The Sensible Flipper …

No, we are not talking about sweet, intelligent, trained TV dolphins – for those of you old enough to remember the show …

… we are talking about people who buy a piece of real-estate, merely to (perhaps clean it up a little or even do a ‘gut rehab’ then) resell it at a (hopefully) decent profit.

On a larger scale, ‘flippers’ are called ‘developers’ or ‘property speculators’.

In all cases, we are not talking about a Making Money 101 – or even a Making Money 301 – INVESTMENT strategy, we are talking about a Making Money 201 INCOME strategy a.k.a. a true BUSINESS.

Dustbusterz says:

i was just watching your video on what it takes to earn 1 million in 20 years and how time can be the determining factor. in that video, you mentioned flipping real estate. you said you could build up to where your flipping more and more properties(using this as a business). your warning said watch out because the market could crash leaving you high and dry. but i believe( and correct me if i am wrong here) those who are smart( read educated) in real estate should never have to worry about such things as crashing real estate, because they would know exactly where to buy and when to buy and how to buy to avoid this situation. you see, even when the market is crashing ( such as is happening now) you can still find deals areas that are appreciating not crashing.that might take you out of one stater or even out of the country. but you can always find property that is going up in value. that will make you money.

It’s funny, if we had read my previous article – or even this one – a year or two ago, we would be in one of two camps:

1. I like the idea of flipping: in which case, we would be nodding “yeah, yeah … be careful … yadayadayada” all the while looking for our first/next flipping deal, or

2. I don’t like the idea of flipping: we would be reading with the idea of confirming our already ‘set in concrete’ idea that flipping is bad.

But, sitting in the current market, we’re all nodding and saying “how could those idiots not see the crash … they deserve what they got …”

The reality is that those who DO flip put themselves at risk of loss …

… but, so do those who DON’T: they run the risk of loss of missed opportunity.

My point being that there is nothing inherently wrong with developing, or even flipping; they both serve a purpose, they both generate chunks of cash where none existed before; they are both legitimate businesses for those who are so inclined.

That just doesn’t happen to be me …

Just to remind you, the problem with developing/flipping is not one of lack of market knowledge – although, you HAVE to understand exactly what you are getting into to have any chance of success – it’s getting caught out by sudden market changes.

In essence, you are timing the market – hoping that the market stays on a flat-to-upwards trajectory for the whole time that it takes to:

– Close your acquisition

– Make whatever developments or improvements you deem necessary

– Re-market the property / properties

– Close your sales

This takes weeks to months to years depending upon the scale of the project … which leads to another point; the larger the project, the more risk because time is elongated. Markets can change dramatically in just months and certainly years (weeks is another matter, entirely).

The motivator for any flipper/developer is profit – in many cases, this is their INCOME, remember? And, they usually roll one closed deal into the next bigger open deal in a rising market …

… but, we know what eventually happens to rising markets.

However, eventually even the down cycles run their cathartic course … including the current real-estate crash.

Sooner or later, the time will be ripe in most US markets – and, is certainly ripe already in some – for the flippers/developers to come back out of hibernation … or bankruptcy.

Here’s how to do better next time:

1. If you are working on single deals – this one is easy: make sure that you can rent out the property and HOLD for as long as it takes, in case you aren’t able to flip it quickly. Your only risk then is lost opportunity: while you are holding this deal, you may not be able to get onto the next one.

2. If you are working on larger/multi-property deals – develop/rehab with the idea of retaining a proportion of the units for yourself (as long term, buy/hold rentals). Obviously, you are ‘buying’ these from yourself at ‘cost’, so a profit margin should be built in.

If you plan your largest deals correctly, you shouldn’t need to worry about the market ‘going south’ on your most recent deal … you should be protected (e.g. put each ‘deal’ in a separate LLC and offer no personal guarantees, if at all possible) … this may be possible or may not.

Assuming that you can protect yourself from catastrophic loss on your latest deal, then retaining some equity for yourself (i.e. by buying a few properties out of this deal and all previous deals) ensures your long-term wealth, so that you aren’t simply rolling up all of your profits each time …

… it’s like taking some money OFF the craps table each time, because you know you won’t be able to roll the same number over and over before a 7 or 11 eventually hits, wiping you out completely.

I like to think about it this way:

– Imagine that you start with $150

– Through your first deal, you double that to $300

– Instead of buying two new $150 deals and trying to score big again i.e. to make $600 ($300 x 2),

– You split your $300 into three piles: invest one pile outside of your next deal, and buy two new $100 deals

– You split the $400 profit from these two new deals into three piles … and, so on

The next time you try anything that is speculative, try the Double-Then-Divide-Into-Three Rule … let me know how it works for you!

Horses are not for courses …

You can find this post in this weeks Carnival of Personal Finance ….

As I mentioned yesterday, I drafted yesterday’s and today’s series of two posts before the latest round of stock market crashes … it seems that with all the money LEAVING the market at exactly the wrong time – i.e. the market bottom (or, close to!) – everybody is suddenly ‘anti-stocks’ … of course, as soon as we get towards the top of the next bull market all the pro stock / anti-real-estate people will come out of the woodwork again … and, the cycle repeats 😉

There is a great argument for investing in stocks and businesses: Warren Buffett has done it successfully for 40+ years turning himself into either the #1, #2, or #3 richest man in the world (depending upon what’s happening with Bill Gates and Carlos Slim on any given day).

Warren has shepherded his company, Berkshire Hathaway to compounded returns averaging 21% for the past 20+ years doing the one thing that us ‘mere mortals’ have difficulty doing: picking ONE horse and riding it all the way home.

What we seem to prefer to do is invest in Mutual Funds, the stock market equivalent to following all the advice of a ‘top tipster’ in the Saturday Racing Guide for either the horses or the dogs (how many of these newspaper ‘tipsters’ are rich, anyway? If not, how good are their tips, really?) …

… or, we plonk our money into Index Funds, which is the stock market equivalent to betting on every horse in the damn race!

By betting on every horse or – in this case – stock, we are aiming exactly for the average result … for the time frame that we manage to stick it out.

But, wouldn’t we get better results if we simply bought all the stocks in the Index Fund that are above average and ignored all the others? 😉

Simple and powerful strategy, no?


We know that the logic is there: by simply NOT buying the dogs, and concentrating on the (even slight) favorites, we push the odds markedly in our favor.

But, when it comes to stocks – or horses and dogs for that matter – the form guide, tips, and other sources of ‘best buy’ information have proven to be highly unreliable.

The past is simply NO guide to the future, so we are left with either relying on others to pick some winners for us (they will lose us money, relatively speaking, because of the fees they charge, but at least we’ll feel good about having an ‘expert’ doing our guessing for us) or ‘playing the whole card’ i.e. buying the Index Funds …

… the net result is that we tend towards the average (returns) or worse … never better.

So, quite rightly, we talk about the stock market in terms of aiming towards (but, never quite getting there) long-term average returns.

Yet, the total opposite applies to real-estate:

The pro-stock / anti-real-estate movement [AJC: I am neither; I am simply pro-profit 😉 ] points to the average return from real-estate and compares it to the average return from stocks and says “aha … stocks are better!”

Putting aside the leverage, tax, income and other benefits of real-estate, the problem is that nobody buys the whole card when it comes to real-estate …

… there is no Index Fund for real-estate!

[AJC: well, there might be an artificial ‘index tracking’ ETF that does this … but do you know ANYBODY who’s ever bought it? 🙂 ]

You either buy a Mutual Fund (technically, called a REIT) that buys a selection of real-estate for you, based upon what some inside ‘expert’ predicts will do well (after fees, fees, fees) …

… or, you buy one or more properties yourself.

You see, unlike stocks, you NEVER buy the market, so comparing average returns is just plain dumb.

There is also one other key difference:

You DO know how to pick real-estate … you have at least some experience: you bought your own house, didn’t you?

You chose a ‘nice area’, close to schools, transport, in a nice neighborhood, didn’t you? And, if you still live with Mommy and Daddy, well, they bought a nice house, etc., etc. … right?


Right there, you bought in the top half of the market in terms of growth … you just beat the (real-estate) market average!

When it comes to stocks, not one of us is Warren Buffett, so we ‘gamble’ on the performance of some market index that we don’t really understand …

… but, when it comes to real-estate, we are all like Warren Buffett – we all have the capability to pick the horse … oops, house … that will perform better than average.

And, even if we only get ‘the average’ return on our real-estate investment … we are going to do two things that we are never going to do with stocks:

1. We are going to leverage our investment – we will almost always take a mortgage on real-estate, but we will hardly ever borrow to buy an Index Fund

2. We are going to invest for the long-term – we will most likely stay in the real-estate investment for at least 7+ years, but we will most likely try and time the market (i.e. get scared and sell at the first sniff of a ‘down market’) if we buy stocks or Mutual Funds, thus absolutely killing our potential returns.

Still don’t believe me?

Then why is that conservative old banker prepared to back your real-estate acquisition with a couple of hundred grand?!

[AJC: at least until a couple of months ago … and, again in a couple of months time]

See if he’ll do the same when you want to go and visit your bookie … or stock broker 🙂

The time of your life?

It’s interesting that I drafted this post 3 or 4 weeks ago, just before the current wave of stock market crashes hit us; now, of course, I am ‘preaching to the converted’

We spoke about getting – or beating – average returns from either stocks or real-estate, but David points out: what is an average financial return?

I agree with you about the number. However, think you should use real rates of returns not some theoretical possibility. For example your number on mutual funds is 9.5%. Well actual rates of returns for individuals investing in mutual funds averaged 4.4% over the last 20 years (Dalbar, Inc. Vanguard, etc.).

So, what are the average returns for the stock market?

First, define the ‘stock market’:

Do you mean the US market? International (if so, which country or countries)?

If US, do you mean large cap (the stocks with the largest total stock market value or ‘capitalization’)? Or, small cap? Or, do you mean stocks listed one one of the alternative exchanges such as NASDAQ?

Or, do you simply mean ‘all’ stocks listed on the New York stock exchange (NY Composite), or ‘only’ 5,000 stocks (Wilshire 5000) or perhaps ‘just’ 2,000 of the listed stocks (Russell 2000)?

If ‘large cap’ do you mean the top 500 stocks listed on the NY stock exchange (S&P 500) or perhaps the just the largest 30 (DJIA)?

The point here being that there is no such thing as an ‘average return for the stock market’ … you have to decide how you want to slice ‘n dice it first!

Semantics aside, let’s pick an Index – say, the S&P 500 – how has it performed?

Pick a Number!

Here is data taken from and summarized here into the average returns of the S&P 500 for various 10 years periods from 1989 – 1998 through to 1998 – 2007:

10 years too short?

OK, let’s find an online calculator and see how the S&P 500 performs over various 25 year periods:

In case you can’t read the diagram:

The best 25 year return (since 1871) for the S&P 500 was 17.6%, but the worst was 3.1% .. yah think that might make a difference if you your whole damn retirement strategy was hinging on achieving ‘average’ returns?!

BTW: If, you were ‘lucky’ enough to get the average, it was 9.4% …

… but, here’s the problem:

In ‘real life’ people don’t get the average!

Firstly, they rarely choose the S&P 500 … they usually gamble on just one or just a few Mutual Funds that used to perform better than the market (but, rarely ever do again).

Secondly, they pay fees that knock down returns by an average of 1.5%.

Thirdly, even if they do buy into a low cost Index Fund that tracks (say) the S&P 500, they actually rarely stay the course for the full 25 years (take another look at even the 10 year chart, above, if you want to see what that can do to the reliability of your returns).

Don’t believe me?

Check out the Dalbar Study

… then, scroll all the way back to the graph at the very top of this post:

Pictures really do tell more than a 1,000 words 🙂

Debunking the Myth of Replacement Income

Hop on over to our favorite navy jet Fighter Pilot’s web-site where he is hosting this week’s Carnival of Personal Finance … it’s where you get to see what other people are saying about personal finance; particularly useful when you get sick of my daily diatribe … then, when you’re done, come right back here for another dose … 🙂


When you visit a financial planner, one of the first / most critical questions that they will ask you is:

When do you want to retire?

Now, that should be fairly easy for you to answer (at least, until after they have crunched all the numbers and you suddenly realize that you left your ‘financial plan’ a little late and will fall short, and have to keep working).

Their second question is the doozy:

How much income will you need in retirement?

Which is another way of asking how much you expect to spend in retirement?

Now, these are the $64,000 Questions (literally for some!) …

Since you will have no idea how to answer, and even if you think you do the financial planner will still trot out their firm’s trusty Rule of Thumb on this subject and proclaim:

You need 70% [or 75%, or 80%] of your pre-retirement income when you actually do retire.

How do they come to this ‘number’?

Well, it turns out that there is this one source for this piece of ‘holy gospel’ used by almost the entire financial planning industry:

There is an annual study conducted by Aon Consulting and Georgia State University’s Center for Risk Management and Insurance Research called the RETIRE Project.

Here it is in a nutshell:

The primary research focus of the GSU/Aon RETIRE Project is on the important question of ”How much income is needed at retirement in order to continue a person’s pre-retirement standard of living into the post-retirement period?”  In addressing this question, the RETIRE Project develops estimates for pre- and post-retirement taxes, rates of pre-retirement savings and examines certain key expenditures and changes in these expenditures between the pre- and post-retirement periods.

Now, that you know what it’s all about, here’s what they found (for 2008):

The current study finds that retirement income replacement ratios under the baseline scenario start at a high of 94 percent at the $20,000 salary level, progressively decrease to 78 percent at $60,000 and then remain essentially flat through $90,000—the highest salary examined.

There you go, you need to replace anywhere from 78% of your final pre-retirement salary to 94%, depending upon how much you earn.

Simple … but wrong!

Here’s why:

Micro: For a couple (no children, at least no longer at home or dependent) earning one income (ages 65 for the worker and 62 for the spouse) of $50,000 per year, the study assumes that their age/work-related expenses will decrease by $750 at retirement (e.g. no more commuting costs, presumably some extra health-related costs, and so on).

But, it doesn’t take into account the key difference: if you are not earning … you are spending!

How else are you going to absorb all that free time? Sitting on your rear-deck writing speeches  😉 ? Or, will you be out there playing golf, having coffee with friends, indulging your hobbies, etc.?

These all cost, Man!

Macro: More importantly, we know that we want to make fundamental changes in our lives so that we can “live life” … work is what we do while we are saving up to live that life.

In other words, our current life is a compromise in order to get us to the life that we want to live … how can ANY ratio of a ‘compromise life’ equate to a ‘real life’?

Of course it can’t, so here’s what to do next time your financial planner trots out his trusty Rules of Thumb… say:

Forget my current life … here’s the life that I want to live when I stop work, and here’s when I want to start living it .. now, can you draw me a plan that tells me what I have to do/sacrifice/be now in order to get what I want then?

If not, see another financial planner! Or, do it yourself … if you know how the life that you want to live looks:

1. Pull out a scratch-pad and start to fill in this worksheet.

2. Use these sample budgets to help you

3. Don’t forget to account for inflation BEFORE retirement (i.e. double the amount of income you think you need for every 20 years between now and your intended retirements)

4. Multiply by 20 (to then allow for inflation AFTER retirement)

5. There, you don’t just have a ‘number’, you now have The Number

Now, you just have to figure how you’re going to get there 🙂

The boss weighs in …




I wrote a post detailing a memo from the junior partner in a financial advisory firm to one of their more well-off clients; here is the slightly cynical follow e-mail from his boss to that same client:

To: Lee

Our junior partner sent you his rules of investing, Mine are much better:

1. Only buy stocks that will go up. The others are a waste of time.

2. Give your broker a lot of business. By trading in and out he will become your best friend.

3. Pay attention to Wall Street research. The people who produce it are intelligent, honest, and really care about you.

4. Read the papers daily and the listen to TV financial reporting. Do exactly what they tell you.

5. Be nice to your barber – he’ll always have the best stock tips.



The first couple of points are an obvious barb about trading stocks, and timing the market – although, with online trading accounts offering trades at less than $10 each the second point is less of an issue than the first.

I don’t buy ANY financial newsletters of research (I do get the Tycoon Report … hell, it’s free) or read the financial press, or watch much – if any – TV (for news of any kind). I just skim the headlines when I want to understand a market move that has already occurred.

I like my barber … but, he ain’t rich … ’nuff said 🙂

All things are possible …

Of all the countries in the world, America is truly the land of opportunity. It’s just interesting to hear it come from an unusual source: Jerry Springer …

… watch no more than the first 4 minutes of this video to see how Jerry came from nothing to (as he calls it) the “ridiculously privileged life I live today because of my silly show”.

As it happens, this speech is very similar to his recent speech to the newest group of Law graduates at his alma mater – the Northwestern University School Of Law (just given on May 16, 2008)  – where he stood up to jeers and sat down to cheers (and, a standing ovation!); read his closing statements and you’ll see why:

It is perhaps inevitable that we are inclined to always be judging others. But let me share this observation. I am not superior to the people on my show, and you are not superior to the people you will represent. That is not an insult. It is merely an understanding derived from a life spent on the front lines of human interaction, be it in the arena of politics, law, journalism, or in the spotlight of the media. We are all alike. Some of us just dress better, or have more money – or perhaps we were born into better circumstances of parental upbringing, health, brains and luck.

On this great day, when we honor your achievement – which is considerable by any standard – we might also say thank you to God in full recognition that whatever we achieve in life is 99% a gift. After all, not one person in this hall had anything to do with the decision to be born, to whom we’d be born, in what era, in what country, with what health, with what mind. Indeed, if the brightest most successful person living in America today – no matter who you think that person is – if he or she had been born in Darfur, the chances are, he or she would be dead by the age of 5.

No, life is a gift, as is living in America. And I know that from personal experience. You see, I am not the first lawyer in my family. My dad’s brother was. His practice was cut short, as was his life – in Auschwitz. My grandparents, uncles, aunts, cousins, they met their end as well – Chelmo, Thereisenstadt, camp after camp. Hitler turning my family tree into a single vine – mom and dad, by the grace of God, surviving, enabling them to bring my sister and me ultimately to America.
Four tickets on the Queen Mary, January 1949, sailing into the New York harbor. In silence, all the ship’s passengers gathered on the top deck of this grand oceanliner as we passed by the majesty of the Statue of Liberty. My mom told me in later years (I was only 5 at the time) shivering in the cold, that I had asked her: “What are we looking at? What does the statue mean?” in the German she spoke, she replied: “Ein tach allas.” “One day, everything!”

She was right. In one generation, here in America, my family went from near total annihilation to this ridiculously privileged life I live today because of my silly show.

Indeed, in America, all things are possible. So on this day, as we celebrate and honor your achievement, may it be for you – as it was for me – “ein tach allas,” one day, everything.

I can relate to this on many levels (for instance I, too, have a ‘silly show‘) and always say that the difference between a country like (say) Australia and the United States is like opening a sandwich takeout restaurant:

In Australia (and most other countries on this planet) you find an empty shop on a corner location. You clean it out and wheel some second hand fridges and counter tops in. You hang a sign out the front, in vinyl lettering that reads “Joe’s Sandwiches … Fresh To Go”, and …

… work 60 hour work-weeks for what amounts to not much more than minimum wage, until you are too old or sick to continue.

In the United States you find an empty shop on a corner location. You clean it out and wheel some second hand fridges and counter tops in. You hang a sign out the front, in vinyl lettering that reads “Potbelly’s Sandwiches”, and …

… open up 1,000 more all over America … you never make a single sandwich yourself; why should you? After all, you’re now a self-made billionaire!

All things are indeed possible … even for you 🙂

A Making Money 301 Memo …

Lee Eisenberg, in his strangely titled book “The Number” (strangely titled, because it actually has very little to do with calculating your Number and reads more like a rollicking yarn … if traveling around the country investigating the financial planning industry seems ‘rollicking’ to you) provides the following ‘memo’ as an example of good financial advice …

… surprisingly, it is good advice – mainly for those in their Making Money 301 ‘wealth preservation’ phase!

It reads like a memo from a junior member of a financial advisory firm to one of their reasonably well-heeled clients:

Dear [Your Name Here],

I wanted to take a moment to outline a few thoughts and ideas before our meeting Friday morning. Some of this may seem old and redundant, but I would like to present this in the context of of your upcoming asset allocation decisions.

1. Overdiversification – This is the single biggest mistake made in managing assets. Once you get beyond three or four funds, you might as well index the whole pool of your assets. If you have more that one bond fund and two or three equity funds you are not really doing much to increase your return expectations or diversification.

2. Value investing works better. Almost all great long-term investors are value investors. Growth investing in the public market works for moments in time but typically does not produce investment results that hold up over longer time periods (i.e. ten years).

3, Don’t be afraid of volatility. If you get your mix between stocks and bonds right, you can use volatility as an opportunity – especially if you are a net buyer of stocks. Your fixed income allocation should meet your cashflow needs and spending plans for the next five years in any environment. So, knowing that your lifestyle needs are met, you can operate as a long-term investor if you have a comfort level in your manager’s investment style. That way you don’t need to be concerned with volatility in the equity market in any given quarter or year.

4. Fees can kill you. In any given year an extra 1% in fees is no problem, but when you get into allocation of large amounts of money to fund low volatility products, arbitrage strategies, and other “alternative” asset class vehicles, you will be spending 2 – 4% of your expected return of 8 – 10% every year in order to achieve the “Holy Grail” of low volatility.

5. If you don’t believe in the fundamentals of any given investment, don’t invest in it. The quickest way to get into trouble is to be seduced by past returns. When you hit the first significant bump, you’ll pack up and get out – this is not a good prescription for long-term investment success.

6. Low turnover is key. Almost no one has made a lot of money engaging in high turnover strategies. It may work for a year or two but the ability to actively trade your way to wealth is all but impossible. When you incorporate the impact of short-term tax rates into the equation, the mountain you need to climb to achieve successful results gets a lot higher. I would be hard-pressed to ever buy a mutual fund with an annual turnover north of 50%. (I make this comment knowing that the average fund manager has turnover in excess of 85% a year, according to the latest studies).

I look forward to seeing you at 10.00 on Friday Morning.

Sincerely …

Over the next few weeks, I will try and dissect this advice for those of you in (or contemplating) Making Money 301 …

… for those of you still trying to make your money, heed the advice on overdiversification (better, yet, read my posts on the myth of diversification), the impact of fees (even 1% is too much!), and the benefits of Value Investing over Growth Investing.

Show me the money!

Well, it didn’t really take very long, but my FIRST sales site is up and running … feel free to visit, and sign up to receive my 2nd eBook for FREE (don’t buy the 1st eBook mentioned in the ‘sales letter’ … it’s also available FREE to all of my readers, here).


Let’s say that you don’t care about your Life’s Purpose – it’s an airy-fairy exercise not suited to you.


Far be it for me to prove you wrong 🙂

… so here is what you are looking for: a ‘menu’ of Ideal Incomes, already served up for you … pick the one that you like and scan across to the corresponding Number.

This is also useful even if you did work on coming up with at least a reasonable facsimile of Your Life’s Purpose … you might be struggling to calculate the cost of living that future / ideal lifestyle on the worksheet that I provided, so this post will help you, too.

It comes from a book by Lee Eisenberg, appropriately called The Number, but which seems to have very little to do with calculating your Number and a lot to do with:

a. Why you need one (still not convinced that you need one even after all of my diatribe? Go get the book!)

b. Your Life’s Purpose – but, the closest he seems to get to helping you understand what that might be is when he quotes directly from George Kinder’s Big Three Questions.

However, Lee does recount a story of a guy who has no interest in understanding his Life’s Purpose, but does have a very clear idea of his Number and what sort of lifestyle it can support; the ‘mystery man’ produces the following table:

According to this table, I already live “kind of rich” to which I add the travel habits of the “rich” …

Otherwise, this is a remarkably sensible table!

However, the jump between “kind of rich” and “rich” is too large … and, I suspect that a lot of you will find that your dreams also put you somewhere between the two (as it has for us), in which case Michael Masterson’s more detailed discussion of the cost of various lifestyles – from his book Seven Years to Seven Figures – may help (but, read my posts as they correct various glaring errors that, in my humble opinion, Michael has made):

The $100,000 A Year Lifestyle

The $250,000 A Year Lifestyle

The $550,000 A Year Lifestyle

Again, read my posts as I do not believe that these sufficiently take into account market returns (hence ‘safe withdrawal rates’) – even ignoring the current market meltdowns – or the true cost of high-income housing, etc. … so, only use these as a guide to help you with this exercise.

Passion before money …

I’m about to find out if you can make money online: click here to read the latest installment in my new online money-making adventure!


I talk a lot on this site (and, on about money being there to serve your Life …

… yet, we slave our lives away to the pursuit of money. Go figure!

So, when working out your Number – that ‘magic number’ that tells you if/when/how you will retire – it is my contention that you first need to start by understanding your Life’s Purpose.

It’s nice to see that somebody on the finance community agrees with me: George Kinder, author of The Seven Stages of Money Maturity!

In fact, George is a financial planner who is one of the early pioneers / practitioners of a form of financial planning called ‘Life Planning’ … where your financial plan is designed to support the life you want, not necessarily the life that you have.

I have provided some exercises to help you understand your Life’s Purpose, hence your Number; similarly, George Kinder poses three questions that he considers important in achieving a similar result (you may have seen these on Oprah):

1. “Assume you’ve got all the money you need – enough for the rest of your life. Maybe you’re not as rich as Warren Buffet, but you never have to worry about money for any reason. The question is, what would you do with it? How would you live? Feel free to let your imagination roam. What would you do with it all? Think for a moment, then write down the answer … ”

2. “You go to the doctor. The doctor discovers you have a rare illness. He says you’re going to feel perfectly fine for the rest of your life. But, he says the illness will prove fatal. The sorry outcome will occur sometime within five and ten years. It will be sudden. The question is, now that you know that your life will be over in five years, how would you live it? What would you do?”

3. “This question will sound a bit like the previous question, but it’s different: It starts the same way. You go to the doctor. You’re feeling perfectly healthy. And again the doctor says you have a serious illness. But then the doctor says, ‘You only have 24 hours to live.’ So, what did you miss? Who did you not get to be? What did you not get to do?”

Of all these questions, obviously the last is the key … and it is the purpose of the Rear Deck Speech – designed to make you think past ‘things’ and to the more deep/meaningful aspects of your ideal life.

These questions, however, will help you if you’ve been struggling with the Finding Your Life’s Purpose exercises that I provided …

The fractal market …

What does this fern leaf and the stock market have in common?

Surprisingly, a lot!

For a start, this is not a drawing or photo of a real leaf … it’s a actually a computer-generated image derived from just a few short lines of computer code.

It’s a ‘fractal image’ – a branch of mathematics that uses randomness (with many similarities to ‘chaos theory’) to describe natural objects so that they look ‘real’ to the naked eye … again, using only a very simple mathematical formula!

The two most interesting things about fractals:

1. They are easy to generate – they are based upon replication of a very simple formula, over and over again. Order-in-Randomness takes care of the rest

2. As you scale up or down the picture looks remarkably similar ….. take the leaf to the bottom right and blow it up to full-size and you will see something very similar to this original image

What does this have to do with the stock market? Well take a look at the following two graphs:

These both indicate movements in the Dow Jones Industrial Average; what’s interesting isn’t the direction … it’s the shape …. they both indicate a random series of up/down movements in a general direction (that, too, seems to change randomly).

The interesting thing about these charts is that they are the same chart (almost)!

One is a 1 year view of the Dow Jones, the other a 3 year view (it should be easy to work out which is which!) …

… you see, as the IBM scientist who ‘founded’ fractal geometry (well, actually revived … it was ‘discovered’ in the late 19th century by a scientist named Julia) in the 80’s discovered, the stock market is fractal.

While the movement is seemingly random, each piece of market movement when enlarged looks very similar to the larger scale movements … so we have up/down movement in the stock market at every scale: daily, weekly, monthly, annually that actually behave quite similarly.

The frustrating thing is this: chaos theory abounds.

Chaos theory says that when systems become complex, a very small apparent change in one variable (i.e. number) can suddenly have a HUGE change on the whole.

It’s why they say that a butterfly flapping its wings in Japan can cause a hurricane in Louisiana …

You can’t think of a system (except in Nature) more complex than the stock market: thousands of stocks make up a market … each one is a real-live business generating revenue, controlling costs, dealing with market/economic/government changes on a daily, or even minute-by-minute basis.

The whole shebang can move up … down … or sideways. But, within each movement is the movement of each company’s stock. The price of each individual stock is fixed by the investors: are they net buyers or sellers in this micro-second (that’s how fast the stock exchange moves)?

Suddenly, one mutual fund executes it’s order to sell Company A and the effect is minimal, either on that company’s stock or on the market. But, on another day a ‘perfect storm’ arises (an announcement by the feds of a change in interest-rates; a war in the Gulf erupts; etc.) and that same sell-off triggers a panic.

Who can predict it?

Nobody … and, that’s the point … look at the charts: do you see anything that looks remotely predictable in that lot?

Do you want to bet your financial future on where the stock market is heading, even for the next 3 years?

I don’t … but, I do know that while the market can (and, does) move dramatically & randomly, there is an underlying force driving it relentlessly upwards:

The companies that make up the market are producing widgets, and inflation is always making the price of widgets go up/up/up (with an occasional, but only short-term pull-back) inevitably pushing their profits (hence stock price) along with it … where inflation goes, the stock market will surely follow … eventually.

But, who can say exactly when?!

So always be a buyer and holder … never a seller be.