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24 June 2017

Dave Ramsey Lie #5

#5 In Dave Ramsey's Continuing Series Of Lies

This is an excerpt from promotional material attempting to (illegally1) sell people the poor advice of one of Dave Ramsey's "Endorsed Local Providers"

"When Dave says you can expect to make 12% on your investments, he’s using a real number that’s based on the historical average annual return of the S&P 500. The current average annual return from 1926, the year of the S&P’s inception, through 2011 is 11.69%."

Let's take it one lie at a time. First, "He's using a real number that based on the historical average annual return of the S&P500." - True but intentionally deceiving.

This is one of many, many examples of Ramsey using the average person's ignorance against them. The statement itself is true. The deception comes in his use of the words "Average Annual Return". 
Knowledgeable financial professionals know the term is meaningless, and they know what Dave really means, but can't say, is "Compound Annual Growth Rate"

Let's look at it more closely;

"Annual Return" is, well, the annual return. If you begin the year with $100, and at the end of the year you have $110, you annual return is 10%. Simple? Yes. 

January 1       - $100
December 31 - $110
Return (or increase) - $10  *There can't be an "Average Annual Return", since there is only one year

Now, suppose at the end of the second year, you lose money and you end the year with $100 again. 

January 1       - $100
December 31 - $100
Return (or increase) - $0 

What is your total return for the 2 year period? 


You started with $100 and at the end of two years you have $100. Your return is ZERO.
Every literate person can understand this.


According to Dave "Liar" Ramsey, you made 5%.

He says your year 1 return was 10%. Your year 2 return was 0%.

10+0= 10 

divided by the number of years (2),

10/2 = 5

And viola! you have a "Average Annual Return" of 5%. 

Where is this $5 Dave? 

The Truth

Dave Ramsey is intentionally substituting the meaningless term 'Annual Average Return' for Compound Annual Growth Rate (CAGR). 

The CAGR is the number legitimate Financial Advisers use, and, with accurate informational input, can give you realistic numbers to use in making major life planning decisions. 

Ramsey knows when he says 'Average Annual Return', most people will think 'Compound Annual Growth Rate', even though they don't know the term. "They will think Dave Ramsey said I can expect to gain 12% per year, every year."  


The Compound Annual Growth Rate of the Standard and Poor's 500 Index for the period 1929 to 2011 is actually 2.43%2, a huge difference from Dave's 12% Lie, and the real-world difference between a comfortable retirement and abject poverty. 

1- Securities Law, including the Securities Exchange Act of 1934, make it illegal to profit from the sale of securities unless one is licensed. Dave Ramsey is not a licensed securities professional, but receives "kickbacks" from members of his ELP scam

2- Adjusted for Inflation

14 March 2017

Stock Market Asymmetry and It's Implications

The dirty little secret of mainstream financial gurus.

Do you consider yourself an investor? Do you have a 401K or Defined Benefit retirement plan? Many people’s retirement funds are professionally managed and invested directly in stocks and bonds. Even if you never directly participate in the markets, you are affected by them, and your money isn’t as safe as mainstream financial advisors would have you believe.

Everyone knows you can take a loss in the market, as we have all been reminded the past few years. The critical omission is that this is guaranteed to happen. This post focuses on stock market asymmetry and what it means for the average investor.

Below is a chart I created plotting expected performance of the stock market versus actual for the past 80 years. The chart shows the total number of years the market was within 1, 2, or 3 standard deviations.


The chart illustrates the positive bias of the stock market. More importantly for this discussion, is the “fat tail” at the -3 sigma point. Normal Distribution would predict a -3 sigma event 1.8 years out of 80. However, there were actually 3 years when the market lost over 29.9% (3 standard deviations). Statisticians would argue this sample is not statistically valid due to the small sample size, and this argument is correct. However, it has been shown (by others) that this asymmetry holds no matter the time period. It is true for daily, minute and even tick values.

The stock market more closely follows a Power Law distribution rather than a Normal Distribution, but almost all common stock market tools, including the Black-Scholes option pricing model, use the Normal Distribution, ignoring the greater-than-expected risk of substantial losses. This is the dirty little secret of mainstream financial gurus.


The fact that the market does not follow Normal Distribution (the Bell Curve), has several important ramifications.

1.    In order to realize something near the 10.95% mean, market timing must be correct. Retirees do not have the flexibility of waiting +/- 15-20 years to achieve optimal entry-exit timing. If the market is in a much-greater-than-expected slump at retirement time, you lose. Survivors of the 1929 crash had to wait 40 years to recover their losses. Who can  postpone retirement an extra 40 years?

2.    The stock market is MUCH more unpredictable than commonly acknowledged or accounted for.

3.    Most investment mangers lose more money for their clients than they make. This sounds incredible but is true. Managers make a little bit of profit each year until a >3 Sigma event occurs (at a rate much higher than expected due to Power Law distribution of the market) and they lose more for their clients than they have ever made for them. I will try to elaborate on this proof in a future post.

4.    When mainstream financial experts claim you can expect x% return in the stock market over time, they can only mean one of two dishonest things; either “over time” really means an unknown (and unknowable) variable amount of time, or; they are citing a mythical Normal Distribution market.

5.    It is interesting to note, that in the financial gurus make-believe ND stock market world, Black Monday 1987 and the 2008 market meltdown are statistically impossible. Their models do not allow for these events yet they happened.

6.    Day trading is generally considered risky and perhaps much like gambling. The main reason is because optimal market timing is so important and it is infamously difficult to achieve. For investment and retirement funds the time period is the only difference. The importance of timing is exactly the same. Therefore, investing in a long term equities fund is fundamentally no different than the shadowy world of day trading.

There are better ways to invest that greatly decrease risk.

Corporations vs Charters

The history of constitutional law is the history of the impact of the modern
corporation upon the American scene.

-    -  Supreme Court Justice Felix Frankfurter

Individuals are legally required to support corporations’ political advertising. Opposition is a violation of the corporation’s First Amendment rights. [1]

EPA monitoring of the air over a corporation’s factory, constitutes violation of the corporations Fourth Amendment rights. [2]

Corporations must be compensated for compliance to environmental regulations. Lack of compensation violates the corporation’s Fifth Amendment rights.[3]

Yes, inanimate, non-accountable corporate entities have the very same rights[4] afforded you by the authors of the Constitution. But it wasn’t always so. The Constitution doesn’t mention corporations. In Colonial times, corporations as we know them today didn’t even exist. Instead, there were charters*. The Founders knew well the abuses of the contemporary charters such as the East India Company, the Hudson's Bay Company and the British Crown charters in America and chose to allow the States to regulate them.

*Technically corporations are charters. For the purposes of this post, “charter” is used to identify the original charter entity before the re-definition of the word in the 19th century.

Some key differences between corporations and charters;

Of limited duration, Must be renewed or disbanded.[5]
Capital is limited
Capital unlimited. Can be "too big to fail"
Established for defined reason
Essentially unlimited
Strong accountability to shareholders is written into charter
Weak accountability to shareholders.
Minority shareholders protected
Minority shareholder support not needed for major decisions
All stakeholders responsible
Stakeholders not responsible for corporate actions

As early as 1816 Thomas Jefferson, always a foe of large powerful entities, warned of the threat to the young democracy from “moneyed corporations”;

“"I hope we shall …crush in its birth the aristocracy of our moneyed corporations, which dare already to challenge our government to a trial of strength and bid defiance to the laws of our country."
- Thomas Jefferson, Letter to George Logan, 1816”

It took 70 years of struggle, but the corporations won their “trial of strength” in the infamous landmark Supreme Court review of Santa Clara County v. Southern Pacific Railroad, 1886; which overturned previous precedent and was used to give corporations the legal status of a natural person, and thus by extension, protection under the Bill of Rights. (Before this time corporations were considered “artificial persons” with a limited sub-set of human rights).  Since then, corporations have won erroneous judgements one after another, until we have arrived at the sorry state we find ourselves now.

Supreme Court Justice William 0. Douglas commented on the decision decades later, writing;

"There was no history, logic or reason given to support that view"

Corporations are Accountable to No One

Not the Government;

We regularly see in the news headlines “Corporation X Fined XX Dollars”. This is misleading. Corporations no longer exist as a privilege granted by the people through their government, but rather they exist under “contract” with the government. This is the reason fine amounts are “recommended” and companies are allowed to negotiate the final value. Corporations are not “fined” in the sense that you are fined for speeding or jaywalking, but rather the “fines” are more akin to liquidated damages for a violation of their “contract” with the government.

Directors can be held liable only for their own personal misconduct. No single person or persons are accountable for miss-deeds of the corporation.[6]

Not the People;

Corporations, having usurped the Commerce Clause to relieve “themselves” of government authority, and gained protections under the Bill of Rights, have granted “themselves” much greater freedoms than enjoyed by any individual. Individuals cannot invoke Commerce Clause precedent to overrule laws. Corporation can, and do on a regular basis. This has created the curious situation where an entity (the corporation) is no longer accountable to the entity that created it (the government). 

Even the most die-hard free-marketer must admit that even if individuals and corporations should have equal rights, it is much more difficult for the individual to assert those rights. Do you have a personal lobbyist in Washington? (No, your congressional representative doesn’t work for your interests. They follow corporate wishes and interests; you are not going to give them a job when they leave government).

Not Shareholders

Shareholders routinely resort to litigation to assert their supposed rights to control the corporation. Minority shareholders are easy silenced by majority shareholders or shareholder blocs. Shareholders have no direct influence in matters such as treatment of workers or the environment.

Not the Consumer

Even if corporations are not accountable to any one else, they must be accountable to the consumer, right? Not really. Corporations can treat consumers any way they chose. Telephone companies are one example. They routinely mistreat their customers, their business declines, and then they merge or otherwise reform themselves under a different name and continue business with the same equipment, the same employees and even the same customers (Who are non the wiser) Study the history of ATT for proof.  Airlines are another striking example. Under a charter system, entities that harmed the public good would be disbanded and their assets sold and delivered in proportion to their stakeholders.

Corporations (including the Federal Reserve) are the scourge of democracy and will be the cause of the failure of the Grand Experiment.  You cannot “vote with your dollars” to force corporations to behave in an ethical manner. The only hope is to reform the nature of corporate “personhood” and return to the ideals of the founders of this great country.

[1] Pacific Gas & Electric Co. v. Public Utilities Commission of California ET AL. Appeal from the Supreme Court of California. No. 84-1044.

[2]  Dow Chemical Corporation v. U.S., 476 U.S. 337

[3] U.S. Supreme Court review of Pennsylvania Coal Co. v. Mahon 260 U.S. 393 (1922)

260 U.S. 393 Pennsylvania Coal Co. v. Mahon et al. No. 549.

[4] Actually, they have more. An individual’s power to control government is through the vote and the resultant composition of Congress and the Presidency, and ultimately, through elected officials, the Judiciary. But since corporations have successfully hijacked the Commerce Clause to limit government’s power, they are ultimately accountable to no one.

[5] The scourges of the First and Second Banks of the United States were eliminated by allowing the charters of these abominations to expire. The present incarnation of this evil, The Federal Reserve, cannot be dispatched so easily because its status as a corporation allows it to exist in perpetuity.

[6] To cite a recent example, is the CEO of British Petroleum responsible for the Gulf disaster? No, he wasn’t even there, he had no way to know what they were doing, and he can’t be expected to keep up with every employees actions. How about the guy on the
rig? No, he was just an employee doing a job. He can’t be responsible for the corporation. Inevitably, a mid-manager will be taken to task for the disaster and punished accordingly. But does this change the corporate attitude? Can this alter the corporation’s way of doing business? Of course not. In the end, no one is accountable. What incentive does BP really have to be responsible? If worse comes to worse, they can always simply merge with some unknown company, change their name, and continue business as usual. BP can easily change their legal structure, since there is no longer a requirement to serve a public good. Articles of Incorporation are available simply for some relatively trivial paperwork and fees. Would the boycotters even know? No, they would declare “victory”. Would anyone even care that the new ACME Oil company was formerly BP? No, they will have moved on to the next cause. BP knows this.