Are You Holding An Asset from Sentimentality

OLYMPUS DIGITAL CAMERASentimentality is a powerful emotion.  My family laughed when I insisted we pass by the home I grew up in not once, but twice the last time I went back to my home city.  I’ll also swing by old apartments, schools, campsites, and other places where I spent a significant amount of time or even a memorable evening.  When I proposed to my wife, I wanted to do it on Shelter Island in San Diego at a gazebo where we had danced to music from my boombox a couple of years before.  The gazebo apparently was in disrepair and had caution tape around it — it’s actually gone now — so I got down on one knee beside it.

One issue with sentimentality is that it often causes us to keep things long after we should have let them go.  This can clutter up our homes, cause us to have two of many things, and sometimes cause us to use items long after their lifetime has expired when we could have a new, shiny one for a few dollars.  With investing, holding on to an asset through sentimentality can be devastating.

My father once told me to never fall in love with a stock.  While long-term investing is good, sometimes when we’ve owned a stock for a long time we become sentimental about the stock (or other asset).  We then become blind to the fact that the company has changed and hold a large position in a company right from the peak down to the ashes.  We also might become  so convinced that the company is good and will turn around that we’ll continue to plow money into it even as it is going under.  Despite giving me this advice, even my father fell into this trap, holding onto a company that he had seen double for years and years after a new CEO was appointed that radically changed the company and drove it into the ground.

Probably the most dangerous time where many people fall into the sentimentality trap is when there is a death.  Watch an episode of Hoarders and you’ll see that many of the people who now have paths through their homes among piles of possessions started their hoarding after a death.  They ended up keeping everything the person had in an effort to hold onto their memory.

While many people keep clothes and personal items out of sentimentality, which results in clutter and full closets, keeping assets out of sentimentality can cause financial damage.  For example, we keep our parents home and rent it out, even though we live in another state, and end up paying all kinds of money to travel to the home and deal with the issues that require us to be at the home.  We would never buy a home in another state in order to rent it, but we hold onto our parent’s home because we’re sentimental, and in doing so make a bad financial decision to have a rental property that is hard to manage and possibly a bad rental property as well.

Another thing that might happen is that a relative has a lot of shares in a stock that we end up inheriting.  Because the stock reminds us of that relative, we hold onto the stock even though it is way too much money to have in one stock.  If something goes wrong at the company, we risk losing the full value of that stock.  If we had sold instead, we could have used the money for something useful, or even invested the money so wisely so that it would pay us income for the rest of our lives.  The issue is that by having the stock, we remember that relative and we want to hold onto the stock to hold onto a part of him or her.  If we sell it and spend it, or even sell it and just add the cash to our regular portfolio, we lose that connection.

Probably the best thing to do in this situation is to still keep the money together to keep the memory, but either spend it in such a way that you can preserve the memory or invest it together in a way where you still reduce the risk.  One way to spend the money but still hold the memory is to buy something permanent with the money such as pay  in off your home, make a home upgrade, or even buy a vacation home or other luxury.  That way each time you see the item, it will remind you of the person.  If you are going to invest, you could buy a less risky single asset, such as a local rental property, or a single asset that is diversified in itself such as shares of a mutual fund.

One of the best things you can do with an inheritance such as this is create a separate asset for which you use the income for a special purpose.  For example, you could buy shares of a mutual fund and then sell off 10% of the mutual fund each year for a home improvement.  Maybe replace a floor one year, then buy a new couch the next, and so in.  In this way it is like the relative is giving you a gift each year.  As long as the amount you take out each year is modest (maybe between 5-10% from a mutual fund), the relative will keep “giving you gifts” for many years.

In our case, I received money from my Uncle David from a life insurance policy.  Rather than putting the money into our portfolio where it might get lost, I put it into an index mutual fund.  Each year we withdraw 10% and take a special vacation we call the “Uncle David Trip.”  It is not a huge amount of money, but enough for maybe a weekend at a nice hotel or even a week on the road staying in low-cost motels.  By doing this, we can share time as a family and remember my uncle while doing so.  This is much better than an holding onto an old shirt.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on investment strategies, stock picking, and other matters relevant to the investor. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Investing Mistakes that May Be Keeping You from Success


Successful investing is probably 60% psychological and 40% technique.  Many teach various investing schemes and repeat the standard bromides.  The importance of diversification.  Minimizing taxes and transaction costs.  The power of compounding and why stocks will do better than bonds over long periods of time.  Some will relate the excitement of their various trades.  A few will relate stories of some of their failed trades and losses.  Few, however, discuss the psychology of successful investing.

Our emotions affect our actions and most people are very emotional about money.   Unfortunately, most people are wired exactly backwards to be successful at investing.  This is why Las Vegas and a thousand Indian casinos do so well.  We tend to put money into stocks when they are nearing a high and pull it out when nearing a bottom.  We tend to sell winners quickly, missing out on most of the appreciation, and hold onto losing positions for years, selling when they finally recover to where we bought them.

Because the behavior of the crowd is usually wrong public sentiment is actually measured as a negative indicator.  If public sentiment is high and most people are bullish it is time to sell because everyone is fully invested and there is no money left to push prices higher.  Conversely, if everyone is bearish there must be a lot of money sitting on the sidelines that can be invested and therefore it is time to buy.

Today I’ll discuss some common  psychological traps and how to avoid them.

Holding onto losers too long.  Many people will hold onto losing positions, or even average down into losing positions, when they really should just sell the stock.  For some reason, people don’t feel that they have taken a loss unless the stock is actually sold.  “It’s only a paper loss until you sell,” they’ll say.  Often people will hold onto a loss for months or years.  If the stock actually does begin to recover and gets back to where they purchased the shares they will sell out.  This is usually when the stock goes through the roof.

If you have a losing position, it is best to reevaluate the company.  See if there was some mistake in the logic you used when you purchased it.  See if something has changed at the company or there was some news of which you were unaware.  If you can still find nothing wrong, stick by your guns – it may just be market fluctuations and your stock will eventually recover.  If you do find that there was something you missed, accept the mistake, learn from it, sell the stock and move on.  If it makes you feel better, realize that you can offset a gain in another stock.

Holding onto winners too short.  Many people, when they have a stock that moves up 10 or 20%, will sell the stock.  People are fearful of seeing the gain evaporate and becoming a loss.  Another way of doing this is setting a stop-loss slightly below the share price and letting the market decide if the stock gets sold.  The trouble with this strategy is that stocks are sold just when they are starting their big runs up, so the investor misses out on most of the gain.  Because losers tend to be held much too long at the same time winners are sold, many traders never really make much of a profit.

To avoid this, only buy stocks that you feel will do well in the long-term and hold onto them until something at the company changes or the stock gets so outrageously overpriced that it would take years for the earnings to justify the price.  Remember that the idea is to make large profits over a period of years, not small profits over a period of months.

Holding onto winners too long.  A final mistake is to “fall in love with a stock” and hold onto it even after the business has changed and it will no longer continue to grow.  Often, if a stock has gone up and doubled year after year it is difficult to admit that the stock is maturing and it is time to move onto something else.

To avoid this mistake, reevaluate all holdings at least once a year.  Ask yourself if it still seems like a fresh young company with plenty of room for growth or if it has filled most of its market and there is little growth left.  See if demographics are changing or the company was on a rapid growth path and may have expanded too rapidly.  In particular, if a stock has grown substantially under a particular CEO and theat CEO is retiring, it is often time to sell the stock and move on.


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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Why No One Will Every Win A Million Dollars on “Deal, or No Deal”

No one will ever win a million dollars on the game show, “Deal, or no Deal.”  I make this statement with certainty because to do so would require a very odd type of person with exceptionally good luck.  The creators of the show were brilliant in that they make it look like people are playing for a million dollars, but in actuality they’re playing for $500,000, or maybe even $50,000.

The reason a person would need to be very lucky is obvious.  There are 26 briefcases, so the first thing you would need to do to win the million dollars is to choose the million dollar briefcase as your case.  This means that your chances of choosing the right suitcase at the start are 1/26, or about 3.8%.  Not great odds.  This would mean, however, that probably by the time the 26th contestant came along, and almost certainly by the time the 50th of 75th contestants came along, someone would choose the million dollar suitcase.  You would then think that you would see a couple of million dollar winners a year, which you don’t and you won’t.

The reason is the second factor, and that factor makes the odds far lower.  This second factor is human psychology, and human psychology causes most people to choose the certain thing over the chance at something more if the risk/reward ratio is not great enough.  Most people, if given a hundred dollars and told that they could keep the hundred dollars or risk it for a chance at $110 would hold onto the hundred dollars.  The gain they could get was not worth the risk of losing the sure thing.  Many people, however, would play the lottery and put down $2 for a chance to win $300 million dollars, even though their chances of getting killed in a car accident on the way to buy the ticket is much better than their chance of winning.  They do the math instinctively and realize that the gain was enough to justify the risk, mainly because the amount risked is so little and it would not affect their lives very much if they lost it (hey – it’s $2!  That’s cheap entertainment.), so it makes sense to take the risk for the chance at great rewards.  The penalty for losing is low but the gain from winning is astronomical.

And this psychology works against people playing “Deal, or No Deal.”  If the show were simply a matter of choosing suitcases and then seeing if you could make it to the end and have the million dollar case, there would be a winner or two a year.  The reason they have the “banker” making offers as they go is to make people have to make the choice of trading a sure thing for a chance at the million dollars.  (Note the offer is just the average value of the cases, minus a small amount.  It is not made by the guy in the shadowed booth who supposedly is rooting against the player.  Why would someone make their money available to be given away in the first place?)  This puts people who have the million dollar case, a $300 case, and a $10,000 case in the position of giving up a $300,000 offer and risk ending up with $300 if they want a chance to actually win the million dollars case.  Not many people would make this choice.  If you combine the chance of choosing the million dollar case with the percentage of people who would give up a sure $300,000 for a chance of winning a million dollars, you can see why no one will ever win.   The only time that they might have a chance of winning is if they had a large amount whether they won the million dollars case or not.  For example, if the only two suitcases remaining were the million dollar case and the $500,000 case. In that case someone might be willing to risk it since they would still win $500,000 if they didn’t have the million dollar case.  Still, the banker’s offer would be around $740,000, so most people would take the sure $740,000 instead of risking a loss of $240,000 for only a chance to win $250,000 more.

And what does this have to do with investing?  Well, while plugging the average long-term investment return of 10%-12% into a financial calculator will show you that you can end up with $5M, $10M, or more by putting money away regularly into a retirement account and letting it grow in the stock market, few people will ever see these kinds of sums.  The reason is that the biggest gains are made near the end when you are getting near retirement.  For example, compounding at 10% per year, someone would see their nest egg double about every 7 years.  Someone at 50 who planned to work until he was age 70 would therefore see the potential for his $750,000 portfolio to grow to  $6 M before he retired, with gains of several hundred thousand dollars per year during the last few years.

The trouble is that there would also be a risk of seeing a big decline during that period that, if it happened during the last few years before retirement, could leave the individual without enough money to make it through retirement.  This drives people (for very good reason) to become conservative with their money – shifting into bonds and cash – during the periods when they could see the biggest gains by being wholly in equities.  The only way to overcome this (justified) fear is to save enough for retirement early in life to have enough of your money for security in secure investments when nearing retirement while still having enough money in equities to still perhaps “hit the jackpot.”  For example, an individual who had $2 M in retirement savings by age 50 could move $500,000 into large, dividend paying stocks (income stocks) and bonds while still leaving $1.5M in growth stocks, moving a portion of the growth stock portfolio into income stocks and bonds as she neared retirement age until she had $1 M or so in income stocks and bonds at retirement.  She would therefore still have the potential to see her portfolio grow to $12 M or more but still have enough for critical expenses during retirement even if half of the equity portfolio were lost due to a market event.

OK, so I’m sure that some of you have gone to Google by now and found out that someone actually did win the $1 million on “Deal, or No Deal.”  And I’m not talking about the shows where they put three million dollar prizes on the board, effectively taking away the psychological factor.  There actually was one person who legitimately won the million dollars and you can (and should ) see the video here.  She was helped a little by having the $200,000 prize remaining, meaning that by giving up the almost $500,000 sure thing she was only risking $300,000 for a possible gain of $500,000.  I doubt she would have gone for it if she would have only won $300 if she were wrong.

She also did something that was a very poor choice and she was very lucky that it worked out for her.  At the end of the show, if you get down to two suitcases, Howie Mandel offers to allow you to switch cases with the one remaining.  Believe it or not, if she had switched cases her chance of winning would have improved dramatically.  In fact, her chance of winning the million dollars would have gone from 1/26, or 3.8%, to 25/26, or 96%.  (After review, I agree that this is not true because she was eliminating the cases randomly rather than having someone who knows where the $1M case was eliminate those that were not that case, as would be true in the Monty Hall problem.  See the comments below for an explanation.)

The reason is that “Deal, or No Deal” is the Monty Hall Problem on steroids.  In the Monty Hall problem, you are on “Let’s Make a Deal” and choose one of three doors.  One door contains a new car and the other two doors contain a goat.  Monty Hall then shows you one of the doors that has a goat behind it, then offers you the choice of staying with your door or swapping to the other, unopened door.  Because your chances of choosing the right door originally is 1/3, and because Monty Hall, who knows where the car is, eliminates one of the wrong doors, your chance of winning if you switch is 2/3, versus 1/3 if you stay with your original door.

With “Deal, or No Deal,” if you can somehow manage to get down to having only one suitcase and your suitcase left, one of which contains the million dollars, your chances are 25/26 of winning if you switch suitcases.  Your chance if you don’t switch remain 1/26.  This is because your chances of choosing the wrong suitcase at the start, and therefore the chances of the right one being the other suitcase if you know that the other 24 suitcases don’t contain the million dollars, is 25/26.

So why not make it easier psychologically to keep a good amount in growth stocks as you near retirement and maybe win the million dollars.  Make your own choice at retirement between having plenty of money for living expenses should things work out and an incredible fortune if they do instead of between having just enough and having nothing.  Put yourself in the position to take the risks.  Start when you are in your 20’s to build your fortune so that you’ll have five or ten million dollar suitcases instead of just one.

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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

An Alternative to Raising the Minimum Wage

In a speech yesterday, President Obama challenged those opposed to his proposal to raise the minimum wage to offer their solutions to the problem of growing wealth disparity.  As his story line goes, the wealthy are getting far wealthier but the poor and middle class aren’t participating in the growth in wealth.  The question then becomes, what can we do to stop this divergence in outcomes?

The President is probably looking for a government solution.  Ironically, in this case the government may very well be the cause of the problem and therefore the best thing it could do is simply pull back out of the way.  Over the years it has become very expensive to have employees with all of the bureaucratic hurdles that must be passed.  Gone are the days of simply handing out paychecks on Fridays.  Now an entire HR department must be staffed to handle benefits, tax paperwork, and other regulatory compliance functions.  This has reduced the incentive for entrepreneurs to hire employees.

Existing minimum wage laws have also caused employers to replace employees with technology more often.  There are a lot of tasks that an employer would have been happy to hire out at $4 or $5 per hour.  At $7 an hour or more, suddenly it becomes worth it to buy a new computer system or upgrade facilities to allow the tasks to be done with fewer people.  In some cases, tasks that were once done by employees are being given to customers (see self-service checkout at some grocery stores).  As the minimum wage is increased, this will happen more often.  At $12 an hour or more, expect to see self-serve kiosks for ordering at fast food chains.  This would be easy now that most restaurants are taking credit and debit cards.

Also expect to see the door to these jobs closed for many of the entry-level workers if the minimum wage is raised significantly.  Beyond investing in technology to reduce costs, restaurant owners will need to pass the costs onto their customers as much as they can.  This will require increasing the quality of the food and the service since there is a limit to how much you can just raise prices for the same quality.  Since, at higher wages, there will be a lot more people interested in the jobs, including people coming out of culinary school, employers will only be interested in the most skilled and the most efficient employees.  It will be very difficult for those with no experience to get a job and there will be no tolerance for anything but exemplary work performance.  So then you’ll have lots of people out of work and the price of restaurant food rising.  Not a good combination.

This has gotten far worse with the passage of the Affordable Care Act.  There are now strong incentives to cut people to 30 hours per week or less, or keep employment below 50 employees.  Employers who go over those levels will see their costs per employee rise dramatically since they must then provide expensive healthcare coverage.  This has already resulted in some lay-offs and reductions in hours.  It will get far worse this summer as the employer mandate deadline gets closer.

So what can the government do to address this issue if putting new requirements on employers is not the answer?  Here are some suggestions:

1.  Drop the minimum wage to $5 per hour.  This will slow the process of job elimination through technology upgrades and provide more people with the entry-level job they need to learn good work habits and start building a resume.

2.  Approve the Keystone Pipeline, remove the new EPA regulations requiring carbon dioxide sequestration for coal-fired power plants, and get the government out of the energy business in general.  Increasing the costs of energy and closing power plants and coal mines only reduces the number of good paying jobs available.  Pumping billions of taxpayer dollars into plants to build solar panels and other green energy initiatives has also proven to be fruitless because the market does not exist for these technologies.  Instead, fund energy production research and let the market decide when technologies are ready to build in scale.

3.  Examine and cut regulations on businesses where possible.  Reduce the hassle of starting a business and the cost of running a business so that money can be put into more productive places.  In particular, eliminate the certification requirements that are enacted mainly to protect existing businesses from competition.

4.  Eliminate the Affordable Care Act and replace it with a system of Health Savings Accounts and major medical insurance tied to the individual, not to employment.  This would remove a lot of the employment-killing rules that have kept employers from hiring over the last five years.

5.  Replace the income tax with the Fair Tax.  This would eliminate the unproductive use of time to reduce taxes and comply with tax regulations.  It would also reduce the tax burden in general since there would be less fraud in the tax system.

Contact me at, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

The Affordable Meals Act

In a country far away, people often went out to restaurants to eat on Saturday nights.  Some people liked steaks and therefore would go to the steakhouses and get a porterhouse or a rib eye.  Others prefered to do other things with their money, and therefore would opt for chicken.  A small percentage of the population – about 15% – did not go out to eat, instead opting to stay home.

Of those who stayed home, there were some who wanted to eat lobster but were not able to afford more than chicken.  There will others who did not really like going out, and therefore decided to stay home instead and spend their money on other things that they did enjoy.

The king of the country was troubled by the fact that 15% of the people did not go out on Saturday night.  He spoke to the ones who wanted lobster, and they told him that they should be able to get lobster if they needed it.  He felt this was unfair that they could not afford to get lobster and devised a plan.

The king sent out a decree called the Affordable Meals Act, which declared that every citizen had the right to meals at reasonable prices and that if everyone were required to go out and buy meals, we would all be better off.  The people who wanted lobster heard this and understood it to mean that they could get the lobster they wanted for free, or at least at chicken prices.

The others who were buying chicken were worried that the Affordable Meals Act would make them pay more for their meals or that they would not be able to keep getting chicken.  (The ones who chose not to go out ignored the decree entirely, but liked the king because he they felt he was “hip.”)  The king assured the steak eaters and the chicken eaters that if they liked their meals, they could keep getting them.  Nothing would change and they could continue to go out and get those same meals.  He told them that this was just a program for those who wanted lobster but were unable to buy it.  He also said that the prices of all meals would go down overall due to the Affordable Meals Act.  This satisfied many of the chicken and steak eaters.

In the dead of night, the king and his royal council prepared the specifics of the Affordable Meals Act.  It declared the following:

1)  Everyone must go out and buy a meal on Saturday night, or sacrifice 1% of his gold to the king.

2) Every restaurant meal must include steak.

3) Those that could afford steak must pick up part of the cost of the meals of those who could only afford chicken.

4)  People who chose not to go out and pay the fine instead could opt into the plan at a later date, should they decide they need lobster.

The ones who needed  lobster, without ever reading the decree, rejoiced at learning that they would now get lobster and there was great celebration throughout the land.   As the Affordable Meals Act began to be implemented, however, there arose great anger.

First, the king’s court, who were used to getting lobster but paying for chicken, protested when they realized that they were going to need to pay for their lobster and some of the steak dinners for some of the chicken eaters.  The king, who realized his mistake, quickly decreed that his court, many of whom made far more than the steak eaters, would continue to receive lobster at chicken dinner prices.

Next, the chicken eaters discovered that the decree required they buy steak dinners.  “We like our chicken dinners, and don’t want to pay the price of a steak dinner”  they said, “and you promised us that we could keep buying our chicken dinners if we wanted to. ”

“It is true you are paying more than you are now, but that is not a fair comparison,” said the king.  “You were getting chicken dinners before, but  now you are getting steak dinners, which are better.  You should be happy to get steak dinners – you were missing out when you were getting chicken.  Trust me, I know what is best for you.”

“Besides,” said the king, “it isn’t the Affordable Meals Act that caused you to lose your chicken dinners.  The restaurants just chose to stop serving chicken – restaurants change their menus all of the time.”

“But the restaurants said the Affordable Meals Act said that they were no longer able to serve chicken,” protested the chicken eaters.  The king ignored them, just talking about how nice it was that people who want lobster would now be able to get it.  Some of the chicken eaters reduced some of their other spending to raise enough money and went ahead and started purchasing the steak dinners.  Others couldn’t afford steak dinners, but made too much to receive a subsidy, so they decided to stop eating out.

Next the steak eaters, who had supported the Affordable Meals Act, got their bills for dinner and saw that the cost had gone up, to the point where lobster used to be.  “We want people who want lobster to have it, but we didn’t know that we would be paying for it,” they said.  “We thought you said we would be paying less.”  The former chicken eaters laughed at this, with a ting of Schadenfreude.

“You can’t be so selfish,” chided the king and his court.  These people need lobster and can’t afford to pay full price.  They need to be subsidized.  Most of the steak eaters went ahead and paid the higher price.  Some could not afford to pay and decided to pay the tax and eat at home instead.

Part of the king’s plan was to coerce some of those who were not eating out to get on the dinner plan and pay for the steak dinners.  He reasoned that would reduce the price for everyone since they would now be paying steak dinners too, but still not going out very often since they hadn’t in the past.  Many of these individuals, however, decided they did not want to pay the high prices for the steak dinners and decided instead to pay the fine and keep eating in.  This caused the prices to increase still more.  As prices rose, more and more of the chicken eaters started eating in or getting subsidies from the smaller number of people still paying full price for the steak dinners.

Now that they could get lobster for the price of steak, many people now asked for lobster.  The first few indeed got hot, fresh lobsters.  The restaurants soon ran out of lobsters, however.  In addition, since the steak eaters were  now paying more, and the chicken eaters were now paying steak eater prices, many more people were going out more often to “get their money’s worth.”  The restaurants soon ran out of steak as well.

The people complained to the king.  “We are paying for steak and lobster, but there is not much of either.  In addition, we are paying far more than we used to for either steak or chicken.”

The king, worried that the crowds were becoming restless, came out to the balcony of his palace to address the crowds below.  “It is not the Affordable Meals Act that is causing the problem,”  he said. “It is the restaurant owners who are charging too much.   Give me what you were paying to the restaurants, and I’ll see to it that there is steak and lobster for all.”

The king secretly planned to take all of the money, buy lobster for himself and his nobles, and then give the people hamburger and say it was steak.  Any who complained would have their hamburger withheld once he controlled all of the restaurants and thereby had power.

Some in the crowd cheered, saying the king was wise and kind, and that everyone should give their money to the king so that he could provide steak and lobster to them.  Others said they should go to the restaurants, burn them down, and hang the evil restaurant owners from the light poles.

In the crowd, raging towards a frenzy, stood a small boy.  The boy rarely said anything, many thought him to be a mute.  This boy, however, climbed up upon a wagon seat and shouted to the crowd.

“Stop!” he shouted.  “What are you doing?  It is not the restaurant owner who is causing the shortage of steaks and lobsters and the increase in price.  It is the Affordable Meals Act, which the king proposed.  Now you want to give all of your money to this king that created this act that has caused you so much misery.  If you give him your money, you’ll need to beg him for the steak and chicken that you used to provide for yourselves.  He’ll be using your own money to control you.”

“Why don’t we try something different.  How about we require everyone to set aside enough money from their wages to pay for steak, plus a little extra in a pool to pay for those who will need lobster but cannot afford it from their wages.  We will not require anyone to buy steak, however, letting those who want to just buy chicken, and save the extra do so.”

“Many people will opt just for chicken or to eat at home for a while, such that when they do want steak or lobster, they will be able to pay for it themselves from their savings.  They will have saved so much they’ll be able to buy all  the steak and lobster they want.  Those who need lobster but do not have time to build up a savings will be easy to cover because they are few in number compared to the whole population.  Most people will be paying for their own meals, so the burden from those who cannot will be small.  Those who want to spend their money on steak instead of chicken can do so, understanding that by doing so they would probably never be able to afford lobster.”

The people tried the suggestion of the little boy.  They found that by eating in and buying chicken when they were young, rather than paying for steak every week, their savings grew rapidly.  They were able to easily pay for lobster later in life – something they would have never been able to afford had they been spending all of their money on steak.  They also found that the few people who needed lobster before their savings could build were easily taken care of since there were few of them.

The people realized that they did not need to king to control their restaurant spending.  They just needed to save while they were still content with chicken, so that they could have lobster later in life.  They discovered that it was better when everyone who could was saving for steak and buying chicken, rather than paying out all of their money for steak all of the time and the being dependent on others to provide for them when they needed lobster.

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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.