Money – Leverage - Power
The past year has been a great period of growth and reflection for me. While 2024 marked another year of spectacular growth in terms of financial freedom, and professional growth; the same cannot be said of the nation’s economic, financial and political climate. With the election of Donald Trump for another term, the nation is left with the lesser of two evils. On the one hand, the Democratic party is intent on printing money to enable financial bail outs for irresponsible college debt holders, and “green energy” companies with political ties to the government. Their policies are riddled with holes, and would undoubtedly have carried an even heavier tax burden for the American middle class. Now with the Republican leadership coming into office in less than one month, the outlook is similarly bleak. They too will plunder the nation’s resources in order to advance their own personal wealth and that of their closest associates. This is already apparent given who Trump is enlisting into his coming administration.
There is no doubting who politicians favor; those with money and power. The means by which each party implements their respective policies are inconsequential, as the ends are nearly identical; keep working and middle class American families cash strapped and cogs in the machine that keeps the elite in control. As a young adult, my position was typically a hostile one towards our government and political institutions. Regardless of whether I wore the uniform as an army officer, my position was always one of skepticism towards our stated mission, values, and benefit to the American public. Many of these opinions I still hold, as the value of an over priced top heavy bureaucratic military is over stated and over played.
Having completed my undergrad studies in the spring of 2008, I know all too well the consequences of terrible macroeconomic policy by our political leadership. I understand that I really did not have many choices upon graduation. I was already in the Army ROTC program, and was set to receive my commission as a second lieutenant in the field artillery. My wife and I were expecting our new addition to the family and we were butt loads in the hole with our townhome puchased during the preceding housing boom. This takes me into the main point or theme of this blog post; choice.
I always assumed that money affords one leverage and with that leverage you obtain power. I even communicate this to my students when we discuss ethics in computer science. To a certain extent, this principle does still hold merit. Now that my wife and I have achieved some minor degree of financial freedom, my perspective on this idea has changed slightly. During this holiday break from teaching, I encountered an absolutely fascinating biographical depiction of Wall Street’s history, and the men who helped build its foundations. Strangely enough, aside from technological advancements, not much has changed regarding securities trading in the United States. It is still largely dominated by a small group of wealthy elite, and the regulations which are designed to prevent speculation from breaking the economy are dubious or easily circumvented by those with the most wealth. Nevertheless, my investment strategy is fundamentally opposite from the widely speculative pop culture investment strategy employed by many others.
I only invest directly into companies thru a standard brokerage account, and only in those companies with reasonable price to earnings ratios (typically < $100 per share), and those which pay healthy historical quarterly and annual dividends. A couple of my main points in taking this approach;
1. Companies who pay both quarterly and annual dividends are inherently more cash healthy and less debt burdened than those which do not. This normally holds true with their operating margin ratio.
2. Direct ownership versus fund management is inherently more liquid as I can elect to sell shares on my terms, as needed without explicit restrictions.
3. This approach avoids wild swings in net worth, as I can easily offset minor stock drops with heavy cash investments in high yield certificates of deposit or bonds.
While there may be some value to certain managed index funds, they still do not answer the ultimate question for me; how do you ensure the fund is actually following the prospectus’ investment strategy? The simple answer; no one can be 100 percent certain that a managed index or mutual fund is placing its money in the best interest of the fund’s investors. Fundamentally, it is no different than the wild west early days of Wall Street where banks like Goldman Sachs first invented the idea of the “investment trust”, or what we call today a mutual fund. On paper, index/mutual fund returns can look real rosy, but individual investors don’t actually hold any direct ownership in the companies the fund invest in. Instead, fund investors own shares of the fund’s stock. Therefore, if the fund’s investments tank, investors can lose everything and have no recourse in which to easily liquidate their holdings in a timely manner. Case in point are retirement investment vehicles like 401Ks, and individual retirement accounts (IRAs). An individual’s hard earned monies are essentially tied up until retirement or only accessible via loans or steep penalties for early withdrawal.
In my viewpoint, that is what the entire financial system is designed to accomplish; cheap and easy capital for the wealthy elites to manipulate and consolidate their power. The only folks left without a chair when the music stops on these bull runs are the retail investors. Watching the show mentioned above cemented this understanding. Historically, the government or Federal Reserve has simply injected cash into the stock market whenever the bubble is about to burst. This is essentially what the Federal Reserve bank does; print money for their politically connected friends when the market corrects itself so they never lose. I’ve included the Amazon Prime link for the show below, and would recommend anyone interested in learning more about stock and bond investing to watch all episodes.
Nevertheless, as corrupt and tilted our financial system is, it still is the most stable and transparent one in the world. No other country’s stock exchange offers the level of detail as the Securities and Exchange commission’s EDGAR database, including the British. Anyone with an internet connection can research publicly traded companies listed on American stock exchanges, and make informed decisions on where to place their hard earned money for growth.
While sitting in a dealership waiting for my nearly 10 year old vehicle to be serviced this past week, I came to realize the true peace behind financial freedom; choice. It is something I never had as a young adult while burdened by a seemingly endless amount of debt. Be they car payments, student debt, personal loans or punitively high interest on a home martgage, I always felt powerless and with limited choices. Now that we are debt free, and well on our way to over 50% equity ownership of our current home, I no longer feel that desperation or anger towards the systems in place designed to keep us cash poor. I have the knowledge and capability to keep our aging vehicles safely on the road for years to come, all the while growing our small net worth and building a safe and stable nest egg within the confines of the that same system designed to keep us restrained and powerless. For me, having enough money to be debt free, cash flow healthy (>=50% discretionary net monthly income), grants me leverage, and that gives me choice. Choice in where and when we decide to splurge and eat out at a nice restaurant. Choice in where and how I consume, and also choice and restraint in how I choose not to consume. To me that is power. Even more important, that is peace of mind and allows me to focus on what is important; family, health and stability.
Titans: The Rise of Wall Street
(https://www.primevideo.com/detail/0FCSZ741LY6TMIFN37LH7ANYSJ/ref=atv_dp_share_cu_r)
Written by:
1. Ron Stephenson
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