Archives For Interviews

Jason Kelly, author of The Neatest Little Guide to Stock Market Investing: 2013 Edition*, was kind enough to answer some questions via email for AFM readers. Here is that interview:

It’s been awhile since we last talked. Tell us what you have been up to the last year or so?

I was working on the 2013 edition of my stock book in the first half of last year, then focused on upgrading my weekly newsletter site to add in features that subscribers had been requesting. The site began as just a repository for past notes, but over time I added commenting and a podcast and a watch list, and so on, but everything had a tacked-on feel to it. So, my designer and I spent months figuring out what people valued most, how to arrange it so that the most popular uses of the site appeared immediately when subscribers logged in, and then making it all more attractive. Website design is a lot of work, and the irony is that when it’s done best it looks easy as pie, giving the impression that it was just whipped together in an afternoon. Anyway, I’m happy with the result and so are subscribers.

What did you think of the election results last November? Were you surprised?

I’m discouraged by how little difference any candidate makes. Strip away all speeches and make a spreadsheet of the practical results of any administration and we find little reason to be upset or happy regardless of who wins. More and more people are onto this, so apathy is an understandable problem.

As for the last election, I follow polls closely and know which ones have the best track records, and they all favored Obama at the end. Given how close it was, I can’t say I was confident that Obama would win, but I did think the odds favored him. I rolled my eyes when so many announced after the fact that they had known Obama would win and then began calling his victory a landslide. Nobody knew ahead of the fact and he did not win by a landslide. Besides, it’s awfully hard to separate lucky guesses from skill in coin flip contests, right?

To remove suspense from future elections, I recommend monitoring the odds at FiveThirtyEight, the Princeton Election Consortium, and Votamatic. All three are scientific, dispassionate, and very good.

What do you think the reelection of President Obama means for the U.S. economy and stock indexes for 2013? What about the rest of the world?

His reelection doesn’t mean a darned thing for the economy or stocks. They would do what they’ve been doing regardless of who won in November. Obama has neither hurt nor helped stocks, and no president ever does. The impact of the White House on markets is negligible.

As for the economy and stocks, I see the former improving gradually and organically as it has after every other credit-based recession of the past, and I think stocks will provide uninspiring returns until their next major setback, which will create the atmosphere of fear that’s best for buying ahead of a subsequent recovery. Despite media obsession with the horserace aspect of stock investing, long-term success is more about reversion to the mean and exploiting deviations from that mean.

With advancements in technology, is it still possible to be a value investor? How is the average person supposed to find an undervalued company with so much competition out there from mutual funds, hedge funds, and other investors?

Sure. In fact, the advent of technology has made it easier for disciplined investors to rise above the clamor because there’s more noise to distract beginners and the less disciplined. I love seeing a person glued to real-time updates because I know that’s one less person that will be hard to beat. Too much information is a killer in the stock business, at least to the long-term value approach that’s best for most individual investors.

It’s a fairly straightforward process to look at a company’s past financial performance, stock valuation trading range, current position, and future projections, then to determine a fair price to pay today that will offer reasonable odds of price appreciation in the future and, in some case, a predictable flow of dividend income. Then, just wait for the fair price to appear. Get enough of these on a watch list, and it doesn’t matter if 90% of them never get cheap enough to buy. The 10% that do will provide plenty of profit with little stress.

In your book, you don’t talk a lot about index funds. Are you not a fan of index funds?

I write about them as much as is needed, given their simplicity. Frankly, I think I’ve come up with the best way to use indexes, and it’s through the leverage and value-averaging techniques presented in Chapter 4: Permanent Portfolios. The plans are so simple, and indexing so straightforward, that it doesn’t take long to get somebody started on autopilot with these permanent portfolios. Thus, most of the book is dedicated to the more complicated art of finding value in individual stocks.

You raise a good issue, however, one that others have brought to my attention as well. The index-based plans are so simple that nobody takes them seriously. In my view, the 3% quarterly growth value-averaging plan is about all anybody needs for the long term, superior to individual stock-picking for almost all individual investors. To bring it to a wider audience in a way that makes people believe in it, I’m working on a book dedicated to a complete exploration of the plan, and variations on the core method.

In your experience, what do you think is the most common mistake investors make when it comes to managing their portfolios?

Believing that there’s something special about them that will overcome base rate results from investment history. This tendency leads to forecasting a future that’s rosier than is likely, which creates shortfalls that American society makes easy to overcome with debt, the killer of financial freedom. Always assume historical market returns and then invest in ways that provide a chance of upside surprise beyond them, which should be treated as a bonus, not necessary for survival.

In your book you talk about several styles of investing along with an overview of several different investment professionals. Which style do you use personally?

Value averaging** for the core of my portfolio, the 3% quarterly growth method mentioned above. When picking individual stocks, I’m a patient value investor, awaiting cheap prices that I project will provide a good chance of market-beating results in the future. For example, Apple’s recent stumble caught my attention. I’d been watching and waiting for it to settle back, and it finally did.

What’s one or two of your favorite books that you have read recently?

Revolutionary Road by Richard Yates, which illustrates the ease with which people who consider themselves extraordinary can become the very conformists they want to escape in society, and how lacking the guts to make bold life decisions is a sure path to mediocrity. I believe most people should reserve their boldness for exciting life choices rather than for the stock market, where it usually gets them into trouble.

Got any new books in the works?

Always! I’m focused on the one mentioned above, which will provide a full background on the 3% quarterly growth plan, explore variations on it, consider objections and common ways that people ruin the plan by trying to improve it, and so on. I hope it changes the way people manage their 401(k)s and other retirement accounts, putting them on effective autopilot so they can devote their energy to living and loving and seeing the world.

Finally, what are your plans for this year? Got any big travel plans in mind?

Yes! I just returned from a week in Nicaragua, where I researched small coffee farms with my sister and business partner, Emily, and other people in the industry. We jointly own a coffee shop in Longmont, CO called Red Frog Coffee. The Nicaragua trip was an eye-opening experience that made me want to travel among other coffee regions of the world. I like travel with a purpose much more than I like sightseeing, so this struck a chord in me. Emily and I would love to see coffee regions in Africa, especially Ethiopia and Uganda.

For fun, I’m going with my family to Newport Beach, CA this summer. We used to do this as kids, but stopped six years ago. We’re resurrecting the tradition in the same beach rental house we used in the past. Making new memories in a place filled with old memories adds depth to my life. All of us are looking forward to it.

Thank you for this enjoyable conversation!

Thanks for your time, Jason.

*Affiliate Link
**A future AFM topic

Here is an email interview I conducted with Larry Swedroe, author of lots of books on personal finance and investing, including his newest book, The Only Guide You’ll Ever Need for the Right Financial Plan. This was a great interview. If you agree, PLEASE share this with your friends (whether they be on facebook, twitter, or elsewhere). I appreciate Larry taking the time out of his busy schedule to answer these questions.

Oh, and if you haven’t had a chance, enter The Right Financial Plan Giveaway here on AFM. I’ll announce the winners on Thursday morning so you still have time to enter. I’m giving away three books.

What led you to write The Only Guide You’ll Ever Need for the Right Financial Plan?

The three other “Only Guides” (links provided at end of interview) presented the academic research on equities, bonds and alternative investments. They presented what I call the science of investing. The new book is all about the “art of investing”—how do you take the academic research and best apply it to your personal situation. So the book discusses issues like who should own more equities and who should own less, who should own more small caps and who should own less, and similarly for all equity asset classes. It also does the same type thing for bonds. So it addresses such issues as who should own more TIPS and who should own more nominal bonds, who should own shorter term bonds and who should own longer term bonds, and so on.

It also is the first book I am aware of that not only helps individual investors write their own investment plan, but helps them with the ongoing care and maintenance of the plan, addressing issues such as rebalancing, tax management, asset location and withdrawal strategies. But the book goes well beyond that as it also addresses issues like mortgages, social security, long term health care and the designing of a family wealth mission statement. In other words it teaches people how to write a financial plan, not just an investment plan.

To my knowledge, this book is the first of its kind to take on this large task and do it in a way that is accessible for the typical individual investor.

What did the financial crisis of 2008 (and longer) teach you?

I really don’t think it taught me anything, just provided reminders about how risky stock investing is, and what the winning strategy is. Don’t take more risk than you have the ability, willingness or need to take. And the reason is that basically everything that happened in 2008 had already happened and thus investors that knew their financial history should have been well prepared for the events. In other words, while investors could not anticipate when such a crisis would occur, their plan should have incorporated the virtual certainty that such a crisis would occur and the only things we would not know were when it would occur, how long it would last and how deep it would be. In other words, a well-thought-out plan anticipates the risks and builds those risks into the plan. That is why Chapter 2 on The Investment Policy Statement includes a discussion on the need for a plan B: What you will do if the risks show up, as they did in 2008.

What have your clients learned from 2008?

Unfortunately, some people learned that they were overconfident of their stomach’s ability to deal with the stress of severe bear market. Thus, they took more equity risk than they should have, and that in a very few cases led to panicked selling which is almost impossible to recover from. And they did this despite all the education we provide on an ongoing basis. For example, during bull markets we persistently remind clients of the risks of equities and that severe bear markets can occur. Then during bear markets we remind them that we fully expect that they will end (though we cannot be certain) and how important it is to remain disciplined. We also remind them that we had discussed the fact that such bear markets were virtually a certainty and that they were built into the plan and they signed off on that plan, indicating that they understood the risks and were prepared to deal with them.

But there were many other lessons investors in general learned. For example, they learned that as much as they would like to believe otherwise, active managers don’t protect investors from bear markets. They underperform at least as poorly in bear markets as they do in bull markets. They also learned the dangers of stretching for yield, investing in such high risk fixed income investments (which we avoid) as preferred stocks, junk bonds, convertible bonds and emerging market bonds. Those investments, as my book discusses, should be avoided for several reasons, including their risks don’t mix well with the risks of equities.

If you were to pick one thing that is most important to a person’s financial plan, what would it be?

While there are many components to a good financial plan, the most important I think is to make sure that the investor’s equity allocation does not exceed his ability, willingness and the often-overlooked category of need to take risk. The great shame is that so much money was lost by people who took risks they had no need to take because they had already “won the game.” In other words, they could meet their financial needs with very low equity allocations, such as 20-30%.

In your opinion, where do people fail most frequently when it comes to financial planning?

The most frequent failure is the failure to not even have an investment plan in the first place. And we all know that those that fail to plan, plan to fail. The vast majority of investors, even many who work with financial advisors, do not have a written and signed investment plan that lays out their goals, defines the risks they are willing to take and includes an asset allocation and rebalancing table. The second biggest mistake is the failure to integrate a well-thought-out investment plan into a well-thought-out estate, tax and risk management plan. A great example is I knew of an investment advisor that had a great investment plan but he did not have sufficient life insurance to take care of his family in the case of his premature demise. Fortunately we performed a needs analysis for him and convinced him to buy a large life insurance policy. That was the good news. The bad news was that he died a year or so later from cancer. Now he had a great investment plan but it would have failed because he did not live long enough, and thus had not saved enough. His plan failed for reasons other than bad investments. The same type mistakes can occur because people don’t title assets appropriately, designate the wrong beneficiaries, or fail to buy appropriate amounts of liability insurance of all kinds (especially umbrella policies). A good financial advisor should identify such issues, eliminating those risks and mistakes as much as possible.

What does a financial plan look like?

As we discussed above, a good investment plan should clearly spell out the investor’s financial goals as well as the risks they are willing to accept. It should have an asset allocation and rebalancing table as well, and lay down the rules for rebalancing and tax loss harvesting (such as how often they will be checked–I recommend at least quarterly, though we basically do it daily, thanks to technology we have invested in). And as I discussed, the plan should also include what I call Plan B: what options you will exercise if severe bear markets occur. As the book discusses, those options might include cutting spending, working longer than planned, moving to area with a lower cost of living, and so on.

How often should people look at their financial plans? Life changes? Yearly?

This should not be a timed based event, though I recommend it be reviewed annually just to be on the safe side. The only right way to do it is as follows: Since the plan is based on certain assumptions about ability, willingness or need to take risk, whenever any of the assumptions changes, you should change the plan. Generally that will be caused by a life event such as a death in the family, divorce, loss of job, promotion, inheritance, and so on. However, bear markets sometimes teach us lessons as well, as I mentioned. For example, I think it likely that even investors that did not abandon their investment plans may have cut back on spending. This would be a natural thing to do given that risks had increased. Having cut back on spending they may have learned that they really did not need the higher spending levels they were used to and they could be just as happy spending less. Such a person should then consider lowering their equity allocation because they now have a reduced need to take risk.

What are you advising your clients with regards to the future of social security? Does the strategy change based on age?

First, there is a great book on the subject called The Coming Generational Storm: What You Need to Know about America’s Economic Future*, which I highly recommend. While one of my favorite expressions is “my crystal ball is always cloudy,” I think it is safe to say that because of the depth of the problem it will be necessary to attack it from all directions. That means we will almost certainly see cuts in benefits (including perhaps change in the inflation adjustment), increased age requirements and increased taxes. But, in my opinion social security will remain an important part of the safety net we provide the elderly.

In your 40-year career, what is one thing you wish you would have done differently?

Learned just how tyrannical the power of the Efficient Markets Hypothesis is at an earlier age. Fortunately, eventually I learned that while it was possible to beat the market it was so unlikely that you would succeed that it was foolish to try. That not only led to superior investment results but a higher quality of life as I stopped reading (or watching or listening to) what I learned was nothing more than what Jane Bryant Quinn accurately called investment porn. That gave me more time to spend on far more important things such as my family, friends and hobbies such as reading. I read about 60 or so books every year, most of which have nothing to do with investments. My favorite category is historical fiction, with two of my favorite authors being Philippa Gregory and Bernard Cornwell. I also like good detective novels, and among my favorites are Robert Crais, Michael Connelly, Dennis Lahane, Ross Thomas and T. Jefferson Parker.

What’s next on your plate? Any more books to look forward to?

Actually my plate is pretty full. I have a new book called The Search for Alpha. Wiley will be publishing it, with expected release of February 2011. The book examines the evidence on active investing by looking at the research on mutual funds, individual investors, pension plans, 401k plans, venture capital, hedge funds and behavioral finance. It then shows how individual investors can outperform the vast majority of pros by building globally diversified portfolios and staying the course. It will be a much shorter book than some of my others, along the lines of “the Little Book” series.

Then I am in the process of completing an updated and thoroughly revised version of Rational Investing in Irrational Times. The new book is tentatively titled 76 Investment Mistakes Even Smart People Make and How to Avoid them. The prior book only covered 52 of them.

And I have also just finished the third in the Wise Investing Made Simple series. Hopefully the second will be successful and the publisher will be interested in doing the third.

Thanks for your time, Larry. Good luck to you in all your adventures.

Larry also told me that he and his co-authors would be happy to answer any questions AFM readers might have. Send them to me in an email ( and I’ll forward them to Larry. Or, leave them as a comment and I’ll see if I can get Larry to stop by and respond that way.

Also, Larry writes a regular blog called Wise Investing for MoneyWatch.

Related books (affiliate links):

Wise Investing Made Simpler (Second in a series)

The Only Guide to a Winning Investment Strategy You’ll Ever Need: The Way Smart Money Invests Today

The Only Guide to a Winning Bond Strategy You’ll Ever Need: The Way Smart Money Preserves Wealth Today

The Only Guide to Alternative Investments You’ll Ever Need: The Good, the Flawed, the Bad, and the Ugly (Bloomberg)

*Affiliate Link

I’m happy to post this Q&A I had with Jason Kelly (via email).

Q: What led you to write Financially Stupid People Are Everywhere: Don’t Be One Of Them*?

A: I’d written a lot about personal finance in the past, and so had other authors, but the subprime mortgage crisis made it clear that none of our previous efforts had made an impact. Most people are still financial nitwits. In a moment of frustration, I slammed my fist down on the table one day and said, “there are so darned many financially stupid people!” I wrote an article about the mess called “The Whole Damn Sham,” which really resonated with readers, and they asked me to put some of the ideas into a new book. Those two moments made me think that another attempt at showing people the slimmest basics of managing their money in a manner more straightforward than past attempts, was needed.

I decided that the new book should not cover the whole spectrum of being financially smart, but just four ideas that would solve 80% of most people’s financial troubles, along with — and this is key — an explanation of WHY it’s so hard to get ahead in America. There’s a concerted effort at work to take people’s money, and I believe that when people see it clearly they’ll be more motivated to defend themselves against it.

Q: I followed the mortgage crisis pretty closely on (my readers probably got tired of those posts). I came to the conclusion that there were lots of parties responsible for the crisis that occurred. However, you seem to hold one party most responsible. Which one and why?

A: Consumers, because the problem starts with their stupidity. There were plenty of shenanigans and shady practices in government and banking, but that will never go away. Anybody who thinks banks will stop paying off politicians and that politicians will stop doing favors for bankers, is living in a child’s fantasy world.

There’s always been a collusion between government, banks, and big business, and they’re always will be. No new rule or supposed reform will change that or truly protect citizens. The only real way to rein in the bad practices of government and banks is to get smarter with our money. Stop signing on to bad loans. Poof! Just like that, the subprime mortgage crisis would have been impossible. Yes, banks would have offered their poison, but if nobody drank then the damage would have been zero. Instead, dope after dope put the cup to his or her lips and the crisis was born.

There’s a reform effort underway right now. So what? If people still make all the same mistakes, we’ll get into a different kind of mess down the road. There’s no sign that the mistakes won’t be made again, so expect another mess.

Q: Do you think we have reached critical mass with regards to financially stupid people? Is there a way out? How do we get financially stupid people to take an interest in personal finance?

A: This is my last attempt. I won’t write any more personal finance books after this one. If seeing the latest disaster brought on by idiotic money management and reading four simple rules to avoid doing it again STILL doesn’t wake up the army of idiots, then I think nothing ever will, and I will write it off as a lost cause and move on.

That’s why my book doesn’t offer solutions to the corrupt backdrop that creates financial traps for people. That won’t go away. The book suggests to readers that they not be one of the financially stupid, but doesn’t suggest that we can get rid of the financially stupid. My lack of faith in humanity generally shows up in the structure of the book. Cynical? Some would call it that, but to me it’s just the logical conclusion at the end of all the evidence in front of us.

My hope is that financially smart people will put the book in front of financially stupid people, and that it will manage to make more progress with them than all past attempts due to its simplicity, blunt language, and complete picture showing the machinations at work against citizen wealth.

Q: You devote several chapters of your book to politics. Why?

A: To show how politicians work with moneyed interests to skew the landscape in a way that transfers wealth from citizens to government, banks, and big business. People who don’t understand that are not as motivated to defend themselves against it. This is a point that clearly separates this book from others on the personal finance shelf. It’s not enough to see how to manage and protect our money. We must also see why and against what.

It’s also necessary to understand that all politicians, regardless of party, are beholden to the same moneyed interests. I want a greater percentage of Americans to see the political sideshow for what it really is, and to peer through the fun rallies and emotional issues to what’s really going on: the creation of servitude for most voters. The book spends plenty of time showing how money, not voter opinions, determines the future. People need to stop expecting government to protect them, and grasp that government is part of the group trying to fleece them.

I think people who get this can enjoy their financial success more. They will know that the schemers at the top, the puppet-string-pullers if you will, don’t pluck a single dollar of wasted cash out of them. That feels good.

Q: You talk about how much influence corporations have in the political process. What, if anything, can be done to limit such influence?

A: Frankly, not much. There are admirable movements underway right now to limit the role of corporate money in politics, but there have been such movements for a long time. Despite a citizen interest in campaign finance reform, it never happens. Witness the Supreme Court decision in January, Citizens United v. Federal Election Commission, that gave corporations the same rights of free speech that our founding fathers created for people. Gradually, corporations achieve more control, not less.

For more on this, please see my recent article, “Is Democracy Dead In America?” []

I deliberately avoided proposing solutions in this book. Finding solutions is a worthy endeavor, but not in this book. This book assumes it’ll never get better, so people need to get smarter. It focuses on what individuals can do to protect themselves in the event that the backdrop remains as financially hazardous as it is today, which it probably will.

Q: I mentioned in my review of your book that I felt that unions and lawyers also play a significant part in politics. What are your thoughts on that?

A: I agree. This book’s focus on corporate moneyed interests wasn’t meant to imply that they’re the only moneyed interests. If anything, the existence of other reasons the tilted table won’t be righted in favor of citizens confirms the wisdom of focusing on how to defend ourselves instead of on how to fix what might be an unfixable machine.

Had I considered every reason that government can’t change, the book would have become encyclopedic and people would have lost sight of the ways to protect their wealth, and why. The book is intended to get families financially safe, not to right the listing American government.

Q: I gathered from your thoughts on health care that you would welcome a single payer system. What made you open to such a plan?

A: What I point out in the book is that I don’t really care whether the middle man in health care is a private insurance company or a government agency, as long as the ultimate cost to the consumer becomes affordable. I go to lengths to show that enough tax revenue exists to provide every citizen with health care right now, if we only reshuffled government spending priorities away from corporate interests to citizen interests.

For a specific look at how government always leans in favor of corporate profits, see the table on page 139. When government uses its tax revenue to fight pointless wars that profit defense contractors, it’s not called socialism. However, when government uses its tax revenue to provide health care to the people who provided the revenue, it’s called socialism and a government takeover.

A good solution would be to keep taxes the same, but re-prioritize spending so that current taxes provide more social goods. If that’s impossible, as it seems to be, then at least collect fewer taxes so citizens have more money in their pockets to pay for all the services that their taxes don’t provide. Instead, we end up with the worst possible outcome: high taxes without benefits coming back to those who paid them.

An excellent look at this is on page 148, your lifetime income battery. The picture shows a battery divided into thirds. The top third is drained out: “Taxes taken from you and spent on bank bailouts, wars, corporate welfare, etc.” The middle third is drained out: “Needs not provided by taxes taken from you, including health insurance, car insurance, higher education, etc.” Only the bottom third is not drained out. It’s the only part of your income under your control.

People need to think like a corporation to survive in America’s political landscape. What’s in your interest? To get as much return on the taxes you pay. What good have the wars in Afghanistan and Iraq done you? None. Wouldn’t you have rather received cheaper or free health care instead? Sure you would, because that’s in your financial interest.

This book is all about the money, not ideology, and the money it’s most concerned about is yours, and how you can protect it.

Q: What was the most startling thing you discovered when conducting research for your book?

A: How most of the key people in government don’t change from one president to the next.

My favorite example of this is that Larry Summers is the man most responsible for repealing the Glass-Steagall Act of 1933 that had separated speculative investment banking from ordinary commercial banking so that blow-ups on the investment side wouldn’t impact consumers on the commercial side. That worked like a charm until Summers and others in the Clinton administration nullified it. In less than a decade, we were hit by the biggest financial meltdown of our lives because the now combined banks blew themselves up with the investment side of their houses, and thereby took down the commercial side as well.

So, of course we should keep Summers and others of his ilk away from the levers in Washington, right? How better to do that than start with a fresh serving of hope, a candidate more ensconced in hope than any we’d ever seen before: Barack Obama. Mr. New, Mr. Future, Mr. Audacity of Hope. Whom did he appoint as his chief economic adviser? That same Larry Summers.

Elections don’t change as many faces as people think. That’s why we’re on a steady path toward more financial danger, not less.

Q: The bio on your website mentions that you have been living in Japan since 2002. How do the financial habits of the Japanese compare to those of Americans? Any plans to move back to the States?

A: Japan’s government is as troubled as America’s, so we can’t learn any lessons there. Where we can find useful habits are among the citizens, ordinary people managing household budgets.

The big difference is that Japan’s economy is cash based. People save, then buy. In America, too many people buy with debt, then spend the rest of their lives paying interest on that debt as it grows even bigger with more purchases. I’ve come to enjoy very much the handing over of real cash to buy even big-ticket items like a new car, a new computer, and an international plane ticket.

The joy of consuming that way is that it enhances the best part of consumption, which is anticipation. When people buy everything they want right now on credit, they don’t get to enjoy what they bought as much as they would if they thought about the object of their desire for months, saved steadily, and then walked in one fine day and slapped cash on the counter for it. That anticipation part of the process is free, and so much fun.

The use of debt for instant gratification is certainly not free, not fun, and robs people of the joy of looking forward to their purchases.

As for moving back to the states, I’ve always felt that I would one day but I just haven’t wanted to yet. I get back to see my family and friends in California and Colorado a few times per year, so I don’t feel far away. Emailing and phone calling is easy and inexpensive, so living abroad has never been simpler.

Which, by the way, is a great reason to achieve financial freedom. People in debt can’t as easily pick up and move overseas. People sitting on a pile of cash are unencumbered, and can throw a dart anywhere on the world map and take themselves to a place they never imagined. Trust me, life is very different when lived that way, and absolutely wonderful.

Q: So after researching and writing your book, are you generally optimistic or pessimistic regarding America’s future?

A: I’m pessimistic that the corrupt backdrop will change before America reaches a point of near collapse. For the reasons stated above, I think taxes will rise and get wasted on a scale we never thought possible until we reach systemic financial failure. I believe that such a failure could bring a major war, the same way that the Great Depression was followed by WWII.

However, I’m optimistic that more free flowing information will inform citizens of how we got here, and encourage them to change their habits to protect themselves and avoid contributing to future crises by failing to pay their mortgage or credit card debt, for example. In so shoring up their finances and wising up to the machinations of government and its cabal of financiers, people will help contain the damage caused by institutions in the future by refusing to get tricked by their schemes.

Frankly, Jeffrey, I doubt that enough people will wise up to make that scenario happen, but I would love it if they did. Even if my book and my efforts can’t save the nation, at least they can save a part of the nation smart enough to grasp its ideas and protect themselves.

For that, I’m very optimistic.

Thanks, Jason. I appreciate you taking the time to answer these questions.

*Affiliate Link

Collateral Damaged

I received a copy of Charles Geisst’s newest book, Collateral Damaged: The Marketing of Consumer Debt to America*, from the publisher. As the subtitle suggests, the book is a history of consumer debt. I found it interesting and insightful.

After finishing the book, I decided to ask Mr. Geisst if he would answer a few questions for me. He obliged and the you can see the results below.

JLP: What inspired you to decide to write a book about consumer debt in America?

CG: Too much consumer debt has been created by securitization in the US and it was time to determine how much of a role it played in the crisis. Turns out it was significant.

JLP: What do you think was the main cause of the credit/mortgage crisis we experienced over the last couple of years? Was there one event that stood out to you as the main cause or was it a number of events?

CG: The main cause of this was ease of access to credit, from the lneding banks and credit card companies. But clearly it was caused by excessive securitization.

JLP: You talk about usury laws in the book. What are usury laws and do you think they should be brought back?

CG: Historically, in the US usury laws limited the amount of interest that could be charged on a loan, mortgages and consumer loans, although sometimes vaguely. The idea is to bring them back as one law on the federal level, limiting the amount of interest on credit cards and other forms of consumer interest.

JLP: Can another debt crisis be avoided? If so, how?

CG: Avoid next crisis by strict obedience to good lending practices and establish limit on consumer interest. Also, securitization must be effectively monitored.

JLP: What role do you think regulation plays in a capitalistic society? What areas should be regulated?

CG: Too broad to answer easily. Effective regulation on the credit creation process.

JLP: Do you think America is still a capitalistic society?

CG: Yes, capitalism is much more than unbridled, unregulated tomfoolery of the type we have seen over the last 20 years.

JLP: I have written quite a bit about the mortgage crisis. I know it is simplistic but I have always taken the stance that lack of personal responsibility played a huge role in this crisis. What are your thoughts on this?

CG: Yes, of course but it is too difficult to quantify and then qualify. Usually a political point made by conservatives.

JLP: Was it a wise decision for the government to get involved by bailing out financial institutions and some borrowers? Does this set some sort of precedent that the government will always come to the rescue?

CG: Government always has, except in cases of blatant criminality.

JLP: Where do you see the U.S.A. going from here? How long will it take us to move beyond this crisis?

CG: Hopefully, back to a simpler method of borrowing and lending, with less bells and whistles and exotic products. Probably take 5 to 7 years.

JLP: Thanks for your time.

If you are looking for a book that will give you a good overview of the history of debt in America, check out Collateral Damaged*.

*Affiliate Link

Below is an email interview with Brent Kessel, author of It’s Not About the Money: Unlock Your Money Type to Achieve Spiritual and Financial Abundance*, a book that I reviewed earlier this week.

Why did you decide to write a book?

Without wanting to sound cliché, I never really feel like a made the decision. I had observed so many people suffering around financial issues, and barking up the wrong tree, as it were, that I felt compelled to write it. It was one of the easiest things I’ve ever done professionally.

What do you think is the number one reason people fail financially?

They don’t understand what payoff their financial habits are giving them. If they’re chronic overspenders, there’s a need that their purchases are filling, an emotional need, and buying purses or cars or new furniture allows them to feel good about themselves for some time. In order to change the financial habit, they have to replace the payoff with some other payoff that fills the same need. But most people never question what’s motivating their financial habits.

You say in your book that the ideal person would be balanced among the eight financial archetypes. How do you recommend a person obtain that balance?

It’s very difficult work, but very rewarding. It’s very hard to answer this question in a generalized way, which is why there are about 60 highly customized exercises in the book, so that each archetype can create the balance that they need. One way to say it, is that we often need to cultivate the positive attributes of the archetype which is most dormant in us. So for me, that’s mostly been the Innocent. Being willing to have faith and trust that things will work out, without putting quite so much focus on the numbers, given that I’m a Guardian/Saver/Empire Builder predominantly.

Which of the eight archetypes do you think is most prevalent in today’s society?

Pleasure Seeker and Innocent were prevalent until Summer 2008, which is why we’re in this mess. Today, it’s much more Guardian and Saver. People seem to be returning to the values of the ‘30’s – 50’s, but we’ll see how long that lasts.

How do you explain the archetypes to your clients?

I usually don’t. This is part of why I wrote the book, so that they could read the complete story about each archetype in there. As an example, I’ll more intuitively give a client ‘homework’ to spend more money on things which bring sensory pleasure, in the case of an overly frugal Saver, or have an Innocent hire a bookkeeper or sign up for an internet-based service like which shows them where the money’s all going.

What is the typical response from your clients once they learn about the different archetypes?

“Wow, I had no idea you had me so pegged.”

Do you ever have clients who deny the findings?

“Not really. The most I’ve had is someone who felt they couldn’t find themselves in any of them, which is usually a sign of the Innocent. Some people feel that they’re a balance of many, or that it’s constantly changing. Both of these are good signs.”

Once you know a client’s financial archetype, how do you cater your financial advice to fit the archetype?

Again, this is very customized. The Appendix of the book has specific financial planning recommendations tailored to each archetype, and it’s many pages, so it’s hard to summarize. But one example might be to have a Pleasure Seeker sell their vacation home and art collection and deploy that money in more income-producing assets (which don’t produce sensory pleasure), like stocks, bonds, or income properties.

Since writing the book, do you find yourself trying to figure out the archetypes of the people you meet?

Sometimes. It’s mostly intuitive though. If you go to my first MSN story, there’s a video of me walking around Central Park interviewing people and guessing their archetypes. Kind of humorous. The other stories there may give you some good blogging ideas too.

Finally, is it natural for a person’s archetype to change over the years or do people tend to stay the same throughout their lifetimes?

The healthiest people I’ve met with money are able to express different ones at different times. But there’s a whole class of people who, especially when the going gets tough, go back to their tried and true archetypes. Financial habits are hard to break, because unless we very intentionally try to cultivate those which have been dormant, they’ll stay dormant.

Thanks, Brent!

Also, I want to go ahead and announce the winner of the “It’s Not About the Money” book giveaway. There were forty-nine entries and the randomly-selected winner was commenter #31, Walter. Congrats, Walter. I hope you enjoy your book!

I have another giveaway coming up soon. Stay tuned…

I have been reading Liz Pulliam Weston’s MSN Money columns for a couple of years. Although Liz writes about a lot of different topics, her main focus tends to be credit-related issues, which is a topic I don’t usually cover. She’s even written a couple of books on the topic (Easy Money* and Your Credit Score*). So, when I get credit-related questions, I send them to Liz and she answers them for me.

Below is an interview I conducted with Liz via email. I thought her answers were very thoughtful and I’m very appreciative of her taking the time out of her busy schedule to answer them for me.

How long have you been writing about personal finance? How did you get started?

I’ve been writing full-time about personal finance since 1994, when I was a reporter at the Orange County Register. I’d done a stint previously as a business writer at the Seattle Times and had a degree in economics, but I’d taken a few detours (as a feature writer and a political reporter) before deciding that writing about money was what I really wanted to do. To get up to speed, I took the Certified Financial Planner training course after work at University of California, Irvine, which was grueling but well worth the effort. I covered personal finance for the Los Angeles Times for four years before leaving to write for MSN Money in 2002.

Besides writing your columns and books, what else do you do? Or, do you have time to do anything else?

I chase around after my 5-year-old and try to pay attention to my husband once in awhile.

I actually do a lot of radio and TV stuff these days, which is part of promoting the columns and the books. I have a regular hit on Fox Business and talk to the folks at Marketplace Money fairly frequently. The credit crunch and foreclosure crisis have offered a lot of opportunities to be a talking head!

I’m also co-hosting a savings contest, which is the first time I’ve done anything like this. It’s sponsored by FNBO Direct [more about that here], the online bank, and it’s kind of similar to the “America’s Biggest Loser”-style weight loss challenges. To enter, people submit a short video explaining what they want to save for, and the bank will pick five contestants and track their progress for six months. The five contestants will get dollar-for-dollar matching funds, up to $5,000, and the winner gets a spa vacation. The Web site for more details is Pay Yourself First Challenge, if you’re interested in checking it out.

You write a lot about credit-related issues. In your opinion, what is the number one reason why people get into trouble with credit?

I think it’s a tie between naivety and optimism.

Most people are basically optimistic—they think things will turn out all right. That’s a good thing, except when they stick blinders on and refuse to consider that things can (and will) go wrong. So they live paycheck-to-paycheck, or worse, and have no savings or cushion for the bad times. They use plastic or loans to pay for a lifestyle they can’t actually afford. They pile up debt and keep hoping something (a pay raise, a handsome prince, a lottery ticket) will come along to bail them out.

And many people are astonishingly naïve when it comes to lenders. They think if a lender approves them for a loan, they must be able to afford it. Or they carry balances on their credit cards and then are shocked when the issuer doubles or triples the interest rate on any excuse, or no excuse.

While we’re talking about credit, can you tell us a little about FICO 08? How is it different from the previous FICO version?

There are three big differences:

Authorized user information is no longer considered. With classic FICO, you could benefit from somebody else’s good credit history by being added as an authorized user to that person’s credit card. Credit repair outfits figured out they could persuade people with good credit to “rent out” their authorized user slots to complete strangers, and charge those strangers hundreds of bucks for the privilege. Lenders didn’t like that, so the formula’s been changed in FICO 08 to ignore that information—but it could wind up hurting folks who have little other history on their own except the card they share with a spouse or parent.

FICO 08 is less sensitive about opening new accounts. Fair Isaac (FICO creator) figured out that many of us have rather active credit lives: we refinance our loans or switch from reward card to reward card. Fair Isaac realized that such behavior doesn’t necessarily mean we’re riskier borrowers, so the new version of the formula punishes such behavior less.

FICO 08 is more sensitive about how much credit we use. I recommended in my book Your Credit Score* that people use 30% or less of their credit card limits at any given time. (It doesn’t matter to the scores whether you pay off your bills in full every month; what matters is how much of your limit you’re using when your issuer reports your account to the credit bureaus, and that’s typically the balance on your latest statement.) I think that’s going to be even more important as FICO 08 is adopted. You definitely don’t want to come close to maxing out your accounts.

In your opinion, what is the biggest misunderstanding people have about their credit score?

Another tie: people think they have just one score, and that it’s static. In reality, there are more than 100 different credit scoring formulas in use, and your scores change all the time, based on the underlying data in your credit reports.

The most-used scoring formula is the FICO. You generally have to pay to see your credit scores, and my opinion is that if you’re going to shell out hard-earned cash, you might as well get the same formula that lenders use. You can get your FICO scores for all three bureaus at one place: Only one bureau, Equifax, sells FICO scores directly to consumers. The two other major bureaus, Experian and TransUnion, typically sell consumers something else, either their in-house consumer education score or a VantageScore.

Talk about the mortgage crisis is starting to die down somewhat. Do you think the worst is over?

No, I don’t. There are still a ton of exotic mortgages made to supposedly prime credit borrowers that have yet to reset. These are generally the option ARMs that allowed people to make payments that didn’t even cover the interest owed, let alone any of the principal. At some point, usually several years into the loan, these mortgages forcibly reset the payment much higher if you have been making only minimum payments.

As a result of the credit crisis, are credit-worthy people having a more difficult time obtaining mortgages?

If you’ve got good credit and a decent down payment, you should be fine. And “decent” seems to be getting smaller; for awhile during the worst of the crunch folks who had less than a 5% down payment were having trouble, but I’ve heard that with a good-enough credit score (700 or above) 100% financing has once again become available.

But it’s still true that mediocre scores will cause you problems. If your scores are in the mid-600s, you’re not going to have as many choices and you’re likely to wind up with a more expensive mortgage than you might have gotten before the bubble burst.

You wrote awhile back about how you and your husband had become millionaires based on your net worth. Has becoming a millionaire changed your attitude towards money?

Not at all, as far as I can tell. My husband jokes once in awhile about waiting for his Porsche 911 to show up in the driveway, but that’s not gonna happen any time soon!

Who are some of your favorite personal finance gurus? Who do you pay attention to?

You know this: we personal finance writers are as independent as cats. The list of gurus I ignore is a lot longer than the list of the folks I follow!

But I respect John Bogle a lot; he speaks the truth about investing and the enormous impact of fees on your returns.

Others I like include Chuck Jaffe of MarketWatch, Ilyce Glink of and my former colleague Kathy Kristof at the Los Angeles Times. All three are longtime journalists with deep knowledge of the topics they cover. They’re also friends, and I know them well enough to know they’d be a little appalled at being referred to as “gurus.” But they’re smart and they know their stuff.

I don’t invest in individual stocks, but if I did I’d pay attention to what Jim Jubak has to say. He’s my colleague at MSN Money and his track record is impressive. He’s also a seriously smart guy.

I have been blogging about personal finance for nearly four years. Since I started, personal finance blogging has exploded in popularity (at least in the number of personal finance-related blogs). Have you seen a surge in popularity that can be traced back to bloggers?

I’m not sure I can answer this one. I’ve seen a steady increase in interest in personal finance over the whole time I’ve been writing about it. How the advice is delivered has definitely changed, from books/magazines/newspapers/newsletters to personal finance sites and blogs.

I know that traffic to MSN Money keeps growing stupendously year after year. (It doesn’t hurt that MSN is the default home page for the browsers shipped on most PCs!)

I think people really like the interactive nature of blogs. Although most people who read don’t comment, they know that they can. A blogger also may seem more like a “real person” and someone they can emulate, compared to an expert up on some pedestal.

What I’d like to see is more change in the macro money metrics that would tell us our message is getting through. Most people are saving for retirement, which is a good thing and something we may be able to take partial credit for. But there are still too many people carrying balances on their credit cards and too few who have adequate financial flexibility (which I define as emergency funds plus access to credit). People still use payday lenders, get their furniture from rent-to-own outlets and cash out their 401(k)s when they leave their jobs. As long as there’s that kind of behavior going on, we’re going to need to keep working to get the message across.

That concludes the interview.

I have to agree with her last thought. We have a lot more work to do! As Americans, we have to inspire people to take an interest in their financial wellbeing. Unfortunately, the people who need to be reading this stuff don’t typically hang out on personal finance blogs or read finance-related articles. What can we do to change this? That’s a good question.

Once again, thanks to Liz for the interview.

*Affiliate Link

Scott Burns is a busy man. However, he’s not too busy for AFM readers, which is a good thing! Below is an email interview I had with Scott about what’s going on in his life. If after reading the interview, you have questions, please leave a comment and I’ll see if I can get Scott to stop by and answer them. Enjoy!

It has been two years since I last interviewed you. What have you been up to?

I’m still writing my syndicated column. But I left the Dallas Morning News and started AssetBuilder, a registered investment advisor firm.

In that interview, you mentioned that you were working on another book. Is it finished? What’s it about?

Simon & Schuster just released Spend ’til the End* on June 10th. Like The Coming Generational Storm*it’s a book economist Larry Kotlikoff and I wrote together. Spend ’til the End*is grounded in consumption smoothing— the idea that we all try to maintain a smooth and level standard of living throughout our lives. While the idea seems obvious, achieving a level standard of living isn’t easy. Worse, conventional financial planning virtually guarantees that you won’t be able to do it.

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