Entries Tagged 'Economics and Investing' ↓

Previously in Brucenomics I’ve written about Robert Kiyosaki’s book series Rich Dad Poor Dad. In it, Robert distinguishes between “assets” (things that bring money into your pocket) and “liabilities” (things that take money out of your pocket.)

Fittingly enough, in the early part of this century when he began his series, Kiyosaki used houses as an example. Is Your House an Asset? Here’s what he said. A house you buy for yourself is a liability. A house you buy to rent to others at a profit is an asset.

It’s the same thing–a house. It’s the way a thing is used is that creates different outcomes for its owner. And as it turned out, houses as liabilities set off the financial crisis for their owners, then for the owners of mortgage-backed securities (MBSs), then for investors in collateralized debt obligations (CDO) derivatives based on those MBSs, and then for all the rest of us.

All too often when times get tough, the first impulse is to hang onto your money (or for many people their credit cards) and not spend. Robert Kiyosaki’s message is basically that this is not the right thing to do. What you need to do is look at what assets you possess (including that house or credit card) and see how they can bring money into your pocket. Continue reading →

When you invest, whether it is in mutual funds, ETFs, or stocks, you learn about diversification. It’s a “good thing” they tell you. But what exactly does this word mean? Wikipedia defines diversification as “reducing risk by investing in a variety of assets.”

Words change over time. For example, the little three-letter word “let” once meant “hinder” After a long enough time it turned into its opposite “go ahead”. I’d suggest that “diversification” too has changed into something completely opposite to what it meant in the past.

There’s a reason for that. Beneath the word, “diversification,” there are many new kinds of risk at work. Let’s look at just three of these risks.

Concentration risk

This risk applies to the dangers of putting all your eggs in one basket. Unfortunately, things in the markets have gotten so complicated, you may not realize you’re putting your eggs in one basket when you invest. This is particularly true of investing in ETFs.
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The “Madoff twist”

How do Wall Street insiders, smart brokers, and big investors get caught by Ponzi schemes like Bernard Madoff’s?

According to John Kay in the Financial Times columnist, “the fraudster hints at impropriety, but implies that the target will be the beneficiary rather than the victim.” Kay calls this the “Madoff twist.” (FT 3/18/09 p. 9)

I doubt Madoff invented this twist. This kind of trap is set by a lot of unscrupulous people, whether or not they are actual “con men.” The idea is to sell the victim the idea: “we’re smarter than that poor dope.” This works by creating a sense of belonging, superiority, and being privileged to have inside information.

The “having inside information twist”

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