The median household income is around $46,000 a year. Anyone making less than $150,000 a year cannot comfortably save for retirement and live a decent standard of life today. People are in too much debt to simply “contribute more”. They will not be able to simultaneously fund retirement, pay down credit card debt, student loan debt, mortgage debt, and raise a family. Many young people will chose to simply dedicate themselves to making more money and not being burdened with a family at all. The trend is already happening amongst upper-middle class people.

People need to wake up to the reality that retiring will not be a luxury for 70% of Americans in the future. All retirement accounts will be heavily taxed. Even retirement accounts that are funded with after-tax dollars will be taxed. The laws will simply be changed and people will lose a great portion of their money to the government.

This is not some “chicken little” scenario. It is a keen observation into the burdens of Social Security and Medicare. The government will soon run out of money to fund these programs. Those who have saved between $500,000 and $2,500,000 for retirement will bear the brunt of the new tax laws that will be passed. They will be considered “wealthy” and will be punished for their savings the same way the upper-middle class are burdened with the Alternative Minimum Tax. These new laws will make retirement in the U.S. simply unattainable for millions of middle class people that worked hard and have saved their money.

The rich will have their money in investments that will generate great sums of money, but that will be taxed at a lower rate. They will also have enough money to consider retirement in foreign countries where their money will go further. The poor who have saved little to no money in retirement accounts will get by nicely. They will get generous government assistance that the middle class retirees will be paying for. Those who saved money under their mattresses will actually make out better than many of the people who have money in retirement accounts. They will have cash to buy things with and will still get government assistance because their “income” and retirement savings will be too low to be taxed.

Wake up and watch out!

Any situation where money is put at risk for an uncertain future return is a form of gambling.

It is an amazing comment from Mark Hanna since his ultimate boss – Warren Buffett – is one of the greatest investors / gamblers historically.

Recently, Warren Buffett put a large put option on the value of what the S&P500 will be in the long term future (15-20 years) – effectively a bet with no ownership of any company involved.

Also, historically, he made some large bets with significant portions of his investors’ money – like when he took a huge punt on Amex in 1962 when it was at risk of going bust from the Salad Oil scandal (read about it in Roger Lowenstein’s book – An American Capitalist).

And finally, one of the biggest parts of Berkshire Hathaway’s business is insurance and reinsurance – essentially bets on future accidents and catastrophes, some of which are large and which Warren Buffett admits could cause some serious losses down the line.

Just because Buffett and his subordinates are good at betting (like Mark Hanna is at betting that Clayton’s customers will repay their loans) doesn’t mean that they’re not gambling!

In fact, if people knew more about gambling they might be able to approach their investments with more sensibility.

I’ve blogged myself about one of Warren Buffet’s large bad bets in 2008 – on ConocoPhillips, where he didn’t adjust his thinking after his original thesis didn’t work (like a good gambler would) – and he lost big.

1) Warren Buffet was/is a good investor who made one really good call – going heavy on Coca Cola. That’s really it. Now, because he’s “The Warren Buffet,” he can pick a stock and people will step on their own mother’s necks to get a few shares regardless of any quality that the company may or may not posses. Buffet’s philosophy, while logical, is old and really only works for him now because he is who he is. It does not account for…

2) …market manipulation, which if you watch the interview, was part of Stewart’s argument. While he was more critical of CNBC and financial reporting in general, he still addressed (in the clips of Kramer that he played) the shenanigans that fund managers pull to influence stock prices. Tim, you witnessed this first hand, as you mentioned in your previous post:

“100,000 shares of Genentech sold because a no-nothing guest had pulled the name out of thin air.

That was my introduction to how truly rigged the stock market is…”

3) So, if shady influence affecting the short term gains wasn’t bad enough for you (and your 401K), then let’s look at the long term. Hanna cites the Buffet-esque mantra:

“Investing in stocks is provably not speculation. If one were to own all of the stock of a company with positive earnings, cash flow, and net worth, this ownership would have value. Thus, there is also value in a partial ownership stake in this same business. Purchasing any asset at a price less than its value is not speculation. Perceptive investors realize that they are not investing in “the market”; they are actually investing in the companies in which they hold ownership shares.”

He describes these companies as having “positive earnings, cash flow, and net worth”

Okay

April 10, 2008:
Lehman Brothers, AIG, Citigroup, JP Morgan Chase, Bank of America, Goldman Sachs, Bernard L. Madoff Investment Securities and The Stanford Financial Group – companies with “positive earnings, cash flow, and net worth”

April 10, 2009:
Lehman Brothers, AIG, Citigroup, JP Morgan Chase, Bank of America, Goldman Sachs, Bernard L. Madoff Investment Securities and The Stanford Financial Group – CRAP!

Simply put – there is ALWAYS risk to investing. Risk + Money = Gambling. You can gamble smart and increase your chances or you can gamble like a fool and lose it all. You can have a lucky streak or a losing streak. You can cheat and you can get cheated. The above companies were sure things a year ago. They were fixtures of American finance with solid numbers and they were being run by the “smartest” people. They cheated, you lost.

How can Mark Hanna justify what he advocates against what happened to these companies? The answer is that he can’t. When established companies create false impressions that are either backed by other established companies or are so complex in nature that they can not be detected, one can be lead to believe that these companies are sound investments with high returns when they aren’t.

Hell, many of the credit default swaps had AAA ratings!

So how exactly are we supposed to find these undervalued, well-run, positive… blah, blah, blah?

—
That felt good.

Anyway, it’s completely unrelated, but I don’t really comment here, so; Tim, will you ever reveal how you got into Princeton? I mean, you’ve already covered a lot of the things in the book, so I was just wondering if you were ever going to let us in on that one.

Best, -P

“If one were to own all of the stock of a company with positive earnings, cash flow, and net worth, this ownership would have value. Thus, there is also value in a partial ownership stake in this same business.”

The first sort of value could be fairly called “objective value”. The investment is actually returning money regardless of what other people think. The second sort of value is entirely contingent on either a) someone else thinking the stock is worth money, or b) the majority of shareholders agreeing that buying back stocks and paying dividends are good things.

Scenario B is relatively rare. Scenario A is a crapshoot where the media holds the most important hand. Either one is a gamble.

FWIW

Nate (late to the game)