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Monday, July 27, 2009

$$$ Motivators

$$$ Motivators
The following is a snippet from an article in Forbes:
There are cheap and easy ways to vet prospective financial pros before you discover they're trouble the hard way.
Now that Bernard L. Madoff has been sentenced to 150 years for fraud, it's time to heed some lessons: How can you check out the people helping to manage your life savings?
Sure, a lot of smart money with access to expensive private investigators got taken in by Madoff, who admitted his guilt. But he was also the relatively rare case of a conman with no previous adverse public regulatory baggage. As it turns out, there are surprisingly efficient and economic ways to vet financial professionals and the outfits that employ them, for a history of blunders--or worse.
Is this really an answer? Of course due diligence, full disclosure and clear transparency is a necessary step, yet this is akin to just say no to drugs. Bernie Madoff passed every level of scrutiny discussed in this article, not only did he pass scrutiny but as the former head of NASDAQ I would say he stamped his credibility with his connections. The first reality is no amount of government regulation can protect a person from themselves, let’s look at some real answers on how to protect yourself:
This week we continue our search into the psyche of the investor. On the heels of Bernie Madoff and several other fraudsters what lessons are being learned? Once again as has always been the focus we are looking at the scam and the perpetrators and their behaviors as predators. I submit that this is backwards and actually is the core reason that ponzi schemes and all other financial scams continue. Understanding the behaviors of the scam predators doesn’t really help anyone get to the real issue.
What is the real issue? It is the behavior of the victims. The history of fraud is rich with stories of countless victims. This has existed for centuries and I dare say it is not going to stop until people insulate and inoculate themselves from becoming victims. The only way to do this is to fully understand the behaviors that allow you to become a victim. Of course this is a painful exercise in self-reflection, yet if there is to be any reduction in scams, schemes and fraudulent strategies it MUST start with the victims
There can be no fraud without victims. For centuries the behaviors and identification of how fraud and cons are developed has been available to the consuming public. With all this knowledge has any of the losses from fraud been reduced? That answer would be a resounding NO! In fact as the knowledge of how these cons are set up is more available, the amount of loss has actually grown exponentially. This alone should be evidence of the wrong focus.
As Bernie Madoff goes off to prison what benefit do the victims receive in financial gain? As the money is lost, and the guilt and psychic pain lingers with victims, exactly what comes next?
Last week we started with a very basic fundamental in the psychology of investing. This fundamental is the process of suitability. Of the many principles surrounding suitability we looked at RISK. Today we look at the motivators behind risk and hopefully this will help you gain some perspective of how to protect your money by gaining a fuller perspective of your behaviors around money.
There are two types of motivators, and they are towards pleasure and away from pain. We all are subject to both of these motivators. We only want to focus on the motivation as it pertains to making decisions with money. The element of risk is embedded in either a fear of loss or a sense of pleasure in gain. Both of these can be negative or positive. It simply depends on your value system and how you have programmed your behavior.
The fear of loss is most common and it is this button that con men push most often. This fear of loss comes with the urgency to get involved before the gains are missed. Of course you cannot really experience a loss as your money is still in your pocket. The real loss would only be incurred if you have less than you started with (this type of fear works against you after experiencing true loss as well as now you are seeking to recover your loss, this means you double up and display other fear of loss behaviors in order to re-gain the loss). There is no true loss as you still have your money, of course there can be no GAIN if you don’t take a risk and get involved. That is a gain, yet most of us perceive this future gain as a potential loss. Once the fear of loss button is pushed you have to move away from loss and in this case that requires that you give your money to the con, because not to do so would incur a loss in your mind. You have negatively motivated yourself to take on risk.
If you perceive the circumstance properly you would recognize the potential of gain and while moving towards the gain you would experience the proper fear of loss which would be fear of losing your existing money. In this mindset you would take the proper steps to look into the core issues involved in risk. This would include due diligence, full disclosure and clear transparency. Because your fear of loss button has not been pushed and your pleasure of gain button has you would behave responsibly and attach your sense of urgency to common sense. This is only one minor change in perspective, yet it would help insulate you from being victimized.
We will be producing a FREE 3 part email course on the Psychology of Investing, if you are interested please click link to register
Your best weapon is having a non-biased third party advocate that can help walk you through the full suitability process and always be available to help you identify the non conscious motivators you are experiencing in your decision making process. In the end it is simply about making smart decisions about money.

Thursday, July 16, 2009


“Promises, Promises”
The results of Unintended Consequences

Seven months in to a failed economic policy now finds Americans racing for cover. In the 4th quarter of 2008 the outgoing administration decided to bailout (TARP) the failing banks. Maybe wise, maybe dead wrong, yet it was the final mark on the scoreboard. The incoming administration then decided to bet the house on a totally misguided stimulus package. This stimulus was going to magically save the country from a necessary contraction (recession). It’s not as if the US has never faced a recession before and if the government simply follows some basic economic principles, recessions come and go and usually help clear the economy for an oncoming growth spurt. Only the truly misguided would decide that the best solution for a necessary recession would be to deficit spend your way out of it. That is truly the one and ONLY deadly mistake that could be made, the fatal flaw if you will.
So let’s review the promises and the early returns on unintended consequences. The stimulus package had to be passed quickly because it would somehow SAVE the economy. It was pitched as a plan that would provide quick relief to the US economy. It would magically create or “save 600,000 jobs per month. Well the scoreboard now shows the economy bleeding 450,000 jobs per month, promises, and promises. The unintended consequences are that not only has the stimulus package done no good. It has created a huge amount of harm in ballooning the deficit, raising interest rates, creating considerably doubt about the US currency and fanning the flames of inflationary fears. Seems to be a big price to pay for unintended consequences doesn’t it?
The poorly designed and thought out stimulus package took up whatever tiny space was available in deficit spending, yet now the administration wants to pop the bubble by creating another poorly designed and poorly thought out health care reform. Raising taxes during a recession is something a first grader wouldn’t do. How can anyone miss this basic concept? Wasn’t the stimulus package created to kick start the economy? How can you kick start an economy by reckless spending and then increasing taxation on the consumers? Better yet let’s look at the unintended consequences that will come from the so-called health care reform.
The plan designed now has a mandate for businesses to pay an 8% penalty for not providing health insurance. This was part of the “if you’re happy with your existing coverage you can keep your plan” well the truth is you will not get to keep the plan you are happy with. Do the math and follow the motivations of corporations that understand bean counting exceptional well. Most corporations now pay well more than 8% for health insurance plans for their employees; they also have to subsidize COBRA when they cut jobs. Now, if a corporation can save money by paying an 8% penalty then the prudent move would be to drop health insurance coverages for their employees and pay the penalty. This also would allow the corporation to cut jobs with no COBRA liability. In the end, the result will be more loss of jobs. Of course people would have a government health plan, but unfortunately no job, and best of all they would no longer have the health insurance plan they were very pleased with. No one would have a health insurance plan they were pleased with in this scenario.
There was a race to pass a poorly designed and clearly not well thought out stimulus plan. One would think the lesson learned would be that it takes time and consideration to make sweeping changes and that consideration should clearly take into account the law of unintended consequence. Now, there is a race to a pass a poorly designed, non thought out Cap and trade policy, a poorly designed, non thought out Health care reform policy and who knows what other poorly designed and clearly non thought out policies will follow.
The one thing that is clear, we have a group of thinkers in leadership who do not think, they simply react like children at the ice cream parlor. No thought to future consequences and all these decisions are made in a reactionary mode. Once the law of unintended consequences kicks in there is no catching up to it by making reactionary decisions. The only way to recover is to STOP, think through all potential solutions by running all the options out into the future and then backtracking though every potential bump in the road. By doing this you can project the new problems created by the present solutions and then decide if the solutions are worth the unintended consequences. The positive thing is that individual investors can learn what not to do by simply watching the government make every mistake with money possible.