such as the 401(k). A DC plan means that their retirement depends upon how much is contributed to the pension plan. If there is nothing in their plan, they receive nothing. If the plan runs out or is wiped out, again they receive nothing. If the stock market is down, workers with DC plans are in very big trouble. Rather than retirement being a dream, retirement might turn into a nightmare.

CalPERS, the California Public Employee’s Retirement System, is an agency of California’s government and manages pension and health benefits for more than 1.6 million public employees, retirees, and their families. In other words, there are a lot of people counting on CalPERS for their financial security.

Unfortunately, it has a reputation as the one public pension that
lost more money than all the others combined. Some people say it is the most corrupt and inefficient public pension fund in the United States.

In 2010, Stanford University published a warning stating that CalPERs and CalSTRS, the University of California Retirement System, are collectively unfunded by $500 billion dollars and have engaged in overly risky investments.

Half a trillion dollars is quite a shortfall. There goes the myth of obtaining job and retirement security by working for the government.

The Smartest People in the World

You get my point. Unless you have been living under a rock since 2007, I believe you know the story: the story of how the smartest financial brains in the world, the people we look to for financial wisdom, the men and women who went to the best schools in the world, supposedly receiving the best financial education in the world, caused the biggest financial crisis in world history, a crisis some have called the New Depression.

The question that arises is this: If they’re so smart, if the leaders of our financial institutions received the best financial education money could buy, why is the world in such a financial crisis? Why are the rich getting richer, the poor getting poorer, and the middle class shrinking? Why are taxes going up and governments going broke? What happened to the jobs? Why are wages going down as inflation goes up? Why are so many baby boomers, people who followed the advice of the best-educated brains in the investment world, now afraid of running out of money during retirement? Why are so many young people, graduating from school under massive debt, unable to find jobs, jobs that can pay off their student loans? The coming crisis will not be the real estate bankruptcies. The next debt crisis will be defaults on student loans.

Could the problem be the poor quality of our leaders’ financial education and the lack of financial education of the masses?

What Is Financial Education?

Today, millions of people are finally saying, “We need financial education in our schools.” Yet if the brightest minds in the world got the best financial education money can buy, why are we in a massive financial crisis?

A better question is: What is financial education? If schoolteachers do not know what financial education is, how can they teach it? How did the graduates of our best schools—Harvard, Yale, Princeton, Oxford, and Cambridge—guide us into the world’s biggest financial crisis? Why is the University of California teacher’s retirement plan in trouble? Did those who manage that retirement plan really receive a financial education? Are kids in schools receiving a financial education? Are schools preparing students for the real world of money?

Before describing what I believe financial education is, I need to point out the differences between
education
and
training.

In 1969, I entered U.S. Navy flight school at Pensacola, Florida. After three years of flight school, I was flying in Vietnam. Looking back upon the experience, I now realize that I was a
well-trained
pilot. I was not a
well-educated
pilot.

I say that I was well trained because I was trained to fly the helicopter gunship. I had no education as to why we were at war in Vietnam. I did not have any geo-political-economic education. I did not know that Vietnam had been at war for over a thousand years. France and the United States were the last in a long line of imperialist countries trying to conquer Vietnam. I did not know that the war I was fighting was their thousand-year war of Independence, as the Revolutionary War was America’s fight for independence from England.

All we were told was that we were the good guys and the communists were the bad guys. I did not know what a communist was. All I knew was that we wore white hats and they wore black pajamas. We believed in God and communists did not. I did not know we were fighting for oil and control over the resources of Vietnam and the rest of Southeast Asia. Sadly, I see the same thing going on in Iraq and Afghanistan today.

Also, I had no idea how to design, build, or repair a helicopter. I was not educated in metallurgy, design, electronics, fuel, or weapons systems. I had no idea how to fix my helicopter. All I was trained to do was fly, shoot, and follow orders. Press the right button, and people died. Press the wrong button, and I died. By the end of the war, I was very
well-trained
pilot but not a
well-educated
one.

Potty Training

In the real world, people
toilet train
their children. They do not
toilet educate
their children. People train their dogs. They do not educate their dogs. The term “Pavlov’s dog” has come to signify the difference between education and training. In simple terms, ring a bell and Pavlov’s dogs salivated and got hungry, even if there was not any food around.

For those not familiar with the term “Pavlov’s dog,” the term is derived from the famed Russian physiologist and Nobel Laureate Ivan Pavlov (1849–1936), who was recognized for his research on the digestive system of dogs. He is credited with the term “conditioned reflex.” Pavlov’s dog is used to describe someone who merely reacts to a situation automatically instead of using critical thinking.

Modern advertising uses conditioned reflex extensively. Those of you from my generation may recall that Winston cigarettes had a tag line that went, “Winston tastes good ___ _ ______ ____.” At home, we filled in the blanks, “Like a cigarette should.” Or “How do you spell relief?” Our answer, “R-O-L-A-I-D-S.” Advertisers trained us like Pavlov trained his dogs. Today, Aflac uses a duck to keep them on our minds; Geico insurance uses a green gecko to keep them on our minds. The financial-services industry does the same thing. People work hard for their money and, without thinking, turn their money over to banks and pension funds.

In many schools, school administrators are proud to say they have
financial education
in their schools. In reality, it is
financial training
, not financial education. Just as Pavlov trained his dogs to salivate even if there was nothing to salivate about, millions of highly educated people are
trained
rather than
educated
when it comes to the subject of money. For example, I will give you a test to see if you can fill in the blanks:

Go to school, get good grades, and get a _ _ _.

• Work _ _ _ _ .
  

• Save _ _ _ _ _.
  

• Buy a house because your house is an _ _ _ _ _.
  

• Cut up your credit cards. Get out of _ _ _ _.
  

• Live _ _ _ _ _ your means.
  

• Invest for the _ _ _ _ term in a well-_ _ _ _ _ _ _ _ _ _ _ _
  

portfolio of _ _ _ _ _, bonds, and _ _ _ _ _ _ funds.

Many educated people think this is financial education. On television, it is common to see so-called financial experts saying, “Go to school. Get a job. Save money. Cut up your credit cards, and get out of debt. Your house is an asset. Live below your means. Invest for the long term in a well-diversified portfolio of stocks, bonds, and mutual funds.” This is not financial education. This is financial training, the same training that Pavlov used on his dogs and that advertisers use to sell cigarettes, antacids, and insurance.

When the 2007 financial crisis hit, many of those who followed this financial training believed that they were financially educated and lost everything: jobs, homes, retirement, and savings. Many marriages broke apart.

To make matters worse, schools getting on the financial-education bandwagon continue to bring in bankers to promote the wisdom of “saving money.” In the name of financial education, schools also bring in financial planners who train young minds to believe that “investing for the long term in a well-diversified portfolio of stocks, bonds, and mutual funds” is the smart thing to do. Mindlessly sending your money to complete strangers is not the end result of good financial education. It is the end result of dog training.