Wealth on Basil Labib

A Closer Look at 'Inside Job'

gs454236@gmail.com (Basil Labib) — Thu, 12 Aug 2021 16:56:47 +0530

“Inside Job” is a 2010 documentary written, directed and produced by Charles Ferguson on the 2008 global financial crisis. It won the Oscar in the “Best Documentary Feature” category in 2011. Notwithstanding, it makes for an enlightening and thrilling watch that every citizen, who cares about where their hard earned money goes, should watch.

This documentary is not an easy watch that one can grab on a lazy afternoon comfortable on their couch. It has complex sounding terms and concepts that should keep one on the edge of their seat. As those financial experts makes the layman believe, “What we do is far more complicated for you to understand so you better leave us alone as we do it.” They are soft-headed people who will make one feel witless and run away with their money. That is exactly what happened in 2008.

Poster of Inside Job

Economics is a fascinating subject

Economics, the “dismal science”, is a fascinating subject because it aims to study the very fondation that runs our society: money. To me, it is a study of resource allocation (More on this in a future post). It is a set of the simplest ideas that sustain our lives. A small section of people deliberately obfuscate those ideas with cooked-up complex terms just to con everybody else.

Concepts at the root of the 08’ crisis that I have broken down to simple language and added examples to make them concrete:

Information assymmetry: It means when a party has more information regarding a transaction than the other party. A rampant example is the real estate industry where the agent has a more intimate knowledge of the market and the value of the property than you do and clearly, they have no incentive to act in your favor.
Incentives: The powerhouse of any transaction in a economy. I have an incentive to educate myself because I know I can earn more money that way. People basically get up in the morning and do any work (even go out and shoot somebody) because they have an incentive. Incentives drives all our actions, even non-economical. (Don’t proceed further if you get offensed easily) Think about your relationships. You may love your partner. But (really) deep down, it’s just an incentive to have something you don’t.
Value: The basic principle why any transaction is carried out is because you are valuable to the other party. Maybe you invented something, maybe only you can offer a service. The idea is, people should be paid proportionately for the value they create in society. Money is a measure and storehouse of that value. It is a token that says, “Yes, this person is entitled to redeem this much worth for anything else”. This is crucial.

That’s all there is at the core of the crisis. So, let’s dig into it.

How it happened?

A newspaper headline in the wake of the crisis

The following is a brief summary of what led to the housing market crash.

Deregulation in the financial market of the US from the 1980s

Following the Great Depression of 1930s, the financial market of the US was stable and secure due to government regulation. However, during and after the Cold War, few lobbyists started putting pressure on the Congress to deregulate those institutions. What it basically meant was remove restrictions on private banks and firms to use depositor’s (that is, you) money and invest them more freely. It made bankers more greedy and ambitious.

Explosion of derivatives

Think of derivatives as artificial products that banks can offer you. Traditionally, banks are generally involved in lending and borrowing money. But, bankers can devise creative “instruments” – agreements really, that can allow people to bet on anything. Rising crude oil prices, the bankruptcy of a company, or even the weather. Why? Because they get to keep the service charges. Those institutes began exerting power over the political system of the US and got a law passed that essentially banned regulations on derivatives.

Securitization

40 years ago, home buyers would go to a willing lender, ask them for money and then repay them on a fixed basis. Naturally, those lenders were very carefully as to who they lent their money.

Securitization is a concept whereby the lender has no fear of not being repaid. They simply sell their mortgages to an investment bank. Consequently, lenders started making riskier loans because they didn’t care if people don’t repay. Loans for over 90% of the home price started being offered.

Collateralized Debt Obligations (CDOs)

Banks would buy mortgages from lenders, package a lot of them into a CDO, and sell them to investors around the world who would be happy to have a steady flow of cash because who doesn’t pay their mortgages? You see, it’s just the same, boring “I have money. You don’t but you need it. Okay, let me give you my money but you promise to pay me that and some more” packaged in new wrapping foil. Only this time, those mortgages were subprime. Meaning they were bad debt. Those people had over 90% of the home price paid by the mortgage and so had no incentive to keep the house. The moment they couldn’t pay their bills, they can simply walk away because they had no stake in it.

Rating agencies

These are institutes, Moody’s, Standard and Poor’s and Fitch were the key players at that time, that independently assess a financial instruments risk, returns etc and give them ratings to assist the investor in making an investment in those products. The problem was, the banks were paying these agencies to give AAA, or triple A rating (highest rating, equivalent to a goverment bond in terms of security) to subprime CDOs. Why? Because how else will they sell those rotten apples? Further, the agency had no liability if those CDOs turned bad.

Predatory lending

Subprime loans carried higher interest rates. So, the banker had an incentive to offer you those products that maximized his profits, not caring if those borrowers would be able to pay those loans. This is predatory lending.

This cycle reinforced one another, pumping out more loans, feeding the bankers. Employees of major banks like Goldman Sachs, Bear Stearns, Merrill Lynch, Lehman Brothers among others were paid “bonuses”. People owned not one, but five houses. Expensive penthouses, private jets. They degraded to drugs. Prostitution was rampant (and these charges were shown as business expenses), among other things. These greedy, bald people saw money, an unrestricted environment to operate, and a way to extract money for practically creating no value. They were artificially creating these instruments that they knew were bad, bribing rating agencies, and selling them off for the profits. But, there is more.

Credit Default Swaps

AIG, the premier American insurance company, offered others to bet on certain events, such as the fall of a company, or debts going bad, asking them to pay a monthly premium for a return if their bet yielded. Few investment banks saw those CDOs will go bad and started betting against their success and simultaneously selling them off to investors citing they were excellent triple-A products! Moreover, others can speculate on these too. So, if something those CDOs do go bad, AIG is in big trouble. Such chain enforcements blew the crisis out of proportions. There is even more.

After a time, they saw that AIG will go bust trying to repay them after those CDOs go bad which they new were a certainty, so they began to insure themselves for being guaranteed payments from AIG in case the CDOs failed.

The destruction

Bankruptcy of Lehman Brothers, one of the major investment firms on Wall Street

People said $x was wiped out from the economy. But that is absurd. How can money be just wiped out in a flash? The truth is, there was no money to start with. Only on paper. There was no value backing that money. It was just a facade conjured by those bankers in their heads. What was the price?

Iceland went bust. Millions of migrant workers in China lost their jobs. Americans lost their savings, jobs, homes. Lehman Brothers dissolved. Stock markets around the world plunged. Nobody was lending any money. The financial system came to a stand still. Yes, pretty horrible for misaligned incentives, ghost value, and people not knowing what the hell they were doing.

From left: Henry Paulson, Chairman of Goldman Sachs and later Secretary of Treasury, US, Ben Bernanke, Chair of the Federal Reserve, and Timothy Geithner, President of Fed Reserve Bank of NY followed by Secretary of Treasury

Who were accountable? What happened to them?

All of them walked home smiling with severance, reimbursements and damages running in the millions. Most still serve on advisory boards, and board of directors of major companies.

Even, academic economists were incentivised to misdirect the community into believing certain facts that weren’t true and got compensated. After all, money runs the world. Not morals.

What is to come and what we should do

I personally believe, overall prosperity (and survival) of everyone depends on equal access to informational and consumer rights. As we enter the second quarter of the 21st century, the world economy will be even more closely knit. Corporations and firms will continue to act in their best interests. Economics and government policies have to stabilise this delicate balance of powers to ensure basic rights and progress for all.

It is only when we, the citizens, have accurate knowledge as to what goes “up there” that we can safeguard our interests, voice our opinions, and strengthen our opposition. The Internet had democratized knowledge and allowed unrestrained access to information for even the remotest sections of society. People must learn to leverage it effectively.

Notes from the Author

I have refrained from naming any person/persons specifically to avoid unnecessary finger pointing at each other. I encourage you to watch the documentary.
I apologise if any of the dates/years mentioned are wrongly quoted. All errors, typographical or otherwise, are my own.

Notes: The Millionaire Fastlane by MJ DeMarco

gs454236@gmail.com (Basil Labib) — Sat, 03 Jul 2021 21:02:21 +0530

Are you able to successfully leverage the opportunities at your disposal? That is the question that this book tries to answer and provides advice backed by the author’s own experiences. The book is written in a comfortable conversational style, including way too many metaphors and analogies.

The author, himself, has a remarkable lifestyle: starting a tech company during the dot-com bubble, growing it, selling it and so on. Below I have aggregated few core ideas from the book. Enjoy!

My highlights

Beliefs

Beliefs are powerful mechanisms that drive action, whether true or not.

What is wealth?

“Wealth is the ability to fully experience life” — Henry David Thoreau
Wealth is the state when each unit of money that you own earns more than its worth without you doing anything. (mine)
Wealth is composed of fitness (health), family (relationships) and, freedom (choice).

Luck on demand & Accountability

Luck is the residue of process.
“Responsibility is the price of greatness” - Winston Churchill
Responsibility is acknowledging your flaws. Accountability is modifying your ways to eliminate them.

Skills & Education

To trade time is to trade life.
Confined set of skills makes you expendable if demands for them becomes obsolete.
“The only thing that interferes with my learning is my education” — A. Einstein

build a machine for yourself.
Impact millions
Maximum control and leverage.
Wealth = Units sold * Unit profit + Asset value
Appreciable assets - businesses, brands, cashflows, notes, IPs, licenses, patents, inventions and real estates.
Passive income - earning income while not working
Start with $5m at 25, and let it compound. Wanna skip the first 30 years.
Become a producer first and a consumer second.
Business structures - C corp, S corp, LLC (Limited Liability Corporation)

Life choices

Poor choices are the leading cause of poverty.
Decisions made early in life are most impactful and irreversible.
Be willingly to accept your flaws.
“Ridicule is the tribute paid to the genius by the mediocrities” — Oscar Wilde
Create “free time” - time not spend working or recharging from work.
Pledge to never stop learning. Not from books but by engagement.
The acquisition and application of knowledge will make you rich.
Are you interested or committed?
Take intelligent risks.
Big dreams, materialistic or altrusic non-profit foundations, cost money.

Rules of thumb for business

- Need - “What’s in it for me?”
- Control - Over the variables
- Entry - barrier for competition, monopoly, license etc
- Scale - Units sold and Unit profit
- Time - business detached from your time
Live below your means with the intent to expand your means
Financial literacy - I mean, obviously

Entrepreneurship 101

The owner of an idea is not he who imagines it, but he who executes it.
Listen to people’s complains. Customers are foremost.
Look big to impress customers and intimidate competitors.
When supply exceeds demand, prices must drop, suddenly, the product becomes commoditized. Avoid such industries entirely.
Differentiation. Force innovation.
Be copied, never copy. (mine)

Partners:

Accountants and attorneys (among others) must be top-notch
Verify first, trust later
Spectacular product features cannot overcome poor services.

Branding

Build a brand. Rise above the noise.

Discipline & Focus

“…No life grows great until it is focused, dedicated, disciplined.” — Harry E. Fosdick
When you segregate your effort among assets, you build weak assets.

Notes: I Will Teach You To Be Rich by Ramit Sethi

gs454236@gmail.com (Basil Labib) — Tue, 15 Jun 2021 00:00:00 +0000

Sethi’s book, at it’s core, is a set of rules and tricks that can be applied by an aware and motivated individual to ensure a life of abundance relative to their current financial standings. Motivated to become rich himself (and hailing from India) at a young age, Sethi learnt from his blunders and noted his successes. He started blogging about his wins which eventually evolved into this book. Needless to say, his advice are well-researched, practical and tested. Do they work? It seems to.

This is my attempt to summarize the essential ideas presented in the book which is bore out of personal necessity as I am sure I will forget half of them (Speaking from past experience) in due course and will procrastinate till the universe cools down to open the book and reread it. Ergo.

Two caveats before we begin:

The book is dated. Use it as guiding rather than definitive. Research is key. Use the rather scant Terms section to look up artificially confusing financial terms.
The book is centered on the average American citizen. Find appropriate / equivalent schemes for your country of residence.

How to get rich in one line: Clear all debts. Choose the right accounts. Spend consciously. Automate money flow. Invest early and aggressively. Improvise and take action.

Rich or Sexy?

Getting started is more important than becoming an expert.
Ordinary actions get ordinary results.
Why do you want to be rich? (Hint: Because it sucks being poor).

Credit Cards

Two components: credit report and credit / CIBIL / FICO score.
Pay your credit bills on time. It’s free short-term loan. Get a no-fee card.
Rewards are important. Two or three cards are fine. Keep them active for long. Get more credit. Offers excellent consumer protection.
Small wins waste time.
Debt: Pay off the highest interest-incurring cards first. Negotiate lower APR. Setup aggressive automatic transfers to pay off.

Bank Accounts

Online savings account (NIYO, RazorPayX, Open) > Traditional savings account > Traditional current / checking account
Savings account: save up for longer-term goals. Less transactions. Current account: for frequent withdrawals.
Credit Unions: like local banks, not-for-profit, owned by customers.
Downside online savings acc: Few days for transactions to clear.
Talk to rep. Effective and important.

Setup investing

Open up 401(k), Roth IRA and an investment account with a discount brokerage firm (Or whatever is your equivalent in your country).
Setup automatic payments. Match 100% with your employee on 401(k). Go to Roth, then come back to 401 if still left.

Spending

Allocate spending money in “buckets”.
Rule of thumb: 60% expenses, 10-20% investing, 10% savings (or debt), 10% leisure (or debt).
Don’t just save - Save for a goal. Track spending weekly.
Increase revenue flow: Invest aggressively in yourself (health, education). Negotiate raise. Switch to higher-paying job. Do freelancing.

Automate

This provision	…should target
Paycheck	Investment acc; Direct deposit to checking account
Checking account	Investment acc 2; Savings acc; Credit card; Fixed costs (like rent); Unexpected
Credit card	Fixed costs; Leisure spending

Investing

Financial magazines, pundits, portfolio managers, advisers are nuisance. Cannot predict market 75% of the time. Manage yourself.
Preference: (Lifecycle funds) > Index funds > Mutual funds > Stocks, bonds
Major predictor of portfolio volatility: your mix of stocks and bonds. Your investment plan is more important than your actual investments.
Index funds: low-management fee (expense ratio). Rebalance allocation every 12-18 months.
Asset allocation: Check Swensen model
W. Buffett - “Be fearful when others are greedy and greedy when others are fearful”. That is, “Buy low, sell high”.
Ignore the noise.

Terms

credit score / CIBIL / FICO - number between 300 and 850; represents credit risk to lender; higher is better.
APR - Annual Percentage Rate. Interest rate to credit card companies.
Credit utilization rate - how much you owe divided by your available credit.
Life cycle funds or Target date retirement funds - “funds of funds”. managed. assets allocated based only on your age.
Stocks: Large-cap, Mid-cap, Small, cap, International, Growth, Value. Bonds: Government, Corporate, Short term, Long term, Municipal, Inflation-protected (TIPS). REITs.
REITs - Real Estate Investment Trust. Different than stocks or bonds.

Downsides

Okay, this might be a personal rant but the language of the book could have been more terse. This may be a demand my brain concocted from reading classics but formal language never hurts. Foregoing first-person addressing, frequent (and sometimes, redundant) jokes might have helped deliver the ideas in a more concise book thereby boosting the number of prospective readers who otherwise will shy away simply at the page count. As Cicero said, “When you wish to instruct, be brief”.

Maybe, just maybe, I would have been better off reading a classic.

Financial blogs

Get Rich Slowly - interesting
/r/IndiaInvestments wiki - great resource for Indian investors. Check “Recommended Reading” page (Another great collection of resources).
Zerodha Varsity - resource for investors. Newbie friendly.