Thursday, April 26, 2012

The oldest book on Personal Finance, I guess!!


The Richest Man in Babylon

The Man Who Desired Gold

Bansir, a chariot builder, has a conversation with his friend Kobbi, a musician. They bemoan the time and effort which they used to build up their skills and become one of the best chariot builders and one of the best musicians yet they are still poor. They determine to go ask their childhood friend Arkad for advice, since he has become one of the richest men in Babylon.


The Richest Man in Babylon

Bansir and Kobbi meet with Arkad, asking him why fate has favored him so much that Arkad has grown rich while they remain poor, even though they've worked harder than Arkad has. Arkad replies that he was once a hard working scribe who made a deal with a very rich man, Algamish, for the secret to wealth in return for a much needed copy of a law immediately scribed into clay. The rich man agreed and the next day, when Arkad delivered the carving, the rich man delivered in return the secret of wealth. "I found the road to wealth," he said, "When I decided that a part of all I earned was mine to keep. And so will you." (emphasis in the original) Arkad then relates that he asked the same question that is undoubtedly on Bansir and Kobbi's minds, "Isn't all that I make mine to keep?" Algamish then said no, that a man had to pay for his clothes, for his food, etc., but that if he regularly saved at least a tenth of his income (and as much more as he could afford to save) and put that money to work earning interest, he would become wealthy.


A part of all you earn is yours to keep

Arkad relates that he did as advised, saving a tenth of his income for a year, then investing that money with a brickmaker who went on a journey to buy jewels to trade. He related this to Algamish, who castigated Arkad for this foolishness. "Every fool must learn," he said, "But why trust the knowledge of a brickmaker about jewels? Would you go to the breadmaker to inquire about the stars?" Algamish then said, "He who takes advice about his savings from one who is inexperienced in such matters, will pay with his savings for proving the falsity of their opinions." Arkad then saved his money for another year, spending it on fine clothing and regularly scheduled feasts. Algamish comments that Arkad is "eating the children of his savings" by not investing them. Arkad then again saves and wisely invests his money for two years and when Algamish learns of how Arkad has taken his lessons to heart, he hires Arkad as a manager of his estate in Nippur. By continuing to save and invest wisely, Arkad relates that he became the wealthy man that he is now.


Seven Cures for a Lean Purse

Sargon of Akkad, the King of Babylon, is told by his Royal Chancellor that the kingdom is poor. There are not enough jobs for everyone, people don't have enough money to buy what they want to buy, and farmers can't make enough selling their produce to continue farming. All of the gold has found its way into the possession of a few very rich men of Babylon. The King asks why so few men would be able to acquire all of the gold and the Chancellor says because they know how to, that one may not condemn a man for succeeding because he knows how, neither may one with justice take away from a man what he has fairly earned, to give to men of less ability. But why, the King demands to know, should not all the people learn how to accumulate gold and therefore become themselves rich and prosperous? After further consultation with the Chancellor, the King summons Arkad to teach people how to become wealthy. Arkad then delivers a series of lectures to a class of one hundred men, teaching them the seven cures for a lean purse.


Start thy purse to fattening

Arkad instructs the men to begin by continuing to work hard at their current occupations, but for every ten coins placed in their purse to take out for use but nine. "Deride not what I say because of its simplicity," Arkad says, "Truth is always simple."


Control thy expenditures

"How," some of the men ask, "Can a man keep one-tenth of all he earns in his purse when all the coins he earns are not enough for his necessary expenditures?" "How many of you have lean purses," Arkad asks. All of the men say that they have lean purses, that they have no money. "Yet," Arkad responds, "Thou do not all earn the same. Some earn much more than others. Some have much larger families to support. Yet, all purses are equally lean. Now I will tell thee an unusual truth about men and the sons of men. It is this: That what each of us calls our necessary expenses' will always grow to equal our incomes unless we protest to the contrary." Arkad tells the men not to confuse necessary expenses with their desires, that all men are burdened with more desires than they can gratify. "Budget thy expenses that thou mayest have coins to pay for thy necessities, to pay for thy enjoyments and to gratify thy worthwhile desires without spending more than nine-tenths of thy earnings."


Make thy gold multiply

Once you've started saving at least one-tenth of what you earn, you must put that money to work earning interest. "Put each coin to laboring that it may reproduce its kind even as the flocks of the field and help bring to thee income, a stream of wealth that shall flow constantly into thy purse."


Guard thy treasures from loss

"Everyone is tempted," Arkad relates, "By opportunities whereby it would seem that a man could make large sums by investing his money in most plausible projects. Often friends and relatives are eagerly entering such investment and urge him to follow." The first sound principle of investment is security—what is a person who wants a loan from you offering as collateral? Arkad relates again his decision to invest his money with a brickmaker who was going to buy jewels to trade. Some Phoenicians took advantage of the brickmaker's naivety concerning jewels and sold him bits of colored glass. "Guard thy treasure from loss by investing only where thy principle is safe, where it may be reclaimed if desirable, and where thou will not fail to collect a fair rental. Consult with wise men. Secure the advice of those experienced in the profitable handling of gold. Let their wisdom protect thy treasure from unsafe investments."


Make of thy dwelling a profitable investment

If you pay rent to a landlord all your life, at the end of your life you'll have nothing to show for it. If you can instead pay a mortgage on a house, at the end of your life you'll have a house to show for it. "Own thy own home."


Insure a future income

Arkad instructs the class to prepare for retirement and to buy insurance so that their family will be provided for if they die. "No man can afford not to insure a treasure for his old age and the protection of his family, no matter how prosperous his business and his investments may be." Arkad then foretells the future creation of life insurance companies. "Provide in advance for the needs of thy growing age and the protection of thy family.


Increase thy ability to earn

A man must set concrete goals and work to achieve them. These goals should not only be to advance in one's career or one's position, but also to become wiser and more knowledgeable. Further, if a man respects himself, he must do the following:
  • Pay his debts promptly and not stay in debt.
  • Take care of his family.
  • Make a will.
  • Have compassion upon those who are injured and smitten by misfortune and aid them within reasonable limits; do deeds of thoughtfulness to those dear to him.
"Cultivate thy own powers, to study and become wiser, to become more skillful, to so act as to respect thyself. Thereby shalt thou acquire confidence in thyself to achieve thy carefully considered desires."


Meet the Goddess of Good Luck

This section begins with a Babylonian proverb about luck. "If a man be lucky, there is no foretelling the possible extent of his good fortune. Pitch him into the Euphrates and like as not he will swim out with a pearl in his hand." Arkad chats with another group of men and tells them that the Goddess of Good Luck smiles upon those who work hard, save their money, and invest well. She doesn't really patronize professional gamblers, who always seem to end up poor. A person must not procrastinate but must strike while the opportunity is ripe. "Good luck can be enticed by accepting opportunity. Men of action are favored by the Goddess of Good Luck."


The Five Laws of Gold

The narrator of the book now changes to a man named Old Kalabab. Kalabab relates the story of a man named Nomasir, who went out to make his way in the world. He foolishly lost the money that his father had given to him, but remembered the five laws of gold that his father had related to him.
  1. Gold cometh gladly and in increasing quantity to any man who will put by not less than one-tenth of his earnings to create an estate for his future and that of his family.
  2. Gold laboreth diligently and contentedly for the wise owner who finds for it profitable employment, multiplying even as the flocks of the field.
  3. Gold clingeth to the protection of the cautious owner who invests it under the advice of men wise in its handling.
  4. Gold slippeth away from the man who invests it in businesses or purposes with which he is not familiar or which are not approved by those skilled in its keep.
  5. Gold flees the man who would force it to impossible earnings or who followeth the alluring advice of tricksters and schemers or who trusts it to his own inexperience and romantic desires in investment.
Kalabab then relates that, using these laws of gold, Nomasir became rich. "Yet, who can measure in bags of gold, the value of wisdom? Without wisdom, gold is quickly lost by those who have it, but with wisdom, gold can be secured by those who have it not, as these three bags of gold do prove."


The Gold Lender of Babylon

In Third Person, this story tells of Rodan, a spearmaker, who received fifty pieces of gold from the king as a gift for making such excellent spears. Rodan seeks out Mathon, a money lender, to ask for monetary advice—what he should do with the money. Mathon happily exclaims that although many people come to ask him for money, nobody comes to ask him for advice, and that Rodan shall be Mathon's guest of honor at dinner that evening. Rodan relates that his sister wishes Rodan to give the gold to her husband, Araman, so that Araman might become a merchant.


If you desire to help thy friend, do so in a way that will not bring thy friend's burdens upon thyself.

Mathon relates the story of a farmer who could understand what animals could say. One evening as the farmer passed by outside the stable, the farmer's ox complained to the farmer's donkey about how much more work the ox had to do in plowing the field instead of just carrying the farmer around. The donkey laughed and told the ox to try to claim a sick day. The next morning, when the ox proclaimed that he was sick and couldn't work, the farmer ordered that the donkey be used to plow the field. At the end of the day, the ox thanked the donkey for giving him a day of rest and the donkey proclaimed that he was "like many another simplehearted one who starts to help a friend and ends up by doing his task for him. hereafter you draw your own plow, for I did hear the master tell the slave to send for the butcher were you sick again. I wish he would for you are a lazy fellow." This ended the friendship between the donkey and the ox.


Better a little caution than a great regret

Mathon then asks Rodan whether a loan would be well made if the borrower could not repay. "Must not the lender be wise and judge carefully whether his gold can perform a useful purpose to the borrower and return to him once more, or whether it will be wasted by one unable to use it wisely and leave him without his treasures, and leave the borrower with a debt he cannot repay?" Mathon then relates that there are three classes of borrowers, those who promise more financial security than they borrow and who are thus always safe to loan to, those who borrow based on their capacity to earn and ability to repay the loan and thus are safe to loan to, and those who have neither property nor assured earning capacity, who will likely never pay a loan back. He pulls out his box of security tokens and relates some short stories including that of a woman who borrowed money to make her son a merchant. Mathon knew that her son was not ready to be entrusted with such money but to suggest otherwise to the woman was to infuriate her. Since she offered jewels as security, Mathom could not refuse her. Mathon shows that one of tokens of security is a simple knot tied in a piece of rope, given by a person that Mathon has long lended money to, who always promptly pays his loans back, and uses the loans wisely to become richer. Mathon has had such a good experience with this borrower that Mathon no longer requires the man to give a "real" security to borrow money. Mathon states that he does not discourage borrowing gold, he encourages it, if it be for a wise purpose. Mathon ends by telling Rodan to read what is carved beneath the lid of the token box, which saying applies equally to the borrower and the lender. "Better a little caution than a great regret."


The Walls of Babylon

In Third Person, this story tells of Old Banzar, a soldier who guarded the gates of the wall of Babylon. For four weeks, a battle rages in front of the walls but ultimately the height and breadth of the impenetrable walls repulse the invaders.


We cannot afford to be without adequate protection

The story concludes with the unnamed narrator saying that "The walls of Babylon were an outstanding example of man's need and desire for protection. This desire is inherent in the human race. It is just as strong today as it ever was, but we have developed broader and better plans to accomplish the same purpose. In this day, behind the impregnable walls of insurance, savings accounts and dependable investments, we can guard ourselves against the unexpected tragedies that may enter any door and seat themselves before any fireside."


The Camel Trader of Babylon

A new character named Tarkad is introduced as a man who has had nothing to eat for two days (except for two figs that he stole before being chased away). He encounters Dabasir, a camel trader, a man that Tarkad owes money to. Dabasir invites Tarkad into the eating house where he orders food for himself and water for Tarkad. Dabasir relates that he was once a slave in Syria. As a young married man, Dabasir had worked for his father, making saddles, but had lived an extravagant lifestyle, beyond his means. Eventually, due to the constant hounding of creditors, his wife left him and he ran away from Babylon, falling in with some caravan robbers. Eventually he was captured and taken to Damascus, Syria, where he was sold as a slave. At first Dabasir thought it was all a great adventure until his new master offered Dabasir as a eunuch to his master's wives.


Where the determination is, the way can be found

Luckily for Dabasir, his master's oldest wife said that they had enough eunuchs, but needed a camel tender. When Dabasir later tells the oldest wife that he's not really a slave but a free man, she protests that he cannot call himself a free man when his financial weakness has brought him to such ruin, that he must have the soul of a slave within him. Dabasir protests and begins to live apart from the other slaves, to demonstrate that he wants to right what he did wrong, that he has the soul of a free man. The oldest wife eventually helps Dabasir to escape back to Babylon, where Dabasir faces his creditors and eventually repays everything he owns for "where the determination is, the way can be found."


The Clay Tablets from Babylon

The story of Dabasir is continued in more depth, examining how Dabasir was able to repay his creditors. The story is now set as a translation of ancient Babylonian stone tablets as authored by a fictional professor of archaeology, Alfred H. Shrewsbury.
  • Tablet No I
Dabasir, under the advice of his friend Mathon the money lender, is recording his financial journey back to solvency. He vowes to save one-tenth of all he earns, that he will support and clothe his wife (who returned to him when he returned to Babylon) and pay for their house, their food, etc., with seven-tenths of his income, and use the remaining two-tenths of his income to repay his creditors.
  • Tablet No II
Every month, Dabasir will take the two-tenths that he has saved and split it amongst his creditors. He then gives a list of who he owes money to and how much money he owes them.
  • Tablet No III
Dabasir acknowledges that he was a fool when he left Babylon the first time and states that he has spoken to his creditors. Some cursed him for his inability to pay immediately, while others begged to be paid first. Dabasir states that he is determined to repay them all and that he will deal impartially with them all.
  • Tablet No IV
Dabasir relates what has happened in the last three months, that he did indeed save one-tenth of his income for his retirement and to invest and that he saved two-tenths of his income to repay his creditors. He states that his he and his wife are happy and that this plan has made an honorable man of an ex-slave.
  • Tablet No V
Dabasir says that it has now been a further twelves months since he last made a tablet, but that he just finished repaying his creditors and some are impressed enough that they are even willing to lend him money again, should he want it.
Alfred H. Shrewsbury, the archaeologist who is supposedly translating these tablets, then relates that he attempted to do what Dabasir did. He visited his creditors and said that he would now deal with them on a cash-only basis and that he would split 20% of his income equally amongst them all until they were all repaid. His greengrocer "put it in a way that helped to bring around the reset. 'If you pay for all you buy and then pay some on what you owe, that is better than you have done, for ye ain't paid down the account none in three years.'" Alfred then relates that everything went as planned and that although it was difficult he and his wife did manage to live on seven-tenths of their income, save one-tenth, and eventually pay their creditors off with the remaining two-tenths.


The Luckiest Man in Babylon

This story begins by introducing Sharru Nada, a merchant prince of Babylon who is guiding a carvan in. Sharru has long been business partners with Arad Gula (now deceased) and is riding with Arad's grandson, Hadan Gula. Sharru asks Hadan how a rich man should live. Hadan scornfully replies that he would live as richly as he could and that "Work was made for slaves." Hadan then bemoans that neither he nor his father have their grandfather's gift for "attracting the golden shekels." Sharru notices some men plowing a field, pointing them out and asks Sharru if he would like to learn how he and Arad first became partners.
Sharru relates that he was once a slave and that as followed the slave masters down this very road, a fellow slave Megiddo pointed out how the farmers weren't plowing deeply enough and consequently wouldn't get a very good yield for their crops. Another slave named Zabado spoke up and said that the farmers were wise because who wanted to work hard for someone else? Megiddo replied that he liked to work and he liked to do good work, that work had brought him all the good things in his life that he'd ever had. Zabado scoffed at this, pointing out that Megiddo was now a slave just like the rest of them. That night, Sharru crept to the edge of the slave pens and asked Godoso, one of the guards for advice. Godoso told Sharru to make the people at the slave auction want to buy Sharru as a slave, to avoid being sold to the king as a brick carrier to build the walls of Babylon. Sharru relates this to Megiddo the next morning and they resolve to try to make people want to buy them as a slave at the auction that day.
The famous works of ancient Babylon, its walls, temples hanging gardens and great canals, were built by slave labor, mainly prisoners of war, which explains the inhuman treatment they received. This force of workmen also included many citizens of Babylon and its provinces who had been sold into slavery because of crimes or financial troubles. It was a common custom for men to put themselves, their wives or their children up as a bond to guarantee payment of loans, legal judgments or other obligations. In case of default, those so bonded were sold into slavery.
— George S. Clason
Just before the auction, Megiddo counseled Sharru to "treat [work] like a friend, to make thyself like it. Don't mind because it is hard." A farmer then came up to him and Megiddo inquired of the farmer's "farm and crops, soon convincing him that he would be a valuable man." Upon hearing that a man was looking for a baker, Sharru spoke up and asked, "Why should a good baker like thyself seek another baker of inferior ways? Would it not be easier to teach a willing man like myself thy skilled ways? Look at me, I am young, strong and like to work. Give ma chance and I will do my best to earn gold and silver for thy purse." The baker then purchased Sharru. After learning diligently all that he could about baking, Sharru began to take over more and more of the duties of running the bakery. He created a plan to market baked goods throughout the city and thus bring his master, named Nana-naid, even more money. Nana-naid was so impressed by Sharru's diligence and willingness to work that he let Sharru keep a portion of the extra money that was being made. Sharru soon acquired a set of loyal customers, including a man named Arad Gula, who praised Sharru's industrious spirit and ability to market baked goods. In his daily journeys around the city for his master, Sharru ran into Megiddo who was also earning more money for the farmer and had been promoted to foreman. Megiddo was about to buy his freedom and and bring his family to live with him as he continued working for the farmer as a free man. Sharru confided that Arad Gula, at that time, was also a slave who was about to buy his freedom.


Work is the key to golden shekels

Arad had enough money to buy his freedom, and become a merchant himself, but wasn't sure if he wanted to step out from his master's protection since the economy was somewhat shaky. It wasn't until after Sharru counseled him that Arad decided to buy his freedom and become a merchant himself. Nana-naid, Sharru's master, then started to gamble too much and gambled away Sharru. Arad then sought Sharru out, buying Sharru's freedom and inviting Sharru to become his new partner, because he knew how industrious Sharru was and what a good salesman he was. Hadan Gula, Arad's grandson, then realizes that work was the only key to golden shekels that Arad had. Hadan then removes his jewelry and vows to live a more humble life like Arad did, and to work hard so that he could be as successful as Arad was.


Courtesy:  http://en.wikipedia.org/wiki/The_Richest_Man_in_Babylon_(book)#The_Five_Laws_of_Gold 

Wednesday, April 25, 2012

China Adds Silver to the Shanghai Futures Exchange.

Although the global economic recovery is slow, the overall operation is smooth. Driven by emerging countries, major indicators of the United States also started to improve. European debt is also moving in a positive direction. It can be said that the global real economy has stepped out of the haze of financial crisis and systemic risk is quite unlikely to be renewed. Therefore, commodity prices, especially prices of silver closely related to the industrial sector would find strong support from the real economy to run smoothly. However, there are also uncertainties, including high unemployment rate in the United States, sovereign debt crisis in Europe, emerging markets inflation risks and China’s currency policy shift to slow economic growth. 

As part of China’s overall program to merge into global markets, the China Securities Regulatory Commission announced today the addition of silver futures contracts on the Shanghai Futures Exchange. Specific launch time will be decided based on the market situation and the progress made in the preparatory work.


The joining of silver futures into existing copper, aluminum, lead, zinc, gold and steel futures in China is a key step for Chinese businesses to gain a stronger say over commodities prices. Though China is the world’s largest silver producer and consumer, silver has been priced based on London and US silver prices in both domestic and overseas trade, causing distorted reflection of the silver supply and demand scenario in China.
 
The silver futures contracts to be added in Shanghai is not a complete abandonment of global silver pricing, though, but will be priced in consideration of both overseas and Shanghai silver prices, to more accurately present the Chinese silver market and offer Chinese businesses stronger say over silver prices.
Similar to base metals prices, silver prices also have a very high degree of internationalization, London spot prices are the world’s silver pricing Centre. It is not difficult to find from historical data that correlation between domestic and London silver spot prices is very high. In addition to international prices, domestic prices are another benchmark in setting domestic futures prices, which include mainly Shanghai Gold and silver prices. In the short term, Shanghai silver futures prices are expected to move in line with London silver spot, but domestic spot trading may cause certain difference.
High level of market awareness for silver means the silver futures will have more financial relevance, in addition to its industrial relevance. The global economic recovery and investment opportunities will likely push silver futures prices higher in the future. Investors should also bear in mind that opportunities always come with risks, especially in the financial derivatives sector.

Monday, April 23, 2012

Life Insurance Checklist for 2012.


When this year's budget laid down new rules for life insurance, it was presumed that mis-selling would lose its sting. Far from it, mis-selling has now become more dangerous for your finances.
Till 31 March, if someone was mis-sold an unsuitable life insurance policy, the most he would have lost was the liquidity and the opportunity to invest in a more lucrative avenue. But at least he got the tax benefits-tax deduction of the premium under Sec 80C and tax-free income onmaturity under Sec 10(10D).
Now, if a buyer is not careful, he may end up buying a policy that won't offer any tax benefits.
Even the money received by his nominee in case of death will be taxable if the policy does not cover the buyer for 10 times the annual premium.
Individual agents as well as aggregator sites are happily selling insurance policies that are not eligible for tax benefits. Till last week, a prominent insurance portal was hawking Jeevan Vriddhi, a single premium plan from LIC that covers the buyer for 5 times the premium. Posing as a buyer, ET Wealth called up the portal and was given the assurance that the policy will offer the tax benefits under Sec 80C and Sec 10(10D).
Insurance agents also have their hands in the till. They are bombarding buyers with attractive benefit illustrations without educating them on the post-budget tax implications. An agent of a private insurance company approached us with an endowment insurance policy that offered a cover of 7 times the premium.
It is by itself a good plan because it offers the option of a whole life cover as well as term cover and accidental death riders. But the five-year option that he was trying to sell is not eligible for any tax benefits and he was oblivious of the fact. When this was pointed out to a senior official, he mumbled that the company will soon be conducting training sessions on the changes in the rules.
Life Insurance Check List.
The budget has very clearly stated that policies issued after 1 April must meet the 10x criteria to claim the tax benefits. "The Sec 80C tax deduction is not as important for insurance buyers as the Sec 10(10D) tax exemption," says V Srinivasan, chief financial officer, Bharti AXA Life Insurance. For a buyer who is not aware of the 10x norm, there may be a rude shock waiting when the policy matures or when his nominee gets the insured amount after his death.
To ensure that companies don't design products to circumvent the rules, the budget has clarified that the cover shall not include bonuses and other payments made by the company. Only the basic sum assured will be taken into account.
The budget has also mentioned that the cover should remain at least 10 times throughout the tenure of the policy. This means that plans in which the cover comes down from the second year onwards will also not make the cut.
If you are planning to invest in a life insurance policy, make sure it complies with the new eligibility norms for tax benefits. The base cover offered by the policy should be at least 10 times the annual premium. For instance, if the premium is Rs 12,000 a year, then the cover should be at least Rs 1.2 lakh.

Sunday, April 22, 2012

A Bias of Titanic Proportions.


Sunday marked the 100th anniversary of the Titanic's sinking. You probably heard about it. Every major news organization covered it. Two cruise ships tossed wreaths into the ocean where the ship sank. A New York food group re-created the final meal of the ship's first-class passengers. "Something about it is intriguing," the group's chef said. It almost felt like an American holiday.
The Titanic's sinking, which claimed 1,500 lives, was a tragedy. But almost no one ever mentions a word about the 1987 sinking of the ferry boat MV Dona Paz, which killed 4,375 people. Or the capsizing of the MV Le Joola, which claimed 1,863 lives off the coast of Gambia in 2002. Using 2010 statistics as a reference, 1,500 Americans likely died in traffic accidents in the last two weeks alone. No food club will re-create their last meal 100 years from now.
Some stories capture our attention more than others that are objectively bigger and more important. I don't know if there's a name for that, but it should have one. Let's call it the Titanic bias.
The Titanic bias shows up in the financial world all the time. We spend too much time focusing on some financial stories while ignoring others that are more important.
Nothing but noiseThink about this: One thousand dollars invested in the S&P 500 in 1950 would be worth about $78,000 today if you focus on the index alone. But with dividends reinvested, your $1,000 actually grew to $622,000 -- eight times higher than the index shows.
Over the long haul, dividends provide the majority of returns. That should be the biggest story investors spend their time and energy on. Yet look what gets almost all the attention in the media: daily market swings of a few points here and there, none of which matter over the long term.
Apple (Nasdaq: AAPL  ) fell a few percentage points on Monday, bringing shares back to where they were literally a few weeks prior. And the media went wild. By my count, nearly 2,000 articles referenced Apple's "plunge," many as front-page stories.
Meanwhile on Monday, Procter & Gamble (NYSE: PG  ) raised its dividend for the 56th consecutive year, this time by a lofty 7%. Only a handful of news outlets picked up on the news; most were buried by headlines of Apple's one-day hiccup.
For those looking to build wealth, consistently growing dividends are far more important than daily market wiggles. Yet most of us are captivated by the latter. There's your Titanic bias.
Go where the money isThere's also rampant Titanic bias in the current debate over federal taxes. Most of the tax debate -- certainly the most raucous parts -- focuses on tax rates. We argue over things such as whether to let the Bush tax cuts expire, lower the corporate tax rate, or extend the payroll tax cut.
Those are all important issues. But there's a bigger tax story that often goes unnoticed: how much we spend every year on tax loopholes, deductions, and write-offs such as the mortgage interest deduction and the deductibility of health insurance.
The federal government will take in $2.5 trillion in tax revenue this year. But that's after spending more than $1 trillion on tax deductions and credits (technically called "tax expenditures" since they mimic a cash subsidy), most of which disproportionately benefit those with higher incomes. That's where the money is, folks. Letting the Bush tax cuts expire on those earning more than $250,000 a year would generate $700 billion in tax revenue over the next decade. By comparison, the deductibility of health insurance will likely cost more than $2 trillion during that period. The "Buffett rule" rejected by Congress this week would have raised $47 billion in tax revenue over the next decade. We spend that much on the deductibility of retirement savings every 3.5 months. That should be the big tax story people talk about.
Who's really overpaidThen there's the Titanic bias that exists when we talk about CEO compensation. The media have become fascinated with overpaid CEOs. Former Home Depot (NYSE: HD  ) CEO Bob Nardelli was obsessively criticized for taking a severance package worth nearly $200 million after the company's stock fell 40% during his tenure. His pay was the topic of dozens of front-page news stories.
Nardelli was grossly overpaid and deserved the criticism. But there are more sinister and widespread examples of corporate overpay that go largely unnoticed. Consider the compensation of money managers.
According to S&P Capital IQ, Nardelli earned $254 million at Home Depot from 2000-2006. That's 0.8% of the $32 billion in profits the company earned under his watch.
Compare that with mutual fund managers. One analysis by Yoseph West of Vuru concluded that management fees collected on equity mutual funds captured one-third of all investor profits from 2000-2010 -- and the vast majority of those funds underperformed a simple index fund. In 2011, U.S. money market funds distributed $5.2 billion in dividends, but only after collecting $4.7 billion in management fees, according to the Investment Company Institute. That's nearly half of all income. And as Reuters explained, many of those funds are run by one (highly paid) manager. Another study by David Norman, former CEO of Credit Suisse Asset Management, found that U.K. investors pay 8 billion pounds a year in hidden fees to financial advisors, capturing upward of one-third of all investor returns. Several years ago I learned that an unsuspecting family friend was being charged 1% a year by a financial advisor to park her money in a product that yielded about 1% a year. The advisor was taking just about everything for himself, in other words. And he called it "work."
Forget Nardelli. Forget the bank CEOs. The real pay scandal is the one Titanic bias shields our attention from, and it's probably affecting you, right now, whether you realize it or not.
It's a terribly complicated world. Whatever you're worried about, frustrated about, or upset about, there's probably a bigger issue out there that deserves your attention. Something about that is intriguing, you might say.