Words of Caution

By: 
Al Jacobs

For those of you who’ve been around awhile – as I most certainly have – you’ve managed to develop a good bit of understanding of how things work simply by your casual involvement in all sorts of events. And you needn’t even be a party to whatever is transpiring to gain intimate knowledge of the circumstances.

As a serviceman in the U.S. Navy for more than 15 years, I often found myself buried in the details of perennial nonsense which, surprisingly, proved to be extremely valuable at a later date. I specifically recall discovering, as an apprentice seaman, there’s a good bit to be learned by just being kicked around the parade grounds for a year or two.

With this as an introduction of sorts, I’ll now add that over the past several decades I’ve watched the personal lives of some of my friends and acquaintances self-destruct. At first, each misfortune seemed unique with no apparent relation, one to the other. But in looking back I find some common threads in these calamities.

It’s this hindsight vision which now encourages me to pass on some words of caution. I’ve become thoroughly convinced you can sidestep a lot of trouble if you’ll simply avoid three basic human failings. Let me tell you exactly what they are and, most importantly, what you must do to prevent becoming ensnarled in them.

(1) Beware the natural law of income and expenditures. Innumerable works exist on the subject of income and expense as they relate to one another. Whether a scholarly dissertation on taxation, helpful hints on personal budget balancing, a diatribe on welfare spending, or an historical review of the final years of the once dynamic Pennsylvania Railroad, certain elements of fact and fiction are often woven together to blur the obvious.

The inability of many to separate financial illusion from reality is a national defect, and for an individual this failing can be a personal disaster.

Of the many books on the subject, an exceptionally clear and enlightening one titled The Law and the Profits appeared in 1960 by perhaps the most lucid writer of the century, the English historian C. Northcote Parkinson. In it he postulated the maxim that expenditures invariably rise to meet and exceed available income, and substantiated this as it relates both to organizations and individuals. This impulse to spend whatever’s available is the undoing of many otherwise rational persons.

The message ought to be clear; to protect yourself you must reject this tendency to spend up to and beyond your financial limit. A fine example for me was a close acquaintance, a wealthy self-made investor, who liked to boast of his thriftiness by recalling his years as a young depression-era attorney, when he claimed he lived on only 30 percent of his income. (Interestingly, at the same time, his indolent son-in-law boasted, though more discreetly, that he, likewise, lived on 30% of the wealthy man’s income. Perhaps there’s a point to be made here, but it’s one I intend not to pursue.)

(2)  Do not commit to things you don’t understand. Of one thing you may be certain: You’ll often be called upon to make decisions for which you’re unprepared. Whenever possible, defer your judgment to a more favorable time. There are instances, however, when you cannot wait. Under these circumstances you must make your decisions from the best information you can gather at the moment.

Frequently you must weigh the advice and recommendations of others, and the source of the counsel offered deserves to be considered closely. It can be hazardous to place your confidence in persons merely because they’re friends, relatives or professional advisors. The same can be said about the opinions of the wealthy, though it’s not unusual to confuse financial success with knowledge. The line from the Broadway musical Fiddler on the Roof sums it up pretty well: “ … because when you’re rich, they think you really know.”

Similarly, holders of credentials are no guaranteed source of sound advice. If they were, every licensed stockbroker could boast only prospering clients. This extends, as well, to persons with nationwide or even worldwide reputations of one sort or another. You may accept their guidance at your peril.

Of course the advertising business might not function as effectively without the celebrity pitchman. For unknown reasons, the claimed benefits to the purchaser of a complex health insurance policy are presumed more credible when endorsed by an aging television talk show host or an illiterate sports celebrity. This is neither unique to the United States nor is it a recent phenomenon. The ability, for example, of royalty, the British equivalent of celebrity, to market products, was captured nicely in a Gilbert and Sullivan comic opera written well over a century ago with the following lines spoken by the mythical Duchess of Plaza-Toro:

“I write letters blatant
On medicines patent –
And use any other you mustn’t;
And vow my complexion
Derives its perfection
From somebody’s soap – which it doesn’t.” (It certainly doesn’t.)

In short, when required to make decisions on factors you consider less than reliable, disregard any advice, regardless of the source, not clearly understandable or with which you disagree, and try to postpone binding commitments until you acquire the missing information.

(3)  The secret of success in virtually every endeavor is mastery of the details. If there’s a single factor to explain why so many people fail in their undertakings, it’s their inability, or perhaps unwillingness, to spend the time and energy to collect, evaluate and utilize information.

Perhaps this is excusable, as there’s little in the training of most of us that encouraging close scrutiny of anything. It’s my belief admonitions such as “You can’t see the forest for the trees,” and “We must step back to get the big picture,” are mere rationalizations to avoid thought.

The world should be viewed, not as a monolith to be comprehended through revelation, but rather, as a jigsaw puzzle where a multitude of differently shaped and colored pieces are sorted and rotated while being fitted together, often in unattached clusters, as the picture slowly forms. In short, the minutiae, seeming merely to be an annoyance obscuring the subject, is often the actual substance which when then assembled forms the subject.

It’s only by diligent investigation you can know what you are doing, learn what is happening to you, and control the situations confronting you. As once so eloquently expressed: “When you know the details, no one can lie to you.”

These are the simple … perhaps not so simple … ways to stay out of self-made trouble. Whenever you encounter a predicament, however benign it may at seem at first, try to reflect on these three rules … they can save you from a heap of misery.

A concluding thought: If there’s a single habit most Americans appear to embrace, it’s the tendency to increase personal spending as personal income increases. I don’t understand why this is so. Why does more income coming in induce a person to seek something to spend it on? It seems to me – and has always seemed to me – the receipt of more dollars should encourage the recipient to hang onto these extra dollars.

Nonetheless, as the money comes in, most people will systematically spend it on items not even contemplated beforehand. If nothing else, this is a surefire method of inhibiting both savings and investment. Why this habit prevails among the majority of our citizens is something I cannot fathom. Will someone please explain it to me?

Al Jacobs, a professional investor for nearly a half-century, issues weekly financial articles in which he shares his financial knowledge and experience. Al can be contacted at al@abjacobs.com.

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