We bring you the TBB Best of Web links: An epic post on the psychology of money, a hard hitting post on the Big Four cartel, how the term midlife crisis came to be, a fascinating stroll of a Muslim in the West Bank and another hard hitting post on crypto fraud and all kinds of fraud in general and how important it is to have strong rules and laws and lock the fraudsters in jail!
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This is one of those rare EPIC reads. I thought about singling it out and posting it by itself on Saturday. But I slept in 🙂 It is a long read but if you are interested in money and personal finance in general (or more specifically, on behavioral finance) this is just pure gold. There ARE amazingly talented writers out there. Sadly, our hobby has been taken over by crappy to mediocre writers masquerading as travel experts while expertly selling travel rewards credit cards to unsuspecting masses deceivingly selling them fake dreams of traveling for free. Oh wait, today is Sunday, we are only going to focus on the Best of Web, I am sorry 🙂
A key use of wealth is using it to control your time and providing you with options. Financial assets on a balance sheet offer that. But they come at the direct expense of showing people how much wealth you have with material stuff.
There are times when money plans need to be fixed. Oh, are there ever. But there is also no such thing as a long-term money plan that isn’t susceptible to volatility. Occasional upheaval is usually part of a standard plan. When volatility is guaranteed and normal, but is often treated as something that needs to be fixed, people take actions that ultimately just interrupts the execution of a good plan. “Don’t do anything,” are the most powerful words in finance. But they are both hard for individuals to accept and hard for professionals to charge a fee for. So, we fiddle. Far too much.
The idea is that you have to take risk to get ahead, but no risk that could wipe you out is ever worth taking. The odds are in your favor when playing Russian Roulette. But the downside is never worth the potential upside.
A key point here is that few things in money are as valuable as options. The ability to do what you want, when you want, with who you want, and why you want, has infinite ROI.
I used to work in one of the Final Big Four accounting firms before I could not take it anymore and started my own financial planning practice. I could not see myself in there for years trying to fit in, just not my cup of tea I guess. I think this article lays it all out there and I agree with it. It is long, you have been warned.
Remember after the shenanigans with Arthur Andersen auditing Enron…these firms were all supposed to get rid of their consulting practices? Yeah, good luck with that…I am so glad I left that field! I knew it was time when the policy changed and I could no longer use my own travel rewards credit cards for firm travel 🙂 #truestory
For centuries, accounting itself was a fairly rudimentary process of enabling the powerful and the landed to keep tabs on those managing their estates. But over time, that narrow task was transformed by commerce. In the process it has spawned a multi-billion-dollar industry and lifestyles for its leading practitioners that could hardly be more at odds with the image of a humble number-cruncher.
Just four major global firms – Deloitte, PricewaterhouseCoopers (PwC), Ernst & Young (EY) and KPMG – audit 97% of US public companies and all the UK’s top 100 corporations, verifying that their accounts present a trustworthy and fair view of their business to investors, customers and workers. They are the only players large enough to check the numbers for these multinational organisations, and thus enjoy effective cartel status. Not that anything as improper as price-fixing would go on – with so few major players, there’s no need. “Everyone knows what everyone else’s rates are,” one of their recent former accountants told me with a smile. There are no serious rivals to undercut them. What’s more, since audits are a legal requirement almost everywhere, this is a state-guaranteed cartel.
Despite the economic risks posed by misleading accounting, the bean counters perform their duties with relative impunity. The big firms have persuaded governments that litigation against them is an existential threat to the economy. The unparalleled advantages of a guaranteed market with huge upside and strictly limited downside are the pillars on which the big four’s multi-billion-dollar businesses are built. They are free to make profit without fearing serious consequences of their abuses, whether it is the exploitation of tax laws, slanted consultancy advice or overlooking financial crime.
Left to prosper with minimal competition or accountability, the bean counters have become extremely comfortable. Partners in the big four charge their time at several hundred pounds per hour, but make their real money from selling the services of their staff. The result is sports-star-level incomes for men and women employing no special talent and taking no personal or entrepreneurial risk.
Very interesting article how this term came to be. I somehow managed to escape it when I hit 40 but it hit me in the face at 50 #notreally.
“Most people don’t have a crisis,” says Margie Lachman of Brandeis University, a member of the original MIDUS team. Lachman says midlifers are typically healthy, have busy social lives, and are at the earnings peaks of their careers, so “people are pretty satisfied.” Some of those who report having a midlife crisis are “crisis prone” or highly neurotic, Lachman says. They have crises throughout their lives, not just in midlife. And about half of those who have midlife crises say it’s related to a life event like a health problem, a job loss, or a divorce, not to aging per se. Just 10 to 20 percent of Americans have an experience that qualifies as a midlife crisis, according to MIDUS and other studies.
As this data rolled in, most scientists abandoned the idea that the midlife crisis is biological. They regarded it mostly as a cultural construct. The same mass media that had once heralded the midlife crisis began trying to debunk it, in dozens of news stories with variations on the headline “Myth of the Midlife Crisis.”But the idea was too delicious to be debunked. It had become part of the Western middle-class narrative, offering a fresh, self-actualizing story about how life is supposed to go. Another reason for the idea’s success, Lachman says, is that people like attaching names to life stages, such as the “terrible twos” for toddlers, whereas “most people I know say their two-year-olds are delightful.” The midlife crisis persists, in part, because it has a very catchy name.
Fascinating and super educational read!
“What happens when a Pakistani American writer goes deep into the West Bank?” It will shock you! It is really
hard impossible to reason with people who are fanatics (on both sides).
Our awesome negotiator Donnie will make a deal and fix it. LOL!
Jim Chanos: “Cryptocurrency is a security speculation game masquerading as a technological breakthrough”
If you have been reading my blog for a while, you are probably aware what I think of all things crypto. I think it is a bunch of hogwash and you should probably steer clear from it. But hey, it is your money. Be responsible 😉
I like how this guy just murders it though 🙂 And how you can learn about fraud in the financial world too…
As cycles go on, we tend to see higher instances of fraud. In recent memory, there were clearly, from a legal and prosecutorial point of view, more cases of fraud after the dot-com bull market of the late ‘90s, which went from 1991 to 2000. Many of the dot-coms turned out to be fraudulent. We then saw the Enrons and the WorldComs and the Tycos. Frauds generally come to light after the financial cycle turns down. We saw this again after the crisis following the bull market of 2003 to 2007. What happens is that the new capital going into these things dries up. Many frauds are, by their nature, Ponzi schemes that require new money and new investors to pay off the old investors. When people want their money back, the insolvency of the venture is discovered. John Kenneth Galbraith has this wonderful term called “the bezzle” [inventory of undiscovered embezzlement]. That’s the heart of the fraud, the nature of the fraud in the company. He points out that in the up phase, there’s this wonderful period where both the fraudsters and the defrauded think they’re getting richer.
In the new bitcoin and crypto-craze, the whole idea is that we need to get away from fiat currencies by creating our own fiat currency for which there is no lender of last resort, no third party adjudicator. For those who believe it’s a store of value in the coming apocalypse, the idea is that you’re going to have to safeguard your key under a mountain with fingerprint and eye scan security while the hordes are outside your bunker trying to get in to use it — for what, I have no idea. Because for those who believe that you need to own digital currency as a store of value in the worst-case scenario, that’s exactly the case in which a digital currency will work the least. Food would work the best!
Bitcoin is still the area for people who are trying to avoid taxation or other examinations of their transactions. That’s one thing where I think it probably still has utility, but the governments have figured that out. Last year, just as the mania was really going, an early convert who had gotten in early and had made a lot of money wrote this humorous blog about trying to cash in his winnings, if you will. He chronicled telling the exchange that he wanted to convert his bitcoins into U.S. dollars and have them wired into his U.S. bank. It took something like eight or ten days and numerous follow-ups and phone calls. The funniest part was his having to fax his passport to Lithuania.
When people always ask me about the large frauds we’ve dealt with, they ask, who were the auditors? And I say, who cares? Every great fraud was basically audited, most of the time by major firms. In China it’s even worse than that because although the statements might say Pricewaterhouse, if you read the fine print it actually says, “Pricewaterhouse reviewed the work by an affiliate in China.” So it’s often a smaller firm that has a relationship with the big firm that actually does the auditing. Pricewaterhouse just puts its stamp of approval on that.
I always joke that the two presidents who have put more executives in jail than all the rest combined were both named Bush. W’s father was instrumental in prosecuting the S&L [Saving and Loan] crooks back in the early ‘90s and put about 3,000 of them in jail. I think they realized that the public was losing money in the stock markets, not just because of the frauds, but because the long dot-com bull market had ended. People were upset. Then when you had the revelations of WorldCom and Enron on top of it, there was a sense that every corporation was crooked and this was going to have exogenous impacts on the economy and the market as a whole. I think they correctly realized that we’ve got to basically show that we’re the cops on the beat. And they did.
I think we were better off after the dot-com era. Not because we enacted Sarbanes Oxley [passed by the U.S. Congress in 2002 to protect investors from fraudulent corporate accounting activities] but because the public saw that there was justice. The bad guys got caught and at least if I lost money, they paid the price of their freedom. That never happened in ’08 and ’09 for a variety of reasons. We’ve just had a continuation of the cycle and the cycle is still going.
People in New York and San Francisco and Boston might be fine with everything, but in the South and Midwest, where you’re from and where I’m from, there’s still this general sense that “the bastards got away with it and I’m still suffering.” So there is an exogenous cost to this where people don’t feel that there was justice. They feel that they were taken advantage of by those sharpies on the coasts. It brings out some of the worst in people, of course, so that’s one small step, then, away from social problems like anti-Semitism and anti-immigrant feelings. It’s us v. them. Nobody is looking after us.
Everybody gets that capitalism involves risk-taking. But the asymmetric situation where people who are dishonest get away with it while people who are honest and provide capital get left holding the bag will really stunt capitalism. I think that’s the issue which the vigilance on fraud, why it’s so important. It is part of the capitalistic system. There will always be people trying to take advantage of other people. It’s still better than when the whole system is flawed, like totalitarian communism, where corruption starts at the very top in terms of the planning itself. But on the other hand, the counterfactual is that it could be so much better if everybody is participating and understands that there is a strong set of rules and penalties when you break them and justice as well. That’s what I think has been lacking in the last generation.
And I leave you with this…
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