Do all roads lead to financial success?


April 4, 2020

This is the first page from the coming series of essays titled “Save like an American”

In 1987, American Philosopher Allen Bloom wrote a book titled The Closing of the American Mind in which he claimed that 90% of American students came to college with the assumption that there is no such thing as objective truth.  The crux of this work was to explore the concept of relativism, the idea that “Truth is what I want it to be” and juxtapose it to the idea that truth can be objective. This idea is essentially the claim that truth can exist independently of one’s opinion and reality can therefore be considered independent of human thought.  Bloom argued that the idea of the relativity of truth makes science and mathematics impossible. This is because both disciplines are highly dependent on logic and deductive reasoning. For instance, 2+2 will always equal 4, no matter how much we might wish it was 5.

This is easy to understand from a mathematical standpoint, but from a philosophical standpoint, the truth is harder to decode. As an example, if a man is walking down the street with his wife and he trips and falls, whose fault was it? The bystanders may say that the uneven ground caused the man to trip and fall. Others may still claim it was the ice that caused the man to slip. The man may claim that his wife pushed him, but can we really deny any of these realities. Perhaps the man was in the middle of a troubled marriage and wanted to believe that his wife pushed him on purpose, and who can tell him otherwise? 

Even in this example, we can still see that the truth is binary, that two realities cannot exist at the same time. Either the man slipped and fell or his wife pushed him. All other interpretations are just that. Interpretations, and clouded by human bias, they can be wrong and worse still, they can be intentionally wrong.  I believe that the most pointent example of the fallacy of relativity can be summed up in the phrase “Those who are hit by a train quickly accept the reality of objective truth.” 

The reason that I started this discussion with a piece on relative truth is because I believe that ideas have consequences. And the ideas of relative truth have impacted the financial industry and have caused millions to lose money unknowingly and necessarily.

For my first few years in the financial industry, I was exposed to numerous different financial philosophies that all seemed to be so disparate from each other. For instance, some people would tell their clients that the path to success was to be debt free. This would entail saving up big piles of money and limiting expenditures, in the hopes of paying off all accumulated debt.  Then there were other philosophies that would place great amounts of a client’s disposable income into the market. The reasoning here is to accumulate a large pile of money in order to pay or fund a dream known as retirement.  

My point here is that in every bull market, it doesn’t seem to matter what philosophy you ascribe to, everyone’s a winner so long as the market ticks upward.  But what about on the other side? What happens when the market drops off overnight or over a period of weeks or months? If you’ve spent your reserves on becoming debt-free, chances are you will be forced to go back into debt to cover life expenses in troubled economic times.  My good friend Jerry Fetta used to subscribe to this theory as an adviser and had this to comment on the realities of the debt-free philosophy:

“I call this [no cash flow with lots of assets] the Anchorage number because Anchorage Alaska, where I live, is terrible about this. Everybody owns their own house, everybody owns a fourplex, yet everybody I meet with has no cash flow. If it does not have cash flow, it is not an asset. Most of the time these people are buying these assets with cash, or paying them off, or paying them down. Take this example: if he’s got two hundred fifty grand in properties that are paid for, he could actually sell those properties, and turn that property from ($250,000) to a million if he would use debt. His cash flow would be higher, he’d be able to deduct the interest off, and he would benefit from debt pay down”

The problem here is that there are so many competing financial ideas and strategies that all have real consequences on the other side- when the market tanks. However, we seem to get lulled into a sense of invincibility when there is an extended bull market and there appears to be a relativity of financial thought. That is perhaps the most destructive aspect of a market-driven financial strategy, because reality has a way of seeping through in the hard times. 

What perhaps is the most troubling aspect of this false sense of security and relativism is the reality that Americans seem to not have enough when the market contracts.  But would it bother you if you found out that no matter what happens in the market, Wall Street always wins?