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Inflation: A Monetary Phenomenon and Its Remedies

Inflation, the sustained increase in the general price level of goods and services, has long been a subject of economic analysis and debate. Among the most influential voices on this issue is Milton Friedman, a renowned economist and Nobel laureate. His profound insights on inflation have shaped modern economic policies and remain highly relevant. Friedman’s main insight is that inflation is "always and everywhere a monetary phenomenon" and can only be controlled through disciplined monetary policy. Friedman’s views on the causes of inflation, its consequences, and the solutions he proposed are timely lessons for the current time we live in. 
The Cause of Inflation
Friedman argued that the root cause of inflation lies in the mismanagement of the money supply. His insight that inflation is "always and everywhere a monetary phenomenon" highlights his belief that excessive growth in the money supply, controlled by central banks, is the primary driver of rising prices. According to Friedman, “Inflation occurs when the quantity of money rises appreciably more rapidly than output.” This means that when the supply of money in an economy grows faster than its production of goods and services, the result is an increase in prices.

Friedman did not prescribe to alternative explanations for inflation, such as wage-price spirals or external shocks. While he acknowledged that these factors could influence prices in the short term, he maintained that persistent inflation could only result from a sustained increase in the money supply. For example, during periods of high government spending or central bank policies aimed at stimulating the economy, the excessive injection of money often leads to inflationary pressures. This is observed everywhere in the world.


The Consequences of Inflation
Inflation is not just an abstract economic concept but a phenomenon with real consequences for society. It erodes the purchasing power of money, disproportionately affecting the poor and middle class of a population. Friedman argued that inflation acts as a “hidden tax” that reduces the value of wealth. Furthermore, it creates uncertainty in the economy, discouraging investment and long-term planning. In his words, “One of the great mistakes is to judge policies and programs by their intentions rather than their results.” For Friedman, inflation is often the unintended consequence of well-meaning policies that fail to consider their long-term effects.

In the aftermath of the great recession of 2009 one reason America did not see high inflation was due to the fact that manufacturing drastically moved overseas, helping keep prices down. Instead of raising prices to consumers companies lowered their cost by making more things overseas. In the aftermath of Covid America had no such card to play and the injection of so much money into the economy caused inflation to reappear. Monetary policy will have a larger effect on inflation than it has in the past twenty years and monetary injections into the economy that outpaces economic growth will risk increasing inflation. 

The Solution to Inflation
Friedman believed that the solution to inflation lies in controlling the growth of the money supply. He advocated for a rules-based approach to monetary policy, where central banks commit to a steady, predictable increase in the money supply that aligns with the economy's natural growth rate. This approach, often referred to as “monetary restraint,” minimizes the risk of excessive money creation and curbs inflationary pressures.

He was critical of discretionary monetary policies that allowed central banks to respond reactively to short-term economic fluctuations. Instead, Friedman proposed what he called a “monetary growth rule.” He explained, “If you want to cure inflation, you have to reduce the rate of monetary growth.” This disciplined approach, he argued, would prevent the boom-and-bust cycles often associated with inflationary policies.

Lessons for Policymakers
Friedman’s views have had a lasting impact on monetary policy, particularly in the adoption of inflation targeting by central banks around the world. His work underscores the importance of prioritizing long-term economic stability over short-term gains. Policymakers, he argued, must resist the temptation to use expansionary monetary policies to stimulate economic growth artificially, as such measures often lead to higher inflation in the future. 

Milton Friedman’s analysis of inflation as a monetary phenomenon provides a clear framework for understanding its causes and remedies. By focusing on the role of money supply and advocating for disciplined monetary policies, Friedman offered a pragmatic approach to addressing one of the most persistent challenges in economic management. His famous quote that “Inflation is always and everywhere a monetary phenomenon” serves as a reminder that effective control of inflation requires a steadfast commitment to sound monetary policy. In an era where inflation remains a concern the Trump administration would be wise to pay attention to Milton Friedman’s insights. 


12/2/24

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WHAT IS THE VALUE OF MONEY

Ask anyone this question and you will get a huge variety of answers. Ultimately it is a tough question with multiple layers to it. Let’s look at a few viewpoints on the matter. Firstly, you could say money’s value equals whatever it is able to purchase. This in turn would mean that money continues to lose value, since its purchasing power lessens each year (inflation). However, on the other hand, certain things get cheaper compared to money, meaning you can buy more of these things (increased supply). So if money's value decreases compared to some things and increases compared to others, how can we understand its value? It is hard to determine money’s value based on what it can buy, because that is ever changing. 

Secondly, money’s value could be found in its utility. Which would be in its capacity to provide a median of exchange. In this case money does not have any value in and of itself, unlike the products and services it purchases. Instead money is merely a numerical representation of value. 

Going a little deeper with this, we find multiple forms of money, known as currencies. So why do we have different kinds of money that put a number figure on the value of products and services? Why not have one numerical standard by which to value everything worldwide? The long answer would take volumes of books to articulate. The short answer is: governments require taxes to be paid in their form of currency, this causes the median of exchange in that country to be whatever must be used to pay taxes. We cannot pay our taxes with pesos, yen, or anything else, only in US dollars. 

A government's use of its own currency is what changes the value of that currency compared to other currencies. This also could fill volumes of books (and has). Basically, how governments manage the median of exchange, or currency, affects its ability to represent value. 

This gets complicated, because it is not just a number representing something, like the number of eggs in a carton. Instead it is putting an intangible figure onto a tangible item. Money turns this intangible representation of value into a tangible thing called currency. So each currency that is used (dollar, paso, yen, etc.) will have a different figure on the value of the eggs. This does not change the actual value of the eggs, it is merely represented differently.

Currencies may be better described as different languages of value, except for the fact that they can change in relation to one another. The different currencies that represent value all represent it differently based upon the supply of those currencies. Remember, money is creating a physical representation of an intangible idea. So if you increase the number of a currency representing a specific value it will take more of that currency to express that value.

For example, if there were ten cartons of eggs representing all the value there is, each carton of eggs would represent 10% of the money supply. Let's say the money supply was $100, each carton of eggs would cost $10. If we increased the money supply 10% to $110, and we still had the same number of egg cartons (so each of the egg cartons still represents 10% of all the value) each carton of eggs would now cost $11. This happens not because the egg carton is more valuable, but because its numerical representation changed. So if the amount of dollars increases 10% and the amount of pesos increases 20% and the supply of eggs stays the same, we can see how the value has not changed, but the numerical language representing value has changed.

However, if there are more or less cartons of eggs produced and the money supply stays the same, then value does change, while the language stays the same. So you can see how when the supply of currency increases, and the supply of products and services is constantly moving up and down, how complicated the idea of the value of money can get. Now we are into the black hole of the economics of supply and demand. When people need more of something they are willing to pay more for it, when there is an over supply of something, people will pay less for it. Individuals cumulatively send signals of what they are willing to pay for things, which tells the market what they want more of and less of supplied to them. 

At the deepest level we can see that the invention, or maybe evolution, of money has been one of the most valuable developments to society and mankind. It is the cornerstone to capitalism and the foundation of trade and exchange. Money created a way for people to trade in fractional shares of value. So that if a person did not have the physical thing of what the other needed (like in a barter), they could just trade a representation of value for the physical thing. This is also what enabled mankind to get rid of the need for slavery. Instead of owning a person (or owning the labor they can produce), money made it possible for each person to own their own labor and sell their time for a numerical representation of value, that they could then use to purchase other things. It may have taken mankind a long time to catch on to the benefits of each person owning their own labor (a person's labor being part of their own private property), but it would not have happened at all if it were not for the invention of money as a means of exchange. 

So, the value of money can be thought about in many different ways. Knowing what money is (a median of exchange that is a numerical representation of value), how it works (currencies, monetary policies, taxes), and how it can benefit society (Capitalism, commerce and exchange) starts to give us a glimpse of its true value. 

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6/21/24

ON PATIENCE

Patience in investing could be measured by the degree to which one can endure suffering. Not a physical form of suffering, but a mental one. Charlie Munger say’s, “if you’re going to invest in stocks for the long term or real estate, of course there are going to be periods when there’s a lot of agony.” This is particularly true of downturns. Whether it’s market wide or just in our own portfolios, we are going to suffer drops in market value. It is during these times that we must practice the discipline of patience.

If we are correct in our analysis of the businesses we own, eventually the market will agree. However, being right about an investment isn’t enough. Buffett says, “only when you combine sound intellect with emotional discipline do you get rational behavior.” If you are correct in your analysis you must also have the emotional fortitude to go against the tide. To be able to say to yourself (paraphrasing Charlie Munger) eventually the market or investors will agree with me, because they are smart and I’m right. 

It is not easy taking an opposing view to that of the market, especially over longer periods of time. It is important to keep our focus on the fundamentals of the companies and not on the price it currently trades at. As Buffett says, “games are won by players who focus on the playing field, not by those whose eyes are glued to the scoreboard.” The scoreboard follows what is played on the field. We must trust that the invisible hand of capitalism will eventually catch up to rational valuations. As Buffett says, “if a business does well the stock eventually follows.”

Still, it is not fun waiting for the market to catch up with your way of thinking. This is when your capacity to suffer is tested. When others are making money and you are not, when the market says you're wrong, it brings on a kind of mental struggle and makes patience hard. This is what separates investors from bad or average, to good and great, because it is also where the real money is made. Munger says: “It's waiting that helps you as an investor, and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you've got to work very hard to overcome that.”

So when the market demands of you agonizing patience, and a rational market seems nowhere on the horizon, take a little pride in your ability to suffer. Because it is in this suffering that fortunes are made. As Munger says, “the big money is not in the buying or selling, but in the waiting.”

1/29/24

LESSONS FROM CHARLIE MUNGER

Charles T.  Munger died 34 days before his 100th birthday. Born 1/1/1924 and died Tuesday 11/28/2023. There have been so many well done tributes to Charlie Munger which discuss his life and legacy. Without a doubt we are saying goodbye to a giant of our time. I first discovered Charlie Munger like most people did, through Warren Buffett and Berkshire Hathaway. Little did I know that I would end up learning more from Charlie than I did from Warren. Charlie's lessons went beyond money, and investing. In one short line he could convey deep lessons. Warren Buffet said about Charlie, “he has the best thirty second mind of any one he ever met.” Instead of adding to the many well written articles and tributes on Charlie Munger, I would like to share some of the lessons I learned from him that impacted my life.

Lesson 1  Wisdom Acquisition is a Moral Duty
“Wisdom acquisition is a moral duty. It is also a moral duty to be as rational as possible. If you can keep your head when everyone else is losing theirs it’s a big advantage.”

“If it's wisdom you are after you're going to spend a lot of time on your ass reading.”

“In my whole life, I have known no wise people, over a broad subject matter, who didn’t read all the time. None, Zero.”

“Warren and I insist on a lot of time being available, almost everyday to just sit and think. That is very uncommon in American business. We read and think. So Warren and I do more reading and thinking and less doing than most people in business.”

“The habit of committing far more time to learning and thinking than to doing is no accident.”

In a speech to a USC Law graduating class Munger said: “Wisdom acquisition is a moral duty. It’s not something you do just to advance in life. Wisdom acquisition is a moral duty. As a corollary to that proposition which is very important, it means that you are hooked for lifetime learning. And without lifetime learning, you people are not going to do very well. You are not going to get very far in life based on what you already know. You’re going to advance in life by what you learn after you leave here.”

“I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you.”

In my own life I was not naturally prone to reading a great deal or spending time in silent contemplation.  I have since structured my entire life around making time to read and think. And while I would not describe myself as wise, I can say that it has had a major impact on my life from when I first started intentionally creating disciplines around this idea. It has impacted both my spiritual being, as well as my work, family and investing. 


Lesson 2   Develop a Latticework of Mental Models
“You’ve got to have models in your head and you've got to array your experience-both vicarious and direct- onto this latticework of mental models.”

“You don’t have to know everything. A few really big ideas carry most of the freight.”

“Simplicity has a way of improving performance through enabling us to better understand what we are doing.”

Charlie Munger gave a speech entitled “the psychology of human misjudgment”, where he laid out ways smart people can get things wrong. One of the  main ways was a lack of cross discipline study. Someone can be an expert in their field and be completely blind to a simple solution, because they don’t know the basics of another field. An easy example of this is the efficient market theory in economics that says the stock market is rational and the price of a stock is equal to its value. A very quick reading of basic psychology throws this entire theory in the garbage, because in psychology you learn real quick that people are not rational and most of the time do not make rational decisions. 

This is just one example he points out, but there are plenty of others that show the need to run ideas through different modes of thought to best come to the correct conclusion. You don’t have to be an expert in all the major fields of study, you just have to grasp important principles. Those who are experts are able to be extremely precise in one area of study, but as Charlie says, “it's better to be roughly right than precisely wrong.”

Charlie spoke about running ideas, problems, and opportunities through a series of filters, through these different mental models. Something might make sense from a particular perspective, but does it make sense viewed through the lens of other disciplines as well?

This is extremely helpful in avoiding one way of thinking. To put it another way, to avoid every problem looks like a nail, because you are holding a hammer. This has been extremely helpful in my development and has helped me destroy what I thought were some of my best ideas. This practice of mental models is not easy and obviously continues to develop over time. 

Lesson 3  “Invert, always invert”
This mathematical principle applied to other disciplines has helped Charlie think differently than most people in a vast number of areas. If you want to think about what is the best way to alleviate poverty in a society, it helps to first think about how you might increase it. If you are thinking about the best way to safely get a plane from one end of the country to the other, what are the best ways to crash it or create the most accidents? 

It would seem like common sense to always look at things from the opposite perspective, but as Charlie says, “of course when people say someone has common sense what they really mean is that person has uncommon sense, because of course, it's not common.” Inverting might be one of the most uncomfortable things we can do. When you are excited about a company, you don't want to think about the worst case scenario. When you have a political view, it's not easy to see the other side of an issue. Charlie recommends learning both sides, because until you know both sides of something, you don’t really know it. Without knowing both sides, you can’t really understand why something is happening or why something isn’t working.

“You need to have a passionate interest in why things are happening. That cast of mind, kept over long periods, gradually improves your ability to focus on reality. If you don’t have that cast of mind you're destined for failure even if you have a high I.Q.”

Lesson 4  Opportunity Cost
“In the real world, you uncover an opportunity and then you compare opportunities with that. And you only invest in the most attractive opportunities. That’s your opportunity cost. That's how we make all of our investment decisions.”

This is in stark contrast to the capital asset pricing model (CAPM) used by the majority of schools and firms. According to investopedia.com, CAPM is described as the relationship between risk (risk being Beta) and expected return for a particular stock. I won’t get into this vast debate here, because opportunity cost relates to more things than just buying stocks, but just trust Charlie on this. The capital asset pricing model along with efficient market theory seem fine only in theory, in practice they are a complete waste of time. 

In investing as well as life we want to make the best decisions. Often when we weigh the cost of an opportunity we only measure the financial cost and occasionally the time costs, when in reality the real cost is the other opportunities we could have chosen. When Charlie talked about it being no accident that he and Warren spend vast amounts of time reading and thinking, it is because they are convinced that all the other things they could be doing with that time are not as good an opportunity as reading and thinking. Weighing different opportunities against each other can help prioritize what you should be spending your time on.

Another thing about opportunity cost is that everyone is not given the same opportunities. You have to compare what opportunities are in front of you, and not start to compare opportunities that are not even available to you. This is as true in life as it is in investing. We will all have missed opportunities and we will never have equal opportunities. You just have to do the best with the opportunities in front of you, and that will yield the best results in your life.
 
Personally this has helped me tremendously in both my investing and in life. It is hard to go into great detail here, but it has affected my portfolio and taught me to make the most of the opportunities I do have available to me. 

Lesson 5  The Golden Rule
“The safest way to get what you want is to try to deserve what you want. It’s such a simple idea. It’s the golden rule. You want to deliver to the world what you would buy if you were on the other end.”

There is a human temptation to try and trick, cheat, gamble, or somehow skip ahead in life. However, there is no surer way to get ahead than to be deserving of it. If the journey there isn’t deserving of its end, it is doubtful it will last. People don't really get away with anything when it is all said and done. 

“People should take away less than they’re worth when they are favored by life… I would argue that when you rise high enough in American business, you’ve got a moral duty to be underpaid-not to get all you can, but to actually be underpaid.”

“If crooks only knew how much you could make by being honest they’d all behave differently.”

“The highest form that civilization can reach is a seamless web of deserved trust--not much procedure, just totally reliable people correctly trusting one another…In your own life what you want is a seamless web of deserved trust. And if your proposed marriage contract has forty seven pages, I suggest you not enter.”

Lesson 6  Avoid Envy, Sloth, and Unreliability
“The world is not driven by greed. It’s driven by envy. I have conquered envy in my own life. I don’t envy anybody.”

“What do you want to avoid? Such an easy answer: sloth and unreliability. If you’re unreliable it doesn’t matter what your virtues are. You’re going to crater immediately. Doing what you have faithfully engaged to do should be an automatic part of your conduct. You want to avoid sloth and unreliability.” 

“Generally speaking, envy, resentment, revenge and self-pity are disastrous modes of thoughts. Self-pity gets very close to paranoia, and paranoia is one of the very hardest things to reverse. You do not want to drift into self-pity…self-pity will not improve the situation.”

“It is very counterproductive for an individual to feel like a victim, even if he is. The best attitude is to be cheerful about everything and plugging along. Who wants to be a victim instead of a survivor? It's ok to recognize your problems, it's not ok to deeply believe it's all others fault.”

I have heard Charlie say something like, envy is the worst of the deadly sins, because there is no pleasure whatsoever in it. Pick a different one if you must, so you can at least get some short term gratification from it.

Lesson 7  Delay Gratification
“It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.”

“Great investing requires a lot of delayed gratification.”

There have been famous studies, such as the marshmallow experiments, showing the benefits to delayed gratification. Charlie’s life is another example of this principle in work. In a time where instant gratification is a click or swipe (or tap, or app, or transfer, etc) away, Charlie reminds us of the importance of delaying one's own desires for the sake of one's own future. 

I could go on with more lessons, especially getting into investing, that I have learned from him. Lessons about diversification or as he likes to call it “diworsification”, or cigar butt stocks vs. compounders, or the importance of patience in investing, the morals of capitalism, and so on. I owe a great deal to the lessons he is leaving behind. It is not an exaggeration to say that he changed the course of my life. We have to say goodbye to all of our heroes sooner or later, and Munger definitely did his best to make it the latter. I am thankful to be a part of the last generation that ever got to see him live at the Berkshire Hathaway meetings. I am thankful for the opportunity I had to learn from him. Though there are people who may not have heard of Charlie Munger, in the investing community we lost a giant of our time.

12/8/23

PUSH VS. PULL PRINCIPLE IN HELPING OTHERS

I sometimes find myself in an internal conversation about how best to help others. At first glance this seems like a simple thing, but it truly gets more complicated on further inspection. One must be careful that our well intentioned efforts and resources do not result in unintended consequences, lest we make things worse, as we often do. Making sure my actions will not harm is the first priority in the process of helping. Next, would be to ask myself, “am I the best person for this at this time, in this situation, or is there a better alternative that would do more good?” ​

​There are two ways in which one’s life impacts another and that is either through pushing or pulling.  Pulling would be defined as “lead by example” or a “do as I do” scenario. A push would be a “do as I say, not as I do” type of scenario. For example, if I need financial advice or help, I may have a friend giving me all sorts of advice, but if he is just as broke as I am, he might not be the best person to listen to. If, in this scenario, this is a close friend or relative, they might really be trying to convince you or get you to do something a certain way. Though they are well-intentioned, pushing you to do something could do more harm than good. It is important to realize you can only help people to the degree that you personally have gone. You can pull people along with you (encourage, advize, or implore to the level you are at), but anything outside of that, and you begin to push people instead of pull them. It is important to stay within your area of competence.

To give an analogy: Picture one person on top of a platform and another person on the ground. The person on the platform lowers the rope, and the person on the bottom ties the rope around him. When the person on top pulls the person on bottom up, he is able to lift with his legs, arms and back. Essentially able to deadlift the weight. Deadlift, by the way, is the way in which a person can lift the most possible weight off the ground. However, if both people were on the ground pushing someone over your head is much more difficult, and there is a higher risk of falling. In addition to the added difficulty, the range of distance is limited to the height of the person. whereas the man lowering the rope could lower a rope much farther. 

Sometimes we are quick to try and help others without reflecting on our own lives. Maybe we need more help than they do. I remember hearing a talk from a woman who wanted to help women in Africa. A noble goal. She traveled there thinking she was going to raise money, help send girls to school and help them get a start in life. She soon discovered that they did not want charity as much as they wanted to provide for themselves and contribute to society. You have heard that it is more of a blessing to give than to receive, well this is true for people who have very little as well. More than charity these communities wanted economic opportunity. This well intentioned woman went from starting a charity to starting a shoe company that provided well paying jobs as well as scholarships. Furthermore, these African women who she intended to help by giving charity, now bless her with a profitable business that provides for all of them and they don’t have to feel like a charity case or feel like a burden; instead they are providing a desired product the people are willing to pay for to have. A socialist might call this exploitation, but these women call it opportunity. 

I am not saying that we should not give charity. What I am saying is that in order to help people, we must first be in a position ourselves to actually help them in the best way possible, and not just give to make ourselves feel better. 

I said all this to say that, by improving yourself you better equip yourself to truly help others. As you improve and grow, you will pull others along with you and will help far more people. By just telling people what is good for them, they have no example to follow, no evidence or proof it works. Pushing can effectively only be done laterally and down. So, naturally, the next question to ask is who’s rope should you tie yourself to? Who should you follow? Who is going to pull you up? Quit getting pushed around and quit pushing around. Start climbing a rope, and help people all along the way, pull those up around you. 

​6/9/23

THE PRINCIPLE OF "KNOW WHAT YOU DON'T KNOW"

What you know is important, but more important than what you know, is to understand what you don’t know. You must know the limits of your knowledge and stay within the boundaries of it. This is important for life, but it is extremely important when it comes to investing. Charlie Munger and Warren Buffett are known for staying within their circle of competence. Yes you should work to expand your area of competence, but be sure to make decisions within it. In other words, know well the boundaries of your knowledge and keep your decision making well within it. 
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It is also important to see things for what they really are regardless of what others say. Abraham Lincon said; “If you call a dog's tail a leg, how many legs does the dog have? Four because calling a tail a leg doesn’t make it so.” When we venture outside our area of competence we are more prone to answering that question with the number five.

It is also important to ask the right questions. Buffett told a story before about a man who came upon a woman and a handsome looking dog; he said to the woman “does your dog bite?” she replied “no”. So he went to pet the dog; the dog immediately snarled and bit the man. Perplexed, he looked at the woman and said “I thought you said your dog doesn’t bite!” She then replied “that's not my dog.” When we venture outside our area of competence we are prone to asking the wrong kind of questions. 

This principle can be summed up in two words: “KNOW THYSELF”. If we know the limits of our knowledge, then we know what areas need to be improved or expanded, what areas we may need to change our minds and what areas we must stand firm on. We are not perfect and there is probably no aspect of our intellect that is fully complete, but Charlie Munger says, “It is better to be roughly right than precisely wrong.” Don’t get hung up on being perfect just make sure you are well within your area of competence. 

​6/9/22   (See also principle number four in the five core principles of value investing for more insights on this topic https://www.focusonthefinish.com/the-5-core-principles.html)

THE PRINCIPLE OF Listening

When listening to others it is very important to listen with the intent to learn, not listening while forming a counter argument. This is especially true when conversing with those who disagree with you in some aspect or another. It is helpful to assume the other person knows something you don't. Even when they disagree with you on a topic you may be an expert in. It is still good to listen to try and understand how this person came to believe what they do. There must always be two things in the foundation of our mindset:

1. At the heart of “listening to learn” we come to a state of mind that is curious. Our mind set cannot be trying to convince someone of our viewpoint, but rather to be curious about theirs’. Maybe your knowledge about something is not as complete as you thought, or maybe they are incorrect, but ask, why do they believe the way they do? How did they reach their conclusion? There may be good cause for their thinking given their history. If you assume the person talking to you knows something that you don’t, then there is always something to learn. Also, unless someone is truly interested to learn something from you, you are most likely not going to change anyone's mind with one conversation anyway. Having this mindset will help you to remember that the person is more important than the argument. 

 

1. We must be willing to change our minds when evidence and facts demand it. We must also realize that situations change and what was true yesterday, may not be true today. There is an old adage that said: “how do you become a millionaire? You start as a billionaire and invest in the air lines.” This used to be true, but we saw Warren Buffett in recent years invest large amounts into the four major airlines. Because the economics of this industry changed, and there was a consolidation that brought air lines to a more stable profitability. If we refuse to admit new facts, we may miss some significant opportunities. In the same breath we must not throw out old truths and principles just because there are new ideas. This is why there is much to be learned from the older generations, and also why history often repeats itself. Charlie Munger in an interview was asked why he and Buffett were so good at what they do. His response was essentially that they are learning machines and they have a willingness to change their minds given the facts.

When we listen to others with a curious intent and a willingness to change our minds where necessary, not only will we expand the depth of our knowledge but we show great respect to our fellow man. 

6/6/22

THE PRINCIPLE OF Integrity 

The definition of integrity according to Oxford is:
"The quality of being honest and having strong moral principles; moral uprightness. The state of being whole and undivided." Most of us would like to think that we have integrity, and to some degree I’m sure we all do. However, if we are to live a life of integrity, we must be honest with ourselves and truly look inward.

Most of us would like to think that we have integrity, and to some degree I’m sure we all do. However, if we are to live a life of integrity, we must be honest with ourselves and truly look inward. Sometimes an inward look can reveal the imperfections in our morality, and forces us to ask the question: “from what or where do I derive my morals?” ​​

​Morality is much a learned trait. This is made evident with so many historical accounts of societal actions, which at the time were considered moral, but are now considered to be immoral: such as slavery, human sacrifice, and so many more. So, since we can obviously see that morals derived from society subtly change over the course of time, and peoples’ logic and reason can so easily be led astray, what can we hold as a constant gauge to which we may judge our own morals? It is not society, for society is mob ruled. It is not found in individuals, for we are all flawed (I mean we are only human after all). It is not found innately in logic and reason, because logic and reason only help explain things, and do nothing to help us derive our morals (other than maybe help lead us to a true source from which they may come from). Our moral guideline must be the Bible. I do not have time for a lecture in apologetics here nor am I the most qualified, (read C.S Lewis’s Mere Christianity for a good overview of “why the Bible”). However, if our morals are derived from Christ and His teachings then we have set the right foundation for our morality. In today's society we no longer appeal to a higher authority of right and wrong. We have taken morality into our own viewpoint, believing the lie that our knowledge is of higher authority than the Word of God. 
 
In regard to the second part of our definition, “the state of being whole and undivided” we must first judge ourselves by the biblical standard. Second, we must recognize our propensity to act a certain way when people are looking, and a different way when they are not. This is true down to the very molecular level of our beings. We will not live whole undivided lives without continuous intervention. Science has observed that molecules move and behave differently when a human is watching than when they are not. How the molecules know the scientist is looking through the microscope science cannot explain. However, if the very molecules in our body behave differently when people are around, it must take focused effort for us to live consistent, whole, undivided lives. Ask yourself what is it you do behind closed doors? Are you a different person around different people?
 
Warren Buffett offers us a quick business rule of thumb by which we can gauge our private decisions. He says to ask yourself, “would you still do what you are about to do if you knew it was going to be on the front page of the newspaper the next day?” This helps discern if you are exercising integrity, and to help judge the morality of it, maybe we should ask what would Jesus do? Or maybe you think that's too cliché. 
 
Integrity is something we must assess in ourselves regularly and work to implement in our lives. Integrity and morality are not easily defined, but when present, makes themselves evident in the lives of those who have them. It is also important to remember that no one is perfect. We must recognize when we are wrong and be willing to change our minds when necessary. This is why we must regularly evaluate ourselves by aligning ourselves with the Bible. If we are honest with ourselves and derive our morals from the God who created them, maybe we can live a whole and undivided life, a life of integrity. 

​2/11/22​

THE PRINCIPLE OF GIVING MORE THAN YOU GET

Many people think of interactions and business deals as a zero sum game where the goal is to get more than the other person in each transaction. Some would say leave nothing on the table and take as much as you can or as they say in Disney’s Pirates of the Caribbean, “take what you can and give nothing back.” However, I would say give more value than you are receiving and in the long run you will gain more. I understand that money has to be made. I am not saying sacrifice profit. The deal has to work for both parties. However, whenever possible it is good practice to give just a little more to the other side. Leave a good experience. This is not a zero sum game. It is not even a single game but rather a series of games and how you play each one can affect the long term results of the accumulation of the games.

Many times a deal is likened to a sports game. You are trying to win as many as possible to have a good season. This is a horrible analogy when it comes to business deals. In a game you are trying to win by as many points as possible (except in golf, more evidence golf is not a real sport). In business if you are trying to “win” every deal, eventually no one will want to deal with you if they don’t have to. If however, people walk away feeling like they too got a good deal and you were not trying to pull one over on them to pad your own pocket, they will want to deal with you in the future and they will most likely keep your interests in mind since you did the same for them.

In the U.S. we also like to compare business to war, executives keep Sun Tzoa’s The Art of War closer to hand than the Bible. While some aspects of the book may hold true, I believe overall it has caused more harm than good leading to a society that does not trust businesses. There are hostile takeovers, short term thinking in corporations, sacrificing long term health  for marginally better short term profits.

There is a way of doing business that benefits your interests while also benefiting all the other stakeholders. Indeed the whole point of doing business is to fill a need and add value to society. It is in adding value and filling needs that the greatest profits are made. This is the whole idea of the free market (people voting with their dollars for what is needed and wanted) and we get into trouble at society's expense when we try to control the free movement of money, which acts as a natural check on businesses. 

It is good practice to always attempt to provide more value to the other party, so that in turn they want to continue to do business and work with you. This is the best way to operate in business when working for the long term. Do not sacrifice long term gains for short term profits. I for one would take short term losses for a long term gain. Moreover I like to invest in companies that operate and have a culture like this. 


​​11/24/21

the principle of stewardship

​
The first thing to realize about stewardship is that we are not owners. Stewardship is defined as the job of supervising or taking care of something. Before we can discuss managing, investing, etc., we must first acknowledge that we are appointed and put in charge of whatever it is we are stewarding, including our lives. Everything is God’s and he gives to each of us according to our ability (Mat.25:15).  

There are only two places in the Bible that I know of where the phrase “well done good and faithful servant” is used,(Mathew 25 and Luke 19) and they are both in parables in reference to money and stewardship. We steward many things --money, our bodies, possessions, relationships, etc.-- but it seems that the one we have the hardest time stewarding God's way is money. It is the one we take most ownership of. Maybe it's because we feel we earned our money. We know we didn’t earn our children, wife, and relationships, but our money we earned through our own blood, sweat and tears.  We must realize that money is from God and he will give not according to our faith or how good of a person we are, but to the level of our ability (Mat.25:15). Therefore we will receive from God what we are able to handle.

​Christians seem to fall into one of two categories, usually depending on if they have some money or not. The first group tends to believe (even if subconsciously, remember actions speak louder than words) that money is inherently bad. It is not ok to seek to be wealthy and those who do so must also be bad. This generates a “holier than thou perspective” leading to resentment. The second group ascribes to the prosperity gospel. The Lord wants to bless you; all you must do is give in order to be blessed, and of course work hard. This in turn leads to the assumption that God owes you something, and  those struggling financially are not blessed and are out of favor with God. 

Both of these groups have the wrong perspective, and limit God to our own point of view. If we are truly managing God’s money, why would we not grow it like the good and faithful servants Jesus talks about in his parables? Furthermore, when we are tithing, we are not giving to get something in return as the prosperity gospel suggests. Instead, we are giving God His dividend, his return on investment. God gives us our talents, abilities, interests, capacity to think and our money. It is our responsibility to steward these responsibilities not to take credit for them.

I would like to offer an image of this idea of God as an investor in our lives. When an individual gives their money to an investor, they expect it to grow and have a return; so tithe is not giving a gift, it is a dividend to God. If there is no return, an investor will take his money and invest somewhere else. God expects not only a financial return, but a spiritual one as well (more on this another time, for now we will focus on the money aspect).  We can look at giving with this same line of thought. If God, the owner, says to give a percentage to a specific need or a one time donation to something, we must do it because it is not our money.

If we are like the first two servants in Jesus' parable, God will increase what he puts us in charge of, in His own timing and in His own way. Again this principle holds true for more than money. It holds true in our talents, relationships, our spiritual walk and more. This is a universal principle and we must realize that we steward all we have and even who we are. We must ask ourselves will we be like the lazy servant and bury and hide what we have been given, will we abdicate the responsibility God has asked of us? Or will we seek to increase all we are and all we are given. In great anticipation will we proudly return what we were given with the increase to the owner? Will we hear “well done good and faithful servant”? God does not just want to bless you, He wants to invest in you and let you share in the building of his kingdom. ​

​8/25/21

A GOOD LESSON FROM ATLAS SHRUGGED

Here is an excerpt from the book Atlas shrugged. It is a speech that the character Francisco gives to the bureaucrats and crony capitalists in the book. If you have not read the book I highly recommend it, the book was written in 1957 and is very relevant for today. It is remarkable to me the lessons from the past that we so quickly forget. It reminds me of a quote by T.S. Eliot from the four quartets: “What there is left to discover by strength and submission has already been discovered once or twice or several times by men who one cannot hope to emulate. But there is no competition, there is only the fight to recover what has been lost and found and lost again and again and now under conditions that seem unpropitious, that perhaps neither gain nor loss. For us there is only the trying. The rest is not our business.” In this speech we rediscover what money and the morality of money is. This gives a good understanding of what money is and how it is created. 
 
Francisco's Speech:
“So you think that money is the root of all evil?” said Francisco d’Anconia. “Have you ever asked what is the root of money? Money is a tool of exchange, which can’t exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears, or of the looters, who take it from you by force. Money is made possible only by the men who produce. Is this what you consider evil? 
 
“When you accept money in payment for your effort, you do so only on the conviction that you will exchange it for the product of the effort of others. It is not the moochers or the looters who give value to money. Not an ocean of tears, not all the guns in the world can transform those pieces of paper in your wallet into the bread you will need to survive tomorrow. Those pieces of paper, which should have been gold, are a token of honor–your claim upon the energy of the men who produce. Your wallet is your statement of hope that somewhere in the world around you there are men who will not default on that moral principle which is the root of money. Is this what you consider evil? 
 
“Have you ever looked for the root of production? Take a look at an electric generator and dare tell yourself that it was created by the muscular effort of unthinking brutes. Try to grow a seed of wheat without the knowledge left to you by men who had to discover it for the first time. Try to obtain your food by means of nothing but physical motions–and you’ll learn that man’s mind is the root of all the goods produced and of all the wealth that has ever existed on earth. 
 
“But you say that money is made by the strong at the expense of the weak? What strength do you mean? It is not the strength of guns or muscles. Wealth is the product of man’s capacity to think. Then is money made by the man who invents a motor at the expense of those who did not invent it? Is money made by the intelligent at the expense of the fools? By the able at the expense of the incompetent? By the ambitious at the expense of the lazy? Money is made–before it can be looted or mooched–made by the effort of every honest man, each to the extent of his ability. An honest man is one who knows that he can’t consume more than he has produced.’
 
“To trade by means of money is the code of the men of good will. Money rests on the axiom that every man is the owner of his mind and his effort. Money allows no power to prescribe the value of your effort except the voluntary choice of the man who is willing to trade you his effort in return. Money permits you to obtain for your goods and your labor that which they are worth to the men who buy them, but no more. Money permits no deals except those to mutual benefit by the unforced judgment of the traders. Money demands of you the recognition that men must work for their own benefit, not for their own injury, for their gain, not their loss–the recognition that they are not beasts of burden, born to carry the weight of your misery–that you must offer them values, not wounds–that the common bond among men is not the exchange of suffering, but the exchange of goods. Money demands that you sell, not your weakness to men’s stupidity, but your talent to their reason; it demands that you buy, not the shoddiest they offer, but the best that your money can find. And when men live by trade–with reason, not force, as their final arbiter–it is the best product that wins, the best performance, the man of best judgment and highest ability–and the degree of a man’s productiveness is the degree of his reward. This is the code of existence whose tool and symbol is money. Is this what you consider evil?
 
“But money is only a tool. It will take you wherever you wish, but it will not replace you as the driver. It will give you the means for the satisfaction of your desires, but it will not provide you with desires. Money is the scourge of the men who attempt to reverse the law of causality–the men who seek to replace the mind by seizing the products of the mind.
 
“Money will not purchase happiness for the man who has no concept of what he wants: money will not give him a code of values, if he’s evaded the knowledge of what to value, and it will not provide him with a purpose, if he’s evaded the choice of what to seek. Money will not buy intelligence for the fool, or admiration for the coward, or respect for the incompetent. The man who attempts to purchase the brains of his superiors to serve him, with his money replacing his judgment, ends up by becoming the victim of his inferiors. The men of intelligence desert him, but the cheats and the frauds come flocking to him, drawn by a law which he has not discovered: that no man may be smaller than his money. Is this the reason why you call it evil? 
 
“Only the man who does not need it, is fit to inherit wealth–the man who would make his own fortune no matter where he started. If an heir is equal to his money, it serves him; if not, it destroys him. But you look on and you cry that money corrupted him. Did it? Or did he corrupt his money? Do not envy a worthless heir; his wealth is not yours and you would have done no better with it. Do not think that it should have been distributed among you; loading the world with fifty parasites instead of one, would not bring back the dead virtue which was the fortune. Money is a living power that dies without its root. Money will not serve the mind that cannot match it. Is this the reason why you call it evil?
 
“Money is your means of survival. The verdict you pronounce upon the source of your livelihood is the verdict you pronounce upon your life. If the source is corrupt, you have damned your own existence. Did you get your money by fraud? By pandering to men’s vices or men’s stupidity? By catering to fools, in the hope of getting more than your ability deserves? By lowering your standards? By doing work you despise for purchasers you scorn? If so, then your money will not give you a moment’s or a penny’s worth of joy. Then all the things you buy will become, not a tribute to you, but a reproach; not an achievement, but a reminder of shame. Then you’ll scream that money is evil. Evil, because it would not pinch-hit for your self-respect? Evil, because it would not let you enjoy your depravity? Is this the root of your hatred of money? 
 
“Money will always remain an effect and refuse to replace you as the cause. Money is the product of virtue, but it will not give you virtue and it will not redeem your vices. Money will not give you the unearned, neither in matter nor in spirit. Is this the root of your hatred of money? 
 
“Or did you say it’s the love of money that’s the root of all evil? To love a thing is to know and love its nature. To love money is to know and love the fact that money is the creation of the best power within you, and your passkey to trade your effort for the effort of the best among men. It’s the person who would sell his soul for a nickel, who is loudest in proclaiming his hatred of money–and he has good reason to hate it. The lovers of money are willing to work for it. They know they are able to deserve it. 
“Let me give you a tip on a clue to men’s characters: the man who damns money has obtained it dishonorably; the man who respects it has earned it. 
 
“Run for your life from any man who tells you that money is evil. That sentence is the leper’s bell of an approaching looter. So long as men live together on earth and need means to deal with one another–their only substitute, if they abandon money, is the muzzle of a gun. 
 
“But money demands of you the highest virtues, if you wish to make it or to keep it. Men who have no courage, pride or self-esteem, men who have no moral sense of their right to their money and are not willing to defend it as they defend their life, men who apologize for being rich–will not remain rich for long. They are the natural bait for the swarms of looters that stay under rocks for centuries, but come crawling out at the first smell of a man who begs to be forgiven for the guilt of owning wealth. They will hasten to relieve him of the guilt–and of his life, as he deserves. 
 
“Then you will see the rise of the men of the double standard–the men who live by force, yet count on those who live by trade to create the value of their looted money–the men who are the hitchhikers of virtue. In a moral society, these are the criminals, and the statutes are written to protect you against them. But when a society establishes criminals-by-right and looters-by-law–men who use force to seize the wealth of disarmed victims–then money becomes its creators’ avenger. Such looters believe it safe to rob defenseless men, once they’ve passed a law to disarm them. But their loot becomes the magnet for other looters, who get it from them as they got it. Then the race goes, not to the ablest at production, but to those most ruthless at brutality. When force is the standard, the murderer wins over the pickpocket. And then that society vanishes, in a spread of ruins and slaughter. 
 
“Do you wish to know whether that day is coming? Watch money. Money is the barometer of a society’s virtue. When you see that trading is done, not by consent, but by compulsion–when you see that in order to produce, you need to obtain permission from men who produce nothing–when you see that money is flowing to those who deal, not in goods, but in favors–when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you–when you see corruption being rewarded and honesty becoming a self-sacrifice–you may know that your society is doomed. Money is so noble a medium that it does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as half-property, half-loot. 
 
“Whenever destroyers appear among men, they start by destroying money, for money is men’s protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, ‘Account overdrawn.’ 
 
“. Do not expect them to stay moral and lose theWhen you have made evil the means of survival, do not expect men to remain goodir lives for the purpose of becoming the fodder of the immoral. Do not expect them to produce, when production is punished and looting rewarded. Do not ask, ‘Who is destroying the world? You are. 
 
“You stand in the midst of the greatest achievements of the greatest productive civilization, and you wonder why it’s crumbling around you, while you’re damning its life-blood–money. You look upon money as the savages did before you, and you wonder why the jungle is creeping back to the edge of your cities. Throughout men’s history, money was always seized by looters of one brand or another, whose names changed, but whose method remained the same: to seize wealth by force and to keep the producers bound, demeaned, defamed, deprived of honor. That phrase about the evil of money, which you mouth with such righteous recklessness, comes from a time when wealth was produced by the labor of slaves–slaves who repeated the motions once discovered by somebody’s mind and left unimproved for centuries. So long as production was ruled by force, and wealth was obtained by conquest, there was little to conquer, Yet through all the centuries of stagnation and starvation, men exalted the looters, as aristocrats of the sword, as aristocrats of birth, as aristocrats of the bureau, and despised the producers, as slaves, as traders, as shopkeepers–as industrialists. 
“To the glory of mankind, there was, for the first and only time in history, a country of money–and I have no higher, more reverent tribute to pay to America, for this means: a country of reason, justice, freedom, production, achievement. For the first time, man’s mind and money were set free, and there were no fortunes-by-conquest, but only fortunes-by-work, and instead of swordsmen and slaves, there appeared the real maker of wealth, the greatest worker, the highest type of human being–the self-made man–the American industrialist. 
 
“If you ask me to name the proudest distinction of Americans, I would choose–because it contains all the others–the fact that they were the people who created the phrase ‘to make money.’ No other language or nation had ever used these words before; men had always thought of wealth as a static quantity–to be seized, begged, inherited, shared, looted or obtained as a favor. Americans were the first to understand that wealth has to be created. The words ‘to make money’ hold the essence of human morality. 
 
“Yet these were the words for which Americans were denounced by the rotted cultures of the looters’ continents. Now the looters’ credo has brought you to regard your proudest achievements as a hallmark of shame, your prosperity as guilt, your greatest men, the industrialists, as blackguards, and your magnificent factories as the product and property of muscular labor, the labor of whip-driven slaves, like the pyramids of Egypt. The rotter who simpers that he sees no difference between the power of the dollar and the power of the whip, ought to learn the difference on his own hide– as, I think, he will. 
 
“Until and unless you discover that money is the root of all good, you ask for your own destruction. When money ceases to be the tool by which men deal with one another, then men become the tools of men. Blood, whips, and guns–or dollars. Take your choice–there is no other–and your time is running out.” 
The following is an excerpt from Atlas Shrugged, © Copyright, 1957, by Ayn Rand.

​8/17/21

Bitcoin

Cryptocurrencies are an intriguing idea. A currency separate and free from government manipulation; its value controlled only through the free market. What is cryptocurrency and what makes it different from other currencies? Why do criminals like it so much and what might be its role in an ever increasing digital society? 

Cryptocurrency and its history
Cryptocurrency is a digital currency that is made and sustained through a technology called block chain. Block chain can be best described as a distributed ledger. Instead of information, such as documents and transactions, controlled and stored centrally, they are distributed across a network. This makes it so no one can change the timestamp on a block of information. This in essence is more secure, because a block of information is time stamped and saved on many different servers which all verify one another. So data can not be manipulated centrally, a hacker would in theory have to hack into hundreds or thousands of servers at the same time instead of one. While this technology has been conceptualized by mathematicians since the late 80’s, we did not see application of it until 1991 when Stuart Haber and W. Scott Stornetta cryptographically secured chains of blocks whereby no one could tamper with timestamps of documents. And it was not until 2008 that block chain was used to create Bitcoin. Bitcoin was started by an unknown person or group that goes by the name “Satoshi Nakamoto.” 

To date no one knows who Satoshi Nakamoto is. To me the name is very reminiscent of Die Hard and Nakatomi Plaza. At first I thought the name was the business executive who got shot by Hans Gruber in Die Hard. However, upon further research, it just sounds similar. Interestingly I am not the only one who has thought this; so let me explain further. This can lead down a rabbit hole, because Hans Gruber in the movie was stealing bearer bonds. Bearer bonds are a type of bond that pretty much no longer exists. A bearer bond is a bond that is owned by whoever is in possession of it (whoever bears it). There is no title other than physical possession.  It is possible that whoever chose the name Nakamoto is referencing the bearer bonds from that movie when he/she/they created Bitcoin. But I digress. I have obviously seen that movie too many times, but what else are you going to watch at Christmas time? 

Bitcoin, as well as other cryptocurrencies use block chain technology to create, store, and move digital currency. I am not an expert in the technicality of this, so I will not go into any great detail on how it is made, but it is generated on computer servers and those servers get paid in bitcoin to create it. It is sort of the opposite of how the government prints money, which is centralized and with the federal reserve. It is made on multiple servers and is very decentralized. The owner of the servers doing the creating can then sell them on the open market. Transferring can also be done between individuals without an exchange. 


Crypto compared to money
The value of any cryptocurrency is whatever people are willing to pay for it. It is similar to art or gold in this sense. Art is worth whatever someone is willing to pay for it. I think many people think of it like gold: as in, there is less cryptocurrency than the dollar and perhaps it can serve as a kind of hedge to the dollar. However, gold and art are both physical assets. I personally do not invest in gold or art for the sole reason that they do not generate any kind of cash flow and their sole value is based on what others are willing to pay for them. Companies and real estate can both generate cash flow through earnings. Gold, art, and now cryptocurrencies are only worth what some other fool will pay for them. The greater fool theory in essence is, I will buy something now because there will be a greater fool who will buy it from me for more later. Any time a price of something is not based on generating and selling a product or service, you can be sure you are operating in the greater fool realm of pricing. 

What makes something a good currency is people's willingness to use it as a medium of exchange. Have you ever asked yourself why we use the dollar and not the passo or gold or silver? The answer is the government. This is one of the few benefits to governments, when they don’t mess it up too badly. Governments issue money as a country's median of exchange by requiring its citizens to pay its taxes in that currency. People can barter or use whatever they want to trade with, but when their tax bill is due, it must be paid in the currency the government dictates. Naturally it is easier to trade in the state issued currency and avoid exchange rates and capital gains on every transaction you do. 

Bringing it back around to Die Hard (sorry I can’t help myself), cryptocurrencies are very much like bearer bonds in the sense they are somewhat anonymous. Whoever holds them owns them. However, bearer bonds would traditionally pay dividends, so the analogy would end there. This is however why criminals have taken to cryptocurrency so much.

Why criminals love it
Cryptocurrencies can be moved and transferred securely and anonymously. This is ideal for criminals such as human traffickers, drug dealers, smugglers, illegal gun purchases, and terrorists. Although cash can be transferred anonymously, it can be hard to move across borders and into bank accounts. Cryptocurrencies provide criminals with ease of transfer as well as easy conversion into cash in and out of bank accounts. It has provided a much needed service to the criminal world. Where it used to cost a lot to move cash across borders and then turn it into clean money that could be put into bank accounts, is now a much easier process saving them millions upon millions of dollars. To make things worse, more kinds of cryptocurrencies and exchanges to trade them on has not only made it easier for criminals to use this service, but it has also made them more money, as people drive the price of the currencies up. What was once a cost for criminals is now another source of revenue. 

Most of you have probably heard about the recent ransomware attack on Colonial Pipeline, where they paid $4.4 million to the hackers. What a lot of headlines failed to report was that they asked for the funds and were paid in Bitcoin. This is not the only example; there is an endless supply of examples of hackers, kidnappers and drug dealers demanding payment in bitcoin and other cryptocurrencies. 

What could its role be in society
Economists have long thought about a currency outside of what the government issues and there have been several experiments with it. Cryptocurrency is the first one to really take off. However, so far it has not become a regular median of exchange and has just been purchased by people who anticipate its appreciation and sale to a greater fool. For the most part the only use as a median of exchange has been in the criminal enterprise. That is not to say that it couldn't develop into a commonly used median of exchange. 

One major issue for it to become a median of exchange is which crypto would end up being used for this purpose? Credit card companies, banks and businesses would have to create a way for easy transfer. This is possible, but determining which one or two or three would end up being used like this would be impossible to tell. 

Another issue is quantity. Creating and distributing enough digital currency throughout society to be used for regular purchases would be very hard. People would have to trade dollars for crypto. In addition cryptocurrencies usually put a cap on what is going to be created, this makes it a scarce resource, similar to gold and not easily used for exchange. If a limit is not placed on how much can be made, it would be over produced until there is such an abundance that it becomes worthless (think hyperinflation, like Germany after world war II).

You could tie a cryptocurrency to gold, similar to what the dollar and other currencies used to be, but unless that gold is stored in vaults and can be actually exchanged, it is just simply a derivative. This is the same problem the dollar had before it transitioned to a fiat currency. Fiat currencies and gold is an article for another time. 

What we might see are countries banning cryptocurrencies and/or issuing their own, China and some other countries are talking about it now. This could make current cryptos worthless or simply left for the underworld of crime. However, this could also bring with it its own evil, issuing in the next level of government surveillance, allowing them to know every person's transactions. If a country issues their own cryptocurrencies it would be done through their own exchanges, allowing them to track every single transaction in real time.  On the other hand, this might make taxes easier; since they would know all your transactions you might not even have to file. They could just take what is owed and you could file if you have a dispute. 

Block chain technology may have many good uses, but cryptocurrencies are, as Charlie Munger referred to them, “as worthless as artificial gold”. Most recently Charlie Munger in this year's Berkshire Hathaway meeting when asked about Bitcoin said: “Of course I hate the Bitcoin success, and I don’t welcome a currency that is so useful to kidnappers and extortionists and so forth. Nor do I like shuffling out just a few extra billions and billions and billions to someone who just invented a new financial product out of thin air. So I think that I should say modestly that the whole damn development is disgusting and contrary to the interest of civilization and I'll leave the criticism to others.” 

Long story short, cryptocurrencies are an intriguing idea whose value is based literally on nothing. Gold you can hold, art you can look at, currencies you can exchange for goods. Crypto’s you can’t hold or touch, there is literally nothing to look at physically and the only thing you can really trade it for is currencies. In my opinion this is a modern example of the emperor having no clothes. 
                                                                                                                                                                                             5/24/21

IS THE MARKET OVERPRICED?

It can be hard to make sense of a market that was arguably overpriced before the pandemic and is now reaching new highs, while still lagging in earnings. Why are market prices of stocks and real estate rising so fast? Markets can not really be predicted, but we can still understand the principles behind what moves them.

Markets are forward looking and move ahead of their earnings (meaning the price of the stock can rise faster than the money they make). This is part of the reason the stock market has increased so much.

Another reason is that interest rates are near zero percent. This can be confusing to understand at first, but it is actually simple. The interest rate, set by the federal reserve, dictates what interest rates are for mortgages, loans, bonds, and debt. When interest rates fall it lowers payment on debt. 

For example: if you were to get a loan for $100,000 and your interest rate was 3% on a 30 year mortgage your monthly payments would be $422. If you were to get that same loan and the rate was 10% your mortgage payment would be $878. So when the federal reserve lowers interest rates they are effectively making it cheaper to buy something at the same price, because your cost to borrow is lower. You can see how this would increase home purchases. What is a little more confusing is how it affects bonds and stocks.

Bonds are a form of debt. Corporations will sell bonds and pay interest to the bondholders. Bonds are traded on the open market; so their yield (or rate of return on the amount you paid) is determined by the price that is paid for the bond. When interest rates set by the federal reserve fall, the yield on newly issued bonds falls. This lowers the amount of money you can make (or lower yield) by purchasing a bond. At the same time it makes it cheaper for corporations to borrow money. So low interest rates have the opposite effect on bonds as they do on the housing market.

As interest rates fall, fewer people want to invest in bonds, because their yields are so low. This, in effect, can give a boost to the stock market, because it is cheaper for companies to borrow money (issuing bonds) and bonds are a low yield alternative. It makes stocks more valuable, similar to real estate. Institutional and individual investors will start seeking higher yield, even if it means buying a stock at a higher price. They will take on more risk to gain a higher percentage  return. This is called chasing yield. This can have a large effect on the stock market.

When low interest rates and government money are what is helping prop up the stock market, it is tricky for the federal reserve to figure out how to increase rates again without scaring people out of the stock market. As long as freshly printed money flows into the economy and interest rates stay low, the market will stay high. We do not know how long money can be added out of thin air before inflation becomes a problem. We do know that no country has been able to do it for very long on the levels we are currently seeing before it became a problem. Governments printing money (or quantitative easing) is a complicated topic that can be discussed another time.

One other factor that has added to the rising market is government money. We see individual investors (like the Redit crowd and new investors) spending government stimulus checks on the stock market. When the government handed $1200 to over 350 million people it injected a steroid dose of over $420 billion directly into the pockets of individuals. Many people sitting at home with nothing to spend it on put it in the stock market. This is in addition to the rest of the stimulus that was injected into the economy.

All this does not create a friendly environment for Value Investors. Stocks on the whole have reached levels where it is hard to find undervalued companies. It is hard to say how long this environment void of good deals will last. With “free” government money and ultra low interest rates, I can’t say stocks are extremely overvalued. However, using traditional valuation methods (based on earnings and cash flow) they do indeed look overpriced.

I continue to look for out-of-favor stocks and ones to add to my wish list, just in case Mr. Market decides to offer me a company on sale. Warren Buffet has gone years in between buying stocks, because he will not compromise on the way he evaluates stocks. Buffet says: “What is “investing” if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value- in hope that it can soon be sold for a still higher price-should be labeled speculation…”.

Charlie Monger says that money is not made in the selling or the buying, money is made in the waiting. 

The good news is that the bounce back from Covid, in the stock market at least, has been very fast. The optimism seen in the stock market is a good sign for the economy recovering. However, financial assets have never been so high at the start of a recovery before. This can lead to slower growth in the future and a continued inflated stock market. In times like these we must be patient for an investment deal to come up that is inside our area of competence. I will not compromise on the fundamental principles of investing, and must muster up the patience needed to wait for the best deal. That being said, if anyone out there knows of something undervalued I would love to hear about it.                                            5/3/21

THE ECONOMICS OF MONEY AND VALUE

There is about $1.7 trillion in circulation in the U.S. and around the world according to irs.gov. Though the Physical dollar is a finite resource (whatever amount is printed at the time), money is not. Money is a numerical depiction of value, offering us a median of exchange to make trade easier. This is true even when we were on the gold standard. Here are three simplified example of how money is created and can grow and the number of dollars in existence has nothing to do with the amount of money there is at a given time.

1. If a farmer raises cows those cows are worth a certain amount of money. When a new cow is born it increases the value of his farm by whatever one cow is worth. The value of the cow is recorded on the books and the farmer has to pay taxes on it. There is no new physical cash but there is new money created and retained in the value of that cow. This is an example of production and one way that money is created through industry.
2. Another way money is created is through lenders like banks. Banks can lend out 90% of their deposits. So if an individual deposits $100,000 into a bank the bank can then lend out $90,000 to other borrowers. Even though $90,000 is lent out $100,000 is still recorded on the books of the individual who deposited it. This infuses cash into the economy and is why fed interest rates are watched so closely. The person who borrows (say for a business loan) does so knowing they will have to pay it back with interest and therefore believes that the business they borrowed the money for will create more money/ Value than was borrowed.
3. Another example of how money is created is in companies equity. If I put $10 cash into xyz company and it doubles its revenue, the $10 worth of shares I have in xyz company are now worth $20. So my original stake in xyz company doubled in value/ money but for the same $10 cash I put in. The company earns more revenue based on its production of goods and services, not by how much money it can take from people but by how much value/money they can create that people need. Those people who buy the goods and services used cash to pay but how did they get the cash? They had to produce something, for most people it is labor hours. They traded their time/ labor for cash because cash can be exchanged for what they need and value and it may be the only thing of value they have to offer society. Every person and business creates value that is exchanged for other things they need and value, currensy is what we use to exchange that value.

GDP (Gross Domestic Product) is what value or goods and services are produced. All of these goods and services worth are represented in money. Therefore money/ value is created through human production, ideas, creation, services, etc. The physical dollar has little to do with what money/ value there is in society. The supply of money only affects how the dollar relates to the value humans create. The more money printed the less value (goods/services) it will purchase, this is known as inflation. If production (creation of value) goes down the more money will be able to purchase, this is known as deflation. So value is created when another cow is born not when another dollar is printed.

Inversely, Money/ Value is destroyed/ reduced in the same way, just opposite. If the cow dies, can’t pay back a loan (because enough value was not created) causing a credit crunch, or the Value of xyz company goes down to $5. All of these things are interconnected and effected by free trade, innovation, and government's monetary policy. 

I say all this to try and show that value is created by people and money is just a numerical representation of that value and that can be translated into any currency, gold, silver, the pound, bitcoin, etc.  Money is only limited by what we as humans produce, and we have shown there are few limits to what we can produce. To think there is a finite amount of money is to have a scarcity and poverty mindset. We are not taught this in schools and it can be hard to grasp but at the same time it can be liberating, releasing us from thinking we have to get cash/ money rather than producing it. This understanding of how our world works will not only increase over all money supply but it can release people from poverty. 

It is my conviction that people can do so much more together than they ever could do individually and we can produce more than our world has ever seen before. With this mindset it is also much easier to be a giver, when you give you are not giving a finite resource but a portion of a living well that continues to produce value and equipping others to do the same by increasing their own value through what they can produce. It is all obviously  more complicated than what I have explained but I’m trying to explain it best I can.  I hope this helps a little with the understanding of something very complicated. Economics can be hard to distil into simplified examples. 

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THE ALLURE OF PEN AND PAPER

​I am thankful for the allure a nice notebook and pen has. It draws you in and begs you to write something and you want to, but you can't. You could not write something good enough or correct enough to be permanently stuck on the pages of this beautifully classic notebook. For so long pages upon pages are not written on and words are lost to time and history.

Finally one day enough is enough and you start writing, writing regardless of the mistakes or errors, regardless of grammar, regardless of what it may sound like. These lines need words written on them, they are listening to your story, your passions, your worries, your praise, they are lifting your words to the heavens so God himself may read your untold story. The universe is crying for an encore, you must write more, fill these pages and more with your words. Imagination is found on these blank pages as soon as they start to get filled. So write to see what is on the pages, write to find your voice, write to appeal to heaven, no one else is watching, so write for your heavenly audience. ​

FEEDING THE 5,000

When Jesus fed the 5000 he could have done so without the boys lunch. So why didn’t Jesus tell the boy “no thanks that’s all you have to eat, you keep that I’ll take care of everything else?” I think there are two things we miss when we read this story first is that the little boy was not the only one with food. Do you really think out of 5000 people he was the only one that had any food? No he was the only one that gave up his food. 

The second thing we miss is that God blesses through our sacrifice. I wonder if the boy even saw the miracle that day. I wonder if he left after giving his food to Jesus and went without food that day. I like to imagine this is a possibility because so often we do not see the fruit of our offering. 

​How many times do I not give what little I have convincing myself that it would not make a difference. If I would only give what little I have, maybe God will feed 5000 with it, but we rarely get to see the miracle God does with our simple gift of a meal or a few dollars. But here we get a glimpse of how God can do so much more with what we give. We never hear about the boy again but I imagine he was truly blessed if he got to see the mericle, he most certainly would have at least heard about it. I don’t want to be the guy in the crowd that horeded his food for fear of going hungry. I want to give, knowing God will take care of me and bless 5,000 more.

I wrote this several years ago and it is amazing to reflect on this.

DO WHAT YOU LOVE?

What a fallacy it is to tell someone to do what makes you happy or to do what you love. For what makes you happy now is most certainly unsustainable and what will make you happy in the future most certainly would not bring you such pleasure in the present. As humans we seek a meaning that is deep enough to sustain us through tragedy. Our goal should not be to seek happiness; for happiness is a low goal and unsustainable. I think every person wants their life to hold some deeper meaning and when we lose or cannot obtain this we settle for short term pleasures as a sad substitute, trying to find what will make us happy now and sacrificing our future. Instead what would bring true Joy would be a life of meaning, a life sacrificed for a deeper purpose elevated through gratitude for the things that are good, and sacrificing one's own short-term happiness and pleasure for something greater. This brings true Joy to your life not by seeking happiness now but by sacrificing it.

CONVEYING THOUGHT THROUGH WORDS

As I write more and attempt to turn my thoughts into sentences I, In a way, have come to envy the intellectual type that can seamlessly translate thought to word. It is a powerful thing to be able to do and not as easy as you might think. The ability to not freeze or lose your train of thought while simultaneously conveying thought (essentially limitless) through language (very limited with specific sets of rules) in the hopes that the words clearly convey the thought you intended to the person you are talking to. This is made evident in a discussion or debate between two people. The person that has the ability to clearly convey thought tends to win a debate. That is why it’s easy to get frustrated when you can’t say what you want to and the other person can. This is how discussions can quickly turn to arguments and the person unable to translate thought to words starts to get upset and many times resorts to attacking  the other person‘s character. This can also happen when you start to realize, either subconsciously or consciously, your side of an argument might be the wrong side. It is easier to verbally attack someone else’s character than it is to admit to yourself you might be wrong. This is because if you are wrong then you would have to change your point of view and if your identity is found in your point of view it is even harder to change. 

Change then would require you to give up your identity. It is much simpler to resort to anger, attacking another person‘s character attempting to attach their identity to something bad or evil to justify keeping your point of view. If instead we have the mindset that the relationship with whoever you talk to is more important than winning a debate or changing people's mind (because it’s almost impossible to change people’s point of view) then from the start of a discussion we can agree to disagree. It’s ok to disagree, it’s not ok to write someone off just because they think differently than you. In addition Identity should not be found in the single point of view, we should always be willing to change with new information and be curious about other points of view. if we value people over opinion unity is bound to happen, we can then look past the differences and find the common. ​

COFFEE MORNINGS

Has anyone else experienced this the past couple days. Cool tired mornings when the bed seems like it could be heaven. The warm covers the most comfortable thing in the world. It is on these mornings that coffee is most required. The warm cup of coffee warms your cold fingers and your nose gets moist from the steam after taking a sip. You almost want to thank the cup of coffee for getting out of bed and you might, but the bed is still calling you. Remembering the warm covers, you now almost want to say goodbye like they are your spouse and you will see them tonight. Instead you must choose the cup of coffee for sanity reasons and face the day. It is only after the second cup of coffee that you realize it's actually an hour earlier, and it is all because of daylight savings times. ​​

BEAUTY COMES FROM LIGHT

Well it’s the day after Christmas and the house is quiet, all except the sound of the coffee pot and my pen on paper. The hustle and bustle of Christmas is over and regular work schedules will return. All the lights will come down, goals will be set for the new year and the season of Thanksgiving and reflection will come to a close. As I sit here still reflecting, not quite ready to focus on goals, I am just so thankful for so many things. I truly live such a blessed life. I am so thankful to God and the blessings He has given even after my own failures and mistakes. I have come to the conclusion that all beauty is made in the light, because nothing can be seen in darkness. Sometimes we cannot see the beauty all around us, we must step into the light. Beauty may be in that eye of the beholder, but it is revealed through the light. And as my quiet morning comes to an end, because I can hear Judah stirring in his room, I thank God one last time for sending the light of the world on Christmas. ​

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