From The Art of Investing in Art:
The Struggles and Stress of Selling Art
vs.
The Simple and Profitable Pleasure of Buying It 

In the years that followed my first attempt as a gallery owner, I gave up on selling art and resumed the simpler, easier, and more fun practice of buying it. And although I was buying only a few pieces a year, I was comfortable with the admittedly eclectic collection I was gradually assembling.

Then one day in the autumn of 2008, a woman came into my office in Delray Beach to drop off some newly framed pieces I’d acquired, and we got to talking.

Her name was Suzanne Snider. She was a long-time fan of the art world, had studied art in and out of college, and had even spent several years in Costa Rica running a surf shop and collecting Costa Rican paintings and prints. I told her about my experience learning about Mexican modern art from Bernard Lewin. And with her background in Costa Rican art and my acquaintance with Nicaraguan art, it didn’t take long before we were talking about the Central American modern and contemporary artists we both knew and wondering whether it made any sense to open a small gallery specializing in that relatively unknown corner of the art market.

We agreed to think about the feasibility of the idea and meet again the following month to discuss it further.

I spent the next several weeks researching the history of Central American art since the 1950s, and it wasn’t easy to find the information I was looking for. The only available books were basically publicity pieces for individual artists and individual shows.

It was discouraging at first, but what kept me going was the artwork itself. The images I was looking at were impressive in so many ways: skillful, sophisticated, and beautiful. Central American art was, in my opinion, the equal of Mexican art, and considerably less expensive.

For example, significant paintings by Diego Rivera, José Clemente Orozco, and David Alfaro Siqueiros were being bought at the time for $100,000 to $1 million. Significant paintings from Central America’s best modernists were being bought for less than a tenth of that.

I knew that I couldn’t afford to assemble an important collection of Mexican art, but it occurred to me that, with Suzanne’s help, I might be able to develop an equally great collection of Central American art.

And so we launched Ford Fine Art.

To keep expenses down, we rented a space that was half the size we probably needed and stocked most of it with paintings we already owned.

I was to act as founder and CEO, which meant writing a mission statement (which evolved as the years passed), creating and recreating business plans every six to twelve months (depending on our successes and failures), meeting with customers (especially those that we felt had “whale” potential), and signing an endless stream of checks.

Suzanne was to act as VP and Director, which meant doing everything I wasn’t doing, including researching the art market, identifying and contacting artists, negotiating deals with them (or their trusts), creating and placing advertising (under my guidance), keeping various inventories, entertaining clients, closing sales, and traveling to Central America when necessary.

Since both of us had had experience enduring the frustrations and fragility of retail art sales, we opted to sell high-quality art to serious art collectors. This meant we had to finance an inventory of such pieces, which I felt I could do because Central American artwork was so reasonably priced. It also meant finding and enlisting at least a dozen potential customers who could be persuaded to buy not just a single work here and there but to build their own collections.

While we were trying to develop our gallery business, Suzanne took on the additional task of helping me achieve my personal goal of building a comprehensive collection of Central America’s most important modernists.

Ford Fine Art, we had decided, was going to bill itself as a vendor of Mexican and Central American modernist masters, although we knew that the pieces we were going to be selling would be by the secondary artists or would be secondary works by the important artists. The important art from the most important artists… that we were going to secure for my personal collection.

The first major obstacle we faced in that quest was something I had already discovered. There was no authoritative literature on Central American modern art in general, nor were there many reliable books about the important modernists from the individual countries.

There were a few artists in each country that had achieved international fame. In Nicaragua, for example, there was Armando Morales and Alejandro Aróstegui. In Mexico, there was Francisco Zuñiga and Carlos Mérida. And in El Salvador, there was Benjamin Cañas and Ernesto “San” Aviles.

The rest were known only within their own countries, and only then by the few brokers that dealt with high-end art. These brokers, of course, would have been happy to sell to us, but they had very little of what we were looking for. At least 90% of it was hanging in the estates and mansions of a small number of very wealthy people.

Wealthy people generally don’t make a habit of selling their art because they are proud of what they own. And even when they run into financial difficulty and might be willing to sell some good pieces, they are reluctant to do so, lest their wealthy neighbors find out about it and gossip amongst themselves about poor old Señor or Señora Whatever. We eventually came up with a strategy for identifying these people and purchasing their art discreetly – a long, slow, and expensive process.

For most of our buying, Suzanne kept track of pieces I was personally interested in as they went on auction, identifying a price range that we believed was good and then bidding within that range, but no higher. As expected, we won some and we lost some.

Meanwhile, we struggled to make Ford Fine Art profitable.

We advertised in a variety of local and national media, and we tested different copy approaches. Some worked and some didn’t. But the ones that worked, worked only marginally, and the ones that lost tended to lose big.

We opened a “branch” of Ford Fine Art at Rancho Santana, an award-winning resort my partners and I had built on the Pacific Coast in Nicaragua. We were hoping that the combination of wealthy resort guests and the Latin American theme would provide us with a new income stream. But it turned out that the only things we could sell to the resort’s guests were mementos of their trips that were priced at less than $3,000.

We opened yet another gallery in Miami, on a main boulevard that was peppered with boutiques and galleries. There was even a dealer of fine Cuban art across the street. Given that the local community was mainly Latin and wealthy, and considering its proximity to other galleries, we decided that if that gallery didn’t work, none would, and we should consider retiring from the business if it hadn’t become profitable within twelve months.

There were just enough sales to give us hope. But at the end of our second year (which was the end of our lease), we cut bait and closed.

The gallery in Nicaragua did better, having profitable quarters here and there. But as I said, what we were selling was mostly low-priced pieces meant for tourists, and there was not enough traffic at the resort or margin in the pricing to give us steady, quarter-after-quarter profits.

Retail sales weren’t working. However, based on some advice from our neighbor across the street, the very successful dealer of Cuban art, we spent another two years renting booths at secondary art shows in Miami during the yearly Art Basel fairs. We might have made a profit, had we been permitted to show our wares in one of the bigger venues, but there were no openings. So that failed, too.

In all, we spent about eleven years and invested more than half a million dollars before we gave up on selling Mexican and Central American art on a retail basis.

Meanwhile, the investing and collecting side of our partnership was moving along. Piece by piece, artist by artist, we were developing what one day could be the world’s most valuable collection of Central American modernist art.

We were getting regular calls from collectors in Guatemala, Honduras, Nicaragua, and El Salvador who had heard about what we were doing and were open to selling us some of what we were seeking, so long as we kept it on the down low. It began as a trickle, but as time passed it became a flow.

Once the supply side of our enterprise was moving, I asked Suzanne to implement an “up-trade” protocol for the pieces I owned. This was not a new idea, but it was an approach that hadn’t been used in this corner of the art market – and with Suzanne’s attentive management, we could do it without creating a lot of buzz.

I had an initial goal in mind for what I considered to be the minimal optimal collection: two large, museum-quality pieces from the most cherished years of each major artist, and a half-dozen smaller pieces (pencil and ink drawings, gouaches, and limited-edition graphics) that illustrated the artist’s development over his or her career.

Of course, there was a fly in my ointment. Suzanne and I had figured out who we thought the most important Central American modernists were, but our opinions didn’t really matter because, as I said, there was no definitive authority out there. Not internationally and not even nationally.

The world needed an authority. And I thought, “Why can’t that be us?”

I had always wondered, when reading books on art history (or on any historic subject), “Who decided that this movement was more important than another movement, or this person was more gifted than someone else?”

And the answer I always arrived at was: The first person to codify and evaluate a cultural trend or movement or style is the prime mover, because everyone with an opinion that comes afterwards must refer to the framework and the opinions of the first.

And then I had this thought: this ambitious, almost arrogant thought: Why couldn’t Suzanne and I produce such a book on the modern art of Central America? We had all the published research that had been done until that time. We were building a network of the dealers, collectors, curators, and historians we needed. We were in touch with the few modernist artists still alive. This was a book that someone was going to write eventually. Why couldn’t we do it then?

Next chapter: The Book That Nearly Broke Me. 

 

From The 7 Natural Laws of Wealth Building:

The Speed of Money – 
Harnessing the Power of Momentum 
to Propel Your Wealth Higher 

Did they all, for example, have Alpha personalities – pushing themselves and others to work tirelessly to accomplish a goal? Did they all have certain advantages, such as friends or family members with money or connections?

I found nothing – no single set of circumstances or characteristics that was common to them all.

But I did discover one fascinating thing about their journeys from zero to a million dollars. All of their net worths rose slowly in the first two years, picked up somewhat in years three to five, and then shot up dramatically in years six and seven.

It looked like this:

That, I did not expect. Seven years or fewer? That seemed unrealistically fast. Reading the bestseller The Millionaire Next Door had given me a different idea. In that book, the authors had provided evidence that it took, on average, 30 or 40 years to achieve millionaire status.

Of course, The Millionaire Next Door was about American millionaires. And the fact is that most millionaires in America are not entrepreneurs or real estate investors or stock traders. They are people that earned a modest income but saved a larger-than-average percentage of that income over their entire lives.

To get a sense of how what they had achieved might look, I pulled up a chart I had developed years ago for Automatic Wealth and various articles and essays to illustrate the “miracle” of compound interest. (Note: To be conservative, I had used an average ROI of 7% to represent an equally weighted stock and bond portfolio, one averaging 10% and the other averaging 4%.)

As you can see, both lines begin with a very gradual rise over the first 10 years, increase a bit in the next 10 years, but don’t really start shooting up until year 30.

Using that as my basis of comparison, I had my accountant pull out the financial reports on about a dozen companies I had either personally started or had started with partners that had broken the million-dollar barrier.

I was looking not for gross revenues but for the book value of the companies – that is, the value of each business on a net-worth basis.

And I found that the timeframe to get from zero to a million had been less than seven years.

I then plotted the timeframes for all the companies on a line graph. And sure enough, they had the same growth curve – gradual during the first five years and then sharply up in years six and seven!

This, of course, is not the growth trajectory of all businesses. For most, it is up a bit for the first several years and then it flattens or dies off.

But that did not contradict what I was seeing. It’s commonly known that most businesses – as well as most financial schemes to achieve fast growth – fail. They fail because of bad business and investment decisions, either at the beginning or somewhere along the way.

What I was looking at, in other words, is not what happens to most people most of the time, but what happens to those people that get rich – i.e., break through the million-dollar barrier in seven or fewer years.

The difference: In the case of the successful businesses I had started, they grew at an average rate of 25% to 30%.

With a stock and bond portfolio, I would only expect an average ROI of 7%.

But in every case, the growth curve was basically the same.

Slow at first.

Increasing a bit in the middle.

And then at some wonderful point in time, shooting up sharply.

I didn’t think of it in these terms then, but what I had discovered was the wealth-building equivalent of Newton’s Second Law of Motion…

Momentum: Newton’s Second Law of Motion

One of Newton’s key theories was that “as an object gains speed or size, the rate of its momentum will increase.”

And that, I believe, is exactly what happened with the people I interviewed for Seven Years to Seven Figures and what I experienced with my own entrepreneurial ventures and real estate investments.

Look at this:

Mass x Velocity = Momentum 

Momentum is the result of something Newton called Mass multiplied by something he called Velocity.

That may sound vague and abstract. But as I discovered when I took the time to think about it, it’s actually easy to understand because it’s something we’ve all experienced thousands of times in our lives.

If you’ve ever seen a “Strongman” competition, for example, where each participant is chained to a huge truck or a railroad car and is challenged to get it moving as fast as he can, you’ve seen an example of this.

For the first 10 or 15 seconds, they strain with all their might, but the truck or railroad car doesn’t budge. Then it begins to move. Very slowly at first, but as each minute passes it picks up speed. And as they approach the finish line, they often appear to be sprinting.

What Did Newton Mean by “Mass”? 

In Physics, Mass (more correctly, Inertial Mass) is defined as “a measure of resistance to acceleration when a force is applied.” And the rule is that the larger its Inertial Mass is, the more difficult it is to accelerate an object.

You might think of it in terms of the density of the object, or even its weight.

A cubic foot of feathers, for example, is going to have much less Inertial Mass than a cubic foot of wood, and a cubic foot of wood is going to have much less Inertial Mass than a cubic foot of lead.

Got it?

What Did He Mean by “Velocity”?

Velocity is defined as “the rate at which an object changes its position with respect to time,” or the speed of an object combined with its direction of motion.

Imagine a person taking two steps forward and then one step back. He may be going at the same speed while stepping forward as he is while stepping backward, but his Velocity in getting from his starting point to his finish point will be about half that of his speed.

Got it?

Now we must simplify one more term: “Momentum.”

As mentioned above, the technical definition of Momentum is a measure of Velocity times Mass. In simpler terms, it is the inherent power or force of a moving object, which is a factor of its weight and speed.

You can visualize Momentum in the physical world by imagining the impact of, say, a small car like a Volkswagen hitting a wooden fence at, say, five miles an hour.

What is likely to happen to it? Probably nothing. And what would happen to the fence? Maybe a scrape or a scratch. But not much.

Now imagine that same car hitting the fence at 60 miles an hour. The front end of the Volkswagen would surely be damaged. Maybe significantly. And the fence? It would probably be knocked down.

Next, imagine a much heavier vehicle, say, a 10-ton truck, hitting the fence at 60 miles per hour. What would be the damage then? The truck would again have little damage, but the fence would almost certainly be destroyed.

Newton also talked about the force of Momentum in terms of how much energy it would take to slow down or stop an object that was already in motion.

So imagine the Volkswagen moving down a very slight decline at five miles per hour. And imagine it rolling toward a powerful man (like those participants in the “Strongman” contests mentioned above). He would probably be able to stop it, right?

But what if it were moving at 30 mph?

Or what if, instead of a VW, it was a 10-ton truck traveling at 60 miles an hour?

You get the point.

In Physics then, Momentum is a measure of the force it would take to move a still object from one position to another or, contrarily, the force it would take to slow down or stop an object that is already moving.

Applying this same natural law to the universe of building wealth, we could say that Momentum is the measure of what it takes to move from one position of wealth to another – for example, what it takes to increase your income from $50,000 a year to $250,000 a year. Or what it takes to go from a net worth of $500,000 to $1 million.

Are you still with me?

This brings us back to Newton’s equation: Mass x Velocity = Momentum.

So now, to convert that Law of Physics to a Law of Wealth Building, we need an analogy for both Mass and Velocity.

I suggest we define Velocity as the time it takes to move from one stage of wealth to a higher one. As in: It took me two years to reach a million dollars in net worth, but only nine months to get to $2 million, and only six months to get to $3 million, and so forth.

That’s simple enough. An analogy for Mass, however, is a bit more complicated.

When I began to work on this chapter, I equated Mass with work, as in how much work you might be willing and able to do to get to a net worth of $1 million.

But after discussing it with Sean, I realized that it was more than simply hard work. Looking again at those charts and remembering what it took for me to get to equity values of a million dollars or more in my businesses, I realized that it was a combination of many things.

Yes, hard work was a big factor. But another undeniable factor was making smart decisions. Another one was having intelligent and hardworking people around me – not just employees, but also professional advisors and consultants and even, in some cases, competitors who were willing to lend me a hand. Another one was the goodwill I developed with my suppliers, subcontractors, bankers, and investors. The more they trusted and believed in me, the easier it was for me to get the capital and terms I needed to grow the business. And that’s to say nothing of the goodwill of my customers. There may be no other business-building “resource” more powerful than that.

The more I thought about it, the more obvious it became. The resources that helped me build those companies so successfully in seven years or less were many – maybe too many to count.

This brought me to a definition of Mass as a component of Momentum in wealth building:

Mass is the span and depth of the personal, financial, social, and political resources 
that can be applied to building wealth. 

Let’s Count the Ways

Personal Resources 

By Personal Resources, I mean everything you (or in business, everyone involved) bring to the table. Here are some that immediately pop to mind:

* Intelligence (IQ)
* Emotional Intelligence (EQ, or common sense)
* Knowledge (both general & specific)
* Skills (leadership skills, negotiating skills, etc.)
* Ambition
* Confidence
* Tenacity
* Endurance
* Charisma
* Commitment

I don’t think I have to explain how helpful all of the above can be in building wealth, either as an individual or as a business leader.

What needs to be said, however, is just as obvious: No one has all or even most of these qualities. What is also obvious is that the more of them you put into play, the more likely it will be for you to efficiently grow your income and, thus, build wealth.

Also worth mentioning: Some of these qualities, such as IQ or charisma, may be inherent – i.e., you have them or you don’t. But many more are things you can learn and improve on over time.

Financial Resources 

This would include the following (no explanation needed):

1. Cash and other liquid financial assets
2. Additional financial assets
3. Creditworthiness
4. Financial connections

Social Resources 

Admittedly, Social Resources is not a category you’d likely find in a textbook on building businesses or acquiring wealth. Nevertheless, in my experience, they can be amazingly helpful.

To my mind, these are the most powerful:

1. People that like you
2. People that trust you
3. People that will vouch for you
4. People that will confide in you
5. People that will teach you
6. People that believe in you
7. People that will share with you

I could write a separate chapter just on this category. And given its importance (and how seldom these resources are considered), perhaps one day I will.

For the moment however, I’d like you to consider your own experiences as a businessperson and wealth seeker. Think about the many ways working with such people helped you create partnerships, build teams, and negotiate deals.

Political Resources 

I’m conflicted about this category because I usually think of politics and political people as being antithetical to building wealth. For the purposes of this discussion, however, I am including it as being potentially helpful so long as you think of it as a subset of Social Resources.

It’s virtually impossible to build a large business or develop a financially successful project without dealing with political players – either on the federal, state, or local level. And although I would advise you, if I were your mentor, not to seek out political connections as a general rule, I also know from experience that when you need a loan or a business project approved or you have to settle some dispute with a government entity, it is much easier if the bureaucrats and other political parties involved in making the decision like, trust, and/or believe in you.

The More Wealth-Building Resources, the Better 

When I think of what it took to increase my net worth from below nothing to a hundred thousand dollars and from there to a million dollars and from a million to 10 million and from 10 million to beyond 100 million, I recognize that I sought out as many of the financial, social, and political wealth-building resources as I could find.

Perhaps I did that because I felt insecure about the few personal resources I had in the beginning (intelligence, ambition, and commitment).

Or perhaps it was because it just seemed like common sense.

What I can tell you with certainty is that I have seldom met anyone who was greedier than I was to acquire and use them all.

I have worked with many businesspeople who believed in the “less is more” approach to building businesses and personal wealth. Most of them had some success with it, but I can think of very few who began with as little as I did and ended up with as much.

As I said, when I first stepped onto the path of building a fortune, I had just a small handful of personal resources to rely on. Not much, but enough to put myself on an upward climb within the hierarchy of the company I worked for. But by the time I reached the pinnacle in terms of becoming a partner in a thriving business, I had already developed dozens of additional resources that I could use to keep growing my wealth.

What did I initially bring to the table?

I was usually the first to get into the office and the last to leave. By volunteering to do just about anything asked, I acquired valuable knowledge about how the company worked as well as valuable skills (how to read a balance sheet, write a contract, negotiate a deal, etc.).

By making a commitment to keep my business promises and do anything I could to help them achieve their goals, I gained the trust of my fellow workers and managers and eventually my boss.

I spent time outside of the business at trade shows, conventions, and seminars, where I met smart and accomplished people, some of whom became colleagues and friends.

I saved money by reducing my spending on unnecessary things and spending a portion of it wisely on things that would make me more money, such as home-study programs on public speaking and negotiating and “winning friends and influencing people.”

As my contributions to the business I worked for increased, so did my salary. And by keeping my living expenses in check, I was able to bank an increasingly larger percentage of my take-home pay.

When I became not only the number one marketer in my company but one of the top marketers in my industry, I persuaded my boss to give me a share of the profits.

I then used every resource I had – my knowledge, my skills, my industry connections – to help my boss (and now partner) grow our business from several million to more than $100 million.

And I did it again with a second business, helping to grow that one to more than a billion dollars.

Looking back at all that now, I can see that what I was doing was taking advantage of the natural law of Momentum to achieve more of my wealth-building goals faster and faster.

Yes, it took a good deal of hard work. There is no question that I outworked almost everyone I worked with. But I could have done that and made very little progress were it not for the steadily increasing “Mass” of my resources being multiplied by the steadily increasing “Velocity” of my net worth’s upward trajectory.

And if you remember Newton’s theory: If you can increase both Velocity and Mass, what you get is an increase in Momentum – i.e., the likelihood that, as time passes, the results of anything you try to do will increase geometrically.

 

From Rancho Santana Then and Now:

Chapter 3. Scouting for Some Promising Land 

The goal was to find an overseas location, preferably on a seacoast, where International Living could buy and sell beachfront property to its subscriber base.

Price was perhaps the top consideration. We were looking to arbitrage the difference between beautiful coastal property, the kind you can find in the U.S. or on some Caribbean islands, but for a fraction of the price that our subscribers would expect to pay for a piece of it.

“We needed someone to do the research for us,” says Kathleen Peddicord, International Living’s publisher at the time. “But not just anyone. We needed someone who understood real estate and property development, too.”

That person turned out to be Bob Fordi, the brother of an editor that was working for the publication.

Fordi had experience in real estate (as an accountant, a consultant, and an investor). Plus, he had a lot of travel experience. He was given the assignment.

It so happened that International Living had just published its annual “Best Places to Retire” issue, and Nicaragua was rated number one in the budget category. “Beachfront land in Nicaragua wasn’t only relatively cheap,” says Peddicord, “it was absurdly cheap back then.”

Top billing plus inexpensive land! So… Fordi was off to Nicaragua to start the search.

The perception of Nicaragua at that time was not good. Most Americans knew it as a dangerous, poverty-stricken, and war-torn country, still suffering from civil strife.

The reality was that the civil war had ended with a peaceful election ten years earlier. Nicaragua’s economy was poor and still recovering from the war. But political discord had died down and, for the most part, Nicaraguans wanted to put the war behind them and move forward.

“In those days,” says Fordi, “when you would fly into Managua, it was like the 1950s at the airport. No jetway, just those old-style roll-up stairs. No air conditioning. There wasn’t even any power at the open-air customs station. Everything was still quite primitive.”

Primitive, but beautiful. Prices for beachfront property in neighboring Costa Rica, where Americans were already looking for a safe and sunlit retirement haven, were climbing strongly. The same type of beachfront property in Nicaragua, just several dozen miles north, was three to five times cheaper.

Fordi spent more than six months touring the country, traveling from its southern border with Costa Rica to its northern border with Honduras, and from the Pacific Ocean on the west to the Atlantic Ocean and Caribbean Sea on the east. And as he visited potential project sites, he was meeting with government officials, business leaders, travel professionals, lawyers, accountants, and even foreign tourists.

“Nicaragua was brand-new to me,” Fordi says. “Not just the land and the culture, but the laws and regulations governing the kind of project we were attempting to do.”

What Fordi found was tens of thousands of salable and available acres – on the beach, on the hills overlooking the ocean, and on cliffs and mountainsides overlooking lush valleys and fertile plains.

“The quality of the land and the views was as good as I saw anywhere in Central America,” he says. “But the prices were so much better. And the Nicaraguan people were so welcoming and positive about our plans.”

Matt Turner, International Living’s corporate counsel, had the same impression. “I’m a big fan of the average Nicaraguan,” he says. “They are a hardy and very optimistic people. They’ve had a rough time. But when I spoke to them, they weren’t complaining about the difficulties of the recent past. They were talking about the possibilities of the future.”

Encouraged by Fordi’s appraisal of Nicaragua’s investment potential, the International Living team – headed by Bill Bonner, Mark Ford, and Kathleen Peddicord – gave the go-ahead for him to take the next step and find the right property for them to buy.

Back home in Baltimore, Fordi located a Nicaraguan attorney who introduced him to Steve Snider, an American expat who was living in Nicaragua and looking to start a real estate business there. After several conversations to clarify exactly what they were looking for, Snider set out to see what he could find.

A few months later, Fordi got a call.

“I think I found what you’re looking for,” Snider said. “It’s called Rancho Santana. It’s basically a large, neglected cattle farm. But it has everything: beautiful beaches, hills and cliffs with fantastic views of the ocean, and it’s only about an hour north of San Juan del Sur and about ninety minutes southwest of Granada.”

Granada, circa 1993
When Mark Ford heard that, he decided to go down and check out the property for himself. It was late in the year, and the rainy season had already begun. The drive from Tola, a small town in the county of Rivas thirty miles or so west of the property, usually took about forty minutes. During the rainy season, it was more difficult.

Ford remembers: “For the first forty minutes, the road was bumpy and muddy, but that was to be expected given that it was used only by big trucks, horses, and oxen. Then we began hitting runoff streams of water coming from the hills to the west of us and, in some cases, lake-fed streams that were moving like raging rivers. We made it past a few of them – just barely – and then, when we were just a mile or so from the property, we hit one that was so intense it would have picked up our SUV and deposited in the ocean if we had been foolish enough to try to drive across it.

“We asked a local farmer to haul us across with his small tractor. He refused. But he did agree to guide us over on muleback, which, having no other option, we agreed to. So, there I was, thirty minutes later, in the middle of nowhere, on a donkey, following a guy on a donkey with a wide-brimmed sombrero on his head and a bandolero across his chest. And I was thinking that I could just as well have been Meriwether Lewis crossing the Missouri River after the Louisiana Purchase in 1803!”

On this, Ford’s first visit to the property, there was only one building: the shack on the beach that the owners, the Granados family, had stayed in when they vacationed there.

The parcel on offer was 1,600 acres of flatland, hills, and cliffs, including two rivers and five beaches.

“The big, pure beauty of it was very California,” says Ford. “The topography struck me as very much like the West Coast of the United States – which, now that I think about it, should not have seemed surprising since it is the same coastline. But this was California as it looked 200 years ago.”

One by one, the other members of the team came down. Struck by the natural beauty of the property – and the entire country – they all agreed. They had found their land. Rancho Santana was it.

Chapter 3 of The Challenge of Charity

Discovering How a Wealth Gap Is Also a Learning and Responsibility Gap

In Chapter 2, I talked about some of the mistakes my partners and I made early on with Rancho Santana, the resort community we were developing in Nicaragua. Some of those mistakes were because we had no experience with real estate outside of the United States. But another mistake – a big one that I was personally guilty of – had to do with a lack of understanding of Third World economics.

Antonio had given me good advice when he explained why the $400 a month that I planned to pay the housekeeper we would be hiring for the vacation home K and I had built at the resort was a bad idea. Although it contradicted my impulses, I could see that it was sensible.

Still, I wasn’t comfortable with paying my housekeeper the local market rate. Notwithstanding the logic of Antonio’s argument, paying a full-time person just $100 a month felt miserly. I wrangled with the dilemma for a few days and landed on a compromise. I would hire two people instead of one. One would work indoors only as a housekeeper and the other would work outside as a gardener, pool cleaner, and occasional handyman. I would pay each of them $125. (Antonio was okay with that.) And I would find some extra chores outside of their regular duties for which I’d pay them an additional $50, which put my overall outlay to $350, but spread over two jobs instead of one.

Experience and Expectations

Yessenia, a young woman from the area who had worked for Antonio’s family, became our housekeeper. And Enrique, a young man Antonio recommended, became our outside worker.

They both seemed grateful for their jobs, arrived promptly every morning at 7:00 a.m., and worked with energy and enthusiasm. It was a promising beginning, but I quickly discovered they had little to no idea about what to do, or even how to do it.

Enrique and Yessenia had grown up in a world without electricity, let alone modern devices. The houses they knew – in the nearby hamlets where they lived – had simple openings for windows, outdoor latrines, and dirt floors. No gardens. No pools. (The first time I gave Yessenia the keys to let herself in and out of our place when we weren’t there, she blushed. She had never seen house keys before.)

So the job of teaching Enrique how to trim hedges with electric clippers, mow the lawn with a gas-powered lawn mower, and change the pool filter fell to me. And we had to hire someone to teach Yessenia how to use a vacuum cleaner, a microwave, an electric stove, a wash machine, and a dishwasher.

But the challenge went deeper than that. Yessenia and Enrique had very different perspectives on what “clean” and “dirty” or “orderly” and “neat” meant. When you have grown up walking on dirt floors all your life, you aren’t accustomed to seeing dirt below your feet as a problem – as something that needs to be fixed. Likewise, when you’ve grown up surrounded by plants in their natural state, it’s not easy to understand why anyone would want to shape them into something else.

It was obvious to me that Enrique and Yessenia needed to learn more than the basics of what is required to maintain a US-styled home, and K and I were going to have to learn how to teach them what they didn’t know.

A happy surprise was discovering that they were as eager to learn as we were to teach them.

Una Pequeña Petición 

There was, however, one thing that bothered me.

As soon as their regular duties were completed, they would find a shady spot and sit down. I would see them talking, relaxing, sometimes even napping until the “official” end of their workday. It didn’t seem to matter whether they had finished their chores an hour early or an hour after they began in the morning. They did what they were asked to do. Then they simply stopped.

This didn’t jibe with my notion of a good “work ethic.” How would they be able to have more in life if they were not willing to do more than the absolute minimum?

But the fact was, I had knowingly and purposely hired two full-time people to do one full-time job. There simply wasn’t enough work to do in and around the house to keep them both busy. At the same time, I recognized that if we’d had additional chores for them to do, they would have happily done them and worked what I would consider to be a full day. In fact, had we asked them, I’m sure they would have even worked extra hours.

In other words, this had nothing to do with being lazy. They simply had a different view of what was expected of them. It wasn’t about staying busy for seven or eight hours. It was about doing what their employer asked them to do. A difference of culture, not character.

I mentioned it to Antonio one day. He shrugged it off.

I persisted. “But don’t you think…”

“Mark,” he said. “Just two months ago, you were telling me that you wanted to pay them too much money. Now you are telling me that they are not working enough to earn the money you are paying them. Your house is orderly. Your garden is manicured. Your pool is clean. What more do you want?”

I had no answer for that. My concern wasn’t about trying to get more work out of them. I feared that I was enabling them to develop a bad habit that would keep them from achieving what I assumed were their dreams. Clearly, Antonio didn’t see it that way.

A Little Emergency

One day, several months after I had hired her, Yessenia came to me to tell me that her mother was very sick. The problem was that the local hospital in Rivas did not have the equipment for the treatment she needed. She would have to go to the big hospital in Managua. And that would cost money – both for the treatment and the transportation.

I asked her how much it would cost, expecting to hear something in the thousands of dollars. But it was less than $500. So it was a no-brainer. I gave her the money and she thanked me.

Then one day Enrique mentioned something about wishing he had a bicycle to get to work. I asked him how he had been doing it. He had been walking. I asked him how much a bike would cost. Less than $100. I gave it to him without a second thought.

These little “solicitations” from Yessenia and Enrique continued as the months passed. And I always felt good about helping them. It wasn’t lost on me that I was solving their personal problems at a fraction of what it would cost me to do so in the US. That is, of course, a common logic to being charitable in poor countries. The cost/benefit ratio is much better than it is in rich countries. And by benefits, I mean the benefits to the giver as well as the receiver.

As the years passed, Enrique and Yessenia found spouses and had children. As their families grew, I found myself helping them with all sorts of wants and needs. There was infant care, grammar school graduations, birthday parties, confirmations, household improvements, and never-ending medical expenses.

Although their wishes were always posed as requests, I had the distinct feeling that they expected me to grant them. To be clear, they never pressured me. On the contrary, with each request I felt like I was the one being given a gift.

And there was an unforeseen bonus: It gave me many opportunities to interact with their children in an avuncular sort of way. And the relationships that developed, immensely gratifying to me, have continued to the present day.

But some of the other homeowners at Rancho Santana didn’t feel the same way as I did. Their attitude was, “I’m paying them well by local standards, so why are they asking me for more money? They should be happy to have such a good job.”

That makes some sense. This time, however, Antonio agreed with me. “We are obligated to help them,” he said. “Because of who we are, we have a responsibility to the people that work for us. Not just to them, but to their families. And especially to their children.”

Anagnorisis 

It clicked. Finally, I had a clear understanding of the dynamics of what was going on.

In deciding to build a resort in this remote area of Nicaragua, my partners and I had invested in a local economy that was very poor and almost entirely undeveloped. Given our intentions, the amount of money we were investing, and the state of the economy, what we were doing was in some ways akin to what the French and English had done in colonizing African countries. We were developing a beautiful part of the world for our use and profit by taking advantage of cheap property prices and labor.

Our project would initially bring millions – and then tens of millions, and eventually more than a hundred million dollars of investment income – to the area. In theory, a good thing. But our purpose was not to improve the local economy. It was to build a tourist resort and residential community for wealthy gringos and, as I said in the beginning of this book, to profit from it.

For this part of Nicaragua to move up to an economy that could support a thriving middle class, it needed more than tourism and a few wealthy landowners. It needed industry. It was, after all, the Industrial Revolution in the US that ended the stark, binary divide that had existed for a thousand years between the world’s rich and poor.

But what we had done, unconsciously and inadvertently, was insert ourselves into a culture that was already, in many ways, like the culture of the feudal medieval societies of Europe.

Noblesse Oblige 

Back then, as we all know, there was the concept of noblesse oblige (literally, “nobility obligates”). It was a moral code that governed the relationship between the nobility and the commoners. It defined the rights and responsibilities of both parties.

But there were also unwritten rules beyond, for example, the written rule that the lord “owned” 10 percent of whatever his serfs produced. And among those unwritten rules was the understanding that when one of his “dependents” became sick or disabled or their children needed something, it was his duty to step in.

Some of those rules were codified. But they also existed in the more general notion of proper conduct.

I believe that idea displayed itself in Antonio’s support of my gut feeling that I had a responsibility to take care of Enrique, Yessenia, and their families. It was how his grandparents and parents treated their workers. It was how he treated the low-paid people that worked for him.

His approach to his workers was informed by the culture he grew up in. And because the local economy was still essentially feudal, that culture included a commitment to noblesse oblige.

Afterthoughts 

Today, the idea of noblesse oblige would likely be viewed as antiquated and even condescending. It was an ethic born out of a worldview that saw in the stark divide between rich and poor, landed gentry and serfs, a natural order. Perhaps even a divine plan. That attitude was replaced at the end of the 18th century by the idea that all men are created equal. And with the higher wages that millions of middle-class workers earned after the Industrial Revolution, it had become feasible for them to take care of their personal needs themselves.

As an employer of primarily white-collar, middle-class employees in my US and European companies, I don’t expect them to ask me for help when they have financial problems. But today in Nicaragua, and particularly in the Tola region of Nicaragua where Rancho Santana is located, the economy is not yet modern in the industrialized sense. Nicaraguan employees get some benefits and protections, thanks to fairly recent governmental regulations. But because the minimum wage is still so low, it is not – for most employees – nearly enough.

In the future, if Nicaragua’s economy develops to the point where unskilled workers are earning $15 or $20 an hour, the idea of noblesse oblige will surely disappear. In the meantime, I will continue to enjoy a relationship with my domestic employees that is archaic but mutually satisfactory.

Lessons Learned 

* When the lifestyle standards between you and your employees is ten times what it is in your home country, accept the fact that even the best and most willing workers will need to learn lots of things that you take for granted.

* When you are paying someone that works for you a tenth of what you’d pay for the same service in the US, understand that it is not reasonable to eschew the local customs of noblesse oblige.

 

An Excerpt from The Art of Collecting Art 

My First (Accidental) Collection – a Little of This, a Little of That

Building a valuable art collection takes more than time and money. It takes patience and discrimination and knowledge of the art industry that is not normally available to the public. During my time as co-owner of an art gallery, working with a partner that understood the game, I had acquired a bit of that knowledge. Among other things, I had learned that…

* The art industry is made up of four different sectors, each with its own practices, protocols, risks, and opportunities: (1) producers (artists, agents), (2) sellers (brokers, dealers, galleries), (3) casual buyers (decorators, casual collectors), and (4) investors (speculators, serious collectors, museums).

* Successful art dealers aren’t dilettantes, like I was. They are serious marketers and salespeople. They are 20% about the art and 80% about the deal.

* The big and fast money is made – also lost – by speculators.

* The sure money is made with “investment-grade” art.

The rest I would eventually learn through trial and error, and with the help and advice of dozens of people I would befriend in the years ahead.

Meanwhile, when I made the decision to step down as co-owner of the gallery, my interest in collecting art got a major boost from the buyout deal I made with my partner.

Our gallery specialized in modern and contemporary art, with a focus on limited-edition lithographs by “names” like Marc Chagall, Picasso, and Salvador Dali. We also sold Color Field and COBRA paintings – two schools of modern art that I knew very little about at the time.

I didn’t like Chagall. (I still don’t.) But I very much liked Picasso and Dali. So I really wanted to be “paid” for my share of the business with pieces of their work. But I knew enough by then to know that if I wanted to be a serious collector, I didn’t want the lithographs. I wanted “significant” one-of-a-kind pieces – i.e., paintings.

I wasn’t attracted to either the Color Field or the COBRA paintings that we had in the gallery. The Color Field art was minimalist and abstract – canvasses of flat bands and boxes of muted color. But even though the COBRA art looked like children’s fingerpainting to me, I arbitrarily chose five pieces. A large painting by Karel Appel. Two small pieces by Asger Jorn, and two pieces by Guillaume Cornelis van Beverloo, a.k.a. Corneille. I found places in my home to hang the smaller works and I put the large Appel in the basement.

I made up my mind to forget about COBRA art and create a collection that I would actually enjoy looking at. But as the years passed and I learned more about the COBRA artists, the seemingly childish things they had produced became more and more interesting to me. The Museum of Art in Fort Lauderdale had a collection of COBRA art that I occasionally visited, strengthening my interest. And one year, when my wife and I were visiting Amsterdam, I happened upon a gallery that specialized in COBRA art and bought a second Appel and two large works by Jacques Doucet and Theo Wolvecamp.

Since then, I’ve added to that small collection with additional works by Appel, Alechinsky, and Corneille.

I now have a reasonably complete assembly of COBRA art that I display in one room of our home in Florida. I’m no longer embarrassed by its apparent lack of technique and juvenile subject matter. I like it. (And its value has multiplied many times.)

My Second Collection – Early 20th Century Modernists

The collection that I began to assemble after exiting the gallery business was comprised of the works of artists that I had first seen in Gabriella’s house so many years before: early 20th century European modernists such as Jules Pascin, Jean Derain, and Édouard Vuillard.

I bought small paintings and drawings as my budget would allow. But the works of these artists were already pricey when I started buying them and have become even more costly. So that collection, near and dear to my heart, is still a modest one, at best.

My Third Collection – Mexican Modernists

I was speaking at an investment conference in Palm Springs, California. Strolling through town, I wandered into an art gallery.

The gallery was dimly lit and dead quiet. The art – mostly oil paintings and some gouaches – was stunning. I spent several minutes meandering around before being greeted by an elderly man in a tattered sweater who had emerged from somewhere in the back. He introduced himself as Bernard Lewin.

I explained that I was in town for business but had the afternoon free and was “in the market for a few pieces.”

Hand on his chin, Mr. Lewin studied me for a moment. Then he smiled, spread his arms, and said, “Look around. Take your time. Ask if you have questions.”

He turned and disappeared into the back.

I spent a good hour or so looking and making mental notes of the pieces I especially liked. I left without seeing Mr. Lewin again, but I went back the next day… and the next day… and the next. Each time, I was warmly received and my many questions were answered before he would, again, disappear.

Despite Mr. Lewin’s apparent indifference towards me as a potential buyer, I loved the art I was looking at and was determined to buy something from him.

What I didn’t know at the time was that I had inadvertently wandered into a gallery that featured some of the most important Mexican modern artists, including Diego Rivera, David Siqueiros, José Clemente Orozco, Rufino Tamayo, Francisco Zúñiga, and Frida Kahlo. And this old man in a tattered sweater was not only a major collector, he was the most important US dealer of their work. (Before his death, he and his wife Edith donated more than 2,000 pieces from their private collection to the Los Angeles County Museum of Art.)

Most of what I thought I wanted to buy – “significant” works by these artists –was way out of my price range. But Mr. Lewin helped me select three pieces that I could afford: a large “mixograph” by Tamayo, a drawing by Rivera, and a beautiful little oil painting by Orozco.

The three cost me considerably more than I had planned to spend. But in retrospect, they were very good investments. The Orozco alone is worth more than ten times what I paid for it.

Over those several days, I had spent a total of no more than four hours with Mr. Lewin. But in that time, he had set me on a path that would immeasurably enrich my life.

Having fallen in love with the Mexican modernists, I began to add to this mini collection with pieces by Francisco Toledo and Vladimir Cora, whose work at the time was relatively affordable. I also bought additional reasonably priced pieces by contemporary (living) Mexican masters.

This set me up for the next phase of my collecting career: I met Suzanne Snider and got back into the art business.

An Excerpt from The 7 Natural Laws of Wealth Building 

Friction

Thirty-four years ago, on my 40th birthday and a year into my first attempt at retirement, I decided that K and I should do some estate planning for our family.

I came to that decision because I had recently gotten into the habit of paging through publications like The Robb Report and Forbes issues on the richest men and women in the world, and I was reading the occasional biography or autobiography of great American industrialists like Andrew Carnegie, John D. Rockefeller, Henry Flagler, and Henry Ford.

I was doing this sort of reading because I had, in the span of less than 10 years, brought myself up from humiliating penury to a net worth of more than $10 million, which, in 1990, put me in what I believed was the category of having “great wealth.”

So, I engaged a lawyer I knew to write me up an “estate plan.”

After seeing the size of our financial assets, he assembled a small group of people to provide us with the full spectrum of the legal and accounting services that he told me we needed. The group consisted of my tax accountant, another guy I knew that was an accountant, and a local lawyer who did my real estate closings. At the last minute, on impulse, I asked MN, at that time the CFO of my primary business, to sit in on our first meeting and tell me what he thought.

After the meeting, he pulled me aside and said, “Mark, these guys are clowns. What you need is a company that specializes in this sort of thing.” And he recommended what was perhaps the best estate planning firm in the US. They were way more expensive than I had anticipated, but in retrospect, they were worth every penny of the more than $1 million I have paid them so far.

As it turned out, this was in the middle of my wealth building career. Since then, my net worth has increased by a multiple of 15, which has made their intensive, personalized, state-of-the-art advice worth even more.

A Concern Surfaces 

When the plan was in place, K and I felt pretty good – like we had accomplished what responsible people with significant assets should do.

But then I read something that concerned me. Apparently, even the wealthiest people, working with the most sophisticated estate planning professionals, didn’t always get it right. Even with the best technical and legal structures, the most common result of leaving fortunes to their heirs was (A) the destruction of the wealth they left behind within two generations, and (B) the destruction of the family itself.

A few families, however, such as the Cargills and Waltons, had avoided these heartbreaking outcomes. One of the deciding factors was the way they wrote their wills and structured their family businesses. The other one – the more interesting one, it seemed to me – was that the entire family met several times a year to make financial decisions together.

I expressed my concern about the long-term effects of our estate plan to several people whom I’d come to trust at the firm that had put it together. Three of them recommended the same company – a small husband-and-wife team that specialized in what is called the “soft” side of estate planning.

When I contacted them, I explained that K and I weren’t so much interested in growing or even preserving the wealth that we would be leaving to our heirs. “We’re much more concerned,” I said, “that in leaving so much money to them, it could result in resentments, objections, fights, and even worse if things got really out of hand.”

They told me that we were right to be worried. They said that they used to work on the “hard” side of estate planning – asset protection, portfolio management, etc. But because of their own experiences as children of wealthy parents, they had decided, instead, to focus their careers on helping clients like us who were aware of the dangers of giving away a fortune.

The program they laid out sounded very much like the approach I’d read about that was taken by the Cargills and Waltons. They called it “family governance.” We liked the way it sounded, and we signed a contract.

And then, within days – before we could even begin the program – two of our sons got into a tiff about what they should do with our primary residence after our deaths. Sell it and split the proceeds? Or keep it and use it as a beach house for the extended family?

“I hope this ‘family governance’ stuff works,” I thought. “If it doesn’t, K and I might be looking at the beginning of the end of everything we’ve worked so hard to achieve over all these years.”

 

Introducing Friction 

In the science of physics, the word “friction” is used to describe forces that slow forward momentum – more specifically, forces that resist “the relative motion of solid surfaces, fluid layers, and material elements sliding against each other.”

Common examples of physical friction include such things as dryness, roughness, competing currents, and so forth.

In the world of wealth building, “friction” would include countless impediments. For simplicity, I’ve classified them into five categories: external friction, internal friction, economic friction, personal friction, and political friction.

External Friction 

In business, external friction includes all the built-in demands and obstacles you can run into that come from outside forces, such as the regulatory agencies of federal, state, and local governments, industry associations, business groups, and basically any outside organization whose requirements get in the way of your efforts to grow your business and your wealth.

Those requirements would include OSHA and ADA rules, SEC and FTC regulations, state and local zoning and building codes, local business regulations, and so on.

Though many of them are necessary to reduce malfeasance and safeguard public interests, they almost always slow down forward momentum.

What to Do About External Friction 

I wish I could tell you that I’ve discovered ways to avoid every sort of external friction we experience when we are building businesses and building wealth. Alas, I cannot.

External friction comes, as I said, from outside agencies, many of which have enforcement powers. Unless the project you are bringing them is going to add tens or hundreds of millions of dollars in tax revenues to their coffers, any energy you spend on attempting to alleviate the friction by getting them to back down is likely to be wasted. More than likely, you’ll just end up delaying your project and tacking on extra dollars to its cost.

What you can do, however, is keep the friction to a minimum by being stoic about it and not allowing yourself to get upset.

 

Internal Friction 

Internal friction refers to problems that arise from within a business. These would include differing priorities, communication systems, and corporate cultures.

Individual departments, for example, may have different vacation policies, working hours, break times, and so forth. Or one department might use a different meeting and/or notetaking system than another department, which can make it difficult for everyone to be on the same page.

Most irritating can be clashes between individual employees… and you!

What to Do About Internal Friction

You might think, “I can’t believe these people are giving me – the person who pays their salaries – such grief!”

And to be sure, one way you can eliminate that kind of internal friction is to fire the offender.

But although that is sometimes exactly the right thing to do, it’s not always so. Sometimes employees slow you down because they can see that what you want them to do is going to have negative repercussions that you will regret.

That’s the challenge in dealing with internal friction.

What I’ve learned to do is not especially clever. It’s a technique I discovered 40 years ago, and it’s worked so well that I’ve never needed another one. Here it is: When an employee criticizes a plan or project you want to set in motion, instead of discussing it with them to try to win them over to your side (which could take a lot of time and only increase your frustration), say something like, “That’s an interesting point, John. I’d like you to think about it and come back to me tomorrow morning with three suggested solutions.”

The next day, one of three things will happen. John will come back and admit that your idea is good to go. He will come back with a better idea. Or he will come back and tell you, “It’s not my job to find solutions, that’s your job!” – in which case… you fire him.

 

Economic Friction 

Economic friction in business includes macroeconomic factors such as inflation and deflation, industry factors such as material and labor gluts and shortages, supply chain issues, regional and local competition, union demands, and, of course, federal, state, and local taxes.

The big problem with economic friction is that it is often unpredictable and almost always beyond your control. Taxes, of course, are predictable and therefore easy to plan for. But macroeconomic swings cannot reliably be predicted. And even industry trends and responses, which often can be foreseen, will sometimes happen quickly and without warning.

What to Do About Economic Friction 

The good news about economic friction is that – although there is almost an infinite number of types – they all have the same solution: insurance.

Insurance was invented to protect individuals and businesses against unpredictable and uncontrollable negative future events. Because insurance programs work with large pools of customers, they can often give you the protection you will need for a price you can comfortably afford.

But is it possible to buy insurance against economic events like inflation or deflation or recession or depression? Not conventionally, as you would against fire or flooding. The way to insure yourself against future economic friction is two-fold: Always keep the spending you do to a minimum. And put a portion of every dollar of profit you get in an “economic emergency fund.”

I have done that with every business I’ve ever owned or run. I do it with my personal income, as well. I do it because I know myself. I know that what I hate much more than saving money for a rainy day is having to come out of pocket to pay for that rainy day.

 

Personal Friction 

Now we come to the sort of friction that every wealth builder and every aspiring wealth builder will inevitably have to deal with. It’s what I call personal friction – meaning it is manifested by your family and friends.

When internal friction in business is manifested personally, it usually comes from partners or colleagues or employees that are not on board with your plans to build the business and are making it more difficult for you to move ahead. And as I explained above, my technique for dealing with it in the case of employees (which is most often the case) is, in my experience, extremely effective.

But here’s the problem with personal friction. If you try to apply that technique to family and friends – as would happen if you tried to apply it to partners or colleagues in business – they won’t likely be willing to come back to you with three solutions to the problem at hand. And if they don’t, you can’t fire them.

What to Do About Personal Friction 

The most important thing to know about personal friction problems is that your chances of solving them by persuading the friction-causing friend or family member to see things your way are very, very slim.

When friends and family members question and criticize your ideas, they are rarely doing so because they want to help you avoid making serious mistakes. They’re doing it because of what psychologists would refer to as “relationship dynamics” – patterns of behavior developed over the years by the people in the relationship, for whatever reasons, that affect the way they interact, communicate, and relate to each other.

And this puts you in a very difficult position:

* You can’t change them.
* And you can’t fire them.

So, what do you do?

I have discovered only one thing that works. And even then, it is far from perfect. My solution is to change the only thing I have a chance of changing: the way I react to the friction they are creating.

I convince myself that, however much it irritates me, they are doing what they are doing out of love. And then I imagine myself – I actually visualize myself – receiving their criticism calmly and even gratefully. I imagine myself thanking them for their caring thoughts. And then I imagine myself ignoring everything they’d said.

It may be hard to believe, but you really can, through purposeful thinking, meditation, and visualization, do this.

Because this kind of friction is a part of you, you have the power to control it.

 

Political Friction 

There is one final sort of friction you may encounter – especially when you’re trying to build a family-owned business.

In terms of a category, I’d call it half personal and half internal. What makes it especially difficult to handle is that it is invisible. Which means that it can fester and grow without you even being aware that it is happening. And its potential for destroying a strong and profitable business is great.

This kind of friction exists in almost every medium- to large-sized business. And yet it is almost never addressed in business classes or talked about among businesspeople.

I call it political friction.

What to Do About Political Friction 

The fundamental currency of business – the metric one uses to measure the financial health of a business – is profit. Honest, sustainable, enduring profit. Which means that whether you’re the CEO or an employee working on the clock, the obvious way to advance your career is to continually contribute to the long-term profits of the business you’re in.

Politics is nearly the obverse. The currency of politics is power. All politicians understand that advancing their careers is about acquiring more and more power. Although having wealth can sometimes help a politician advance, wealth is not, in and of itself, a reliable way to acquire power. In politics, it’s all about making connections and making deals and making promises to colleagues and constituents.

The problem with power as a currency is that it operates in a zero-sum universe. Gaining more power means, by definition, taking power away from others.

In business, on the other hand, the potential for profit is unlimited. A business can (and often does) continually grow its profits by, for example, continually expanding the market for its products.

There are, however, more than a few smart and ambitious people in every industry who take the political approach to advancing their careers. Rather than focusing their time and intelligence on improving the profit potential of the businesses they work for, they apply their energy to acquiring personal power within the organization – which usually means pandering to their superiors.

Politically minded executives breed political underlings because they are not seeking to hire people to help them improve the profits of the business. They hire people like themselves – people who they know will do whatever it takes to please their boss. And that often includes executing projects and policies that make the customers unhappy and the business weaker.

If you have someone like that working for you, it may be difficult to spot them. That’s because political employees are especially skilled at making you believe they have your back and will help you move up the corporate ladder. And they will do so, so long as it helps them in their own climb. But since their loyalty is only to themselves (and the power they hope to acquire), they will throw you under the bus the moment it is helpful to them.

You’ve been warned. So be wary.

When I mentor young executives, I explain to them that, in rising to the top of any business, they will encounter all sorts of challenges and problems. I tell them that they will be able to handle many of them by analyzing data and using logic to find solutions. But when they get involved in people problems – either individual personalities that aren’t committed to the company mission or political personalities who think only in terms of acquiring power – they are getting themselves into corporate quicksand.

There is one more type of friction that has a significant impact on slowing down the natural wealth accumulation curves. It applies to not just business building but to individual investing – and if not identified and remedied, will eventually erode any progress you’ve made over the years by hard work and smart thinking.

I’m talking about…

 

Friction in Finance and Investing 

The most common and most serious friction you will encounter as an investor is expenses – often hidden expenses – that you will be asked to pay.

I’m thinking about such impediments to wealth building as brokerage commissions and fees, transaction costs, taxes, and more.

Benjamin Obi Tayo, Professor of Engineering & Physics at the University of Central Oklahoma, talks about this sort of financial friction using the metaphor of a rocket:

When a rocket is launched into orbit, the rocket has to generate enough thrust to compensate for the incessant gravity [friction] produced by Earth. As a matter of fact, rockets burn about 95% of their fuel to escape Earth’s soupy atmosphere.

When the rocket is in orbit, it becomes the master of space – covering thousands of miles with just a touch of propulsion.

The Earth’s atmosphere and incessant gravity are your investment costs and fees. These fees and costs can greatly slow down your wealth building process.

To illustrate, Tayo offers this hypothetical study of two investment strategies.

Case 1: An investment in an S&P 500 index fund with an annualized average return of 10%.

Case 2: An investment in an actively managed fund that produces an annualized return of 11% but charges 3% for management fees and costs.

The table below shows the portfolio balances for the two cases.

“We observe from the table above,” says Tayo, “that over a 50-year period, a portfolio that is passively managed with less frictional costs produces a return of over $1,100,000, while the portfolio with more frictional costs produces a return of about $500,000 over same period, a difference of over $600,000.”

In a recent issue of Legacy Wealth Monthly, Sean had this to say about the friction caused by financial fees:

The financial industry has been under a lot of pressure recently to lower fees, and it’s all thanks to low-fee or no-fee competition.

In the past, stock brokerages made most of their money from commissions and trading fees. It used to be the case that stockbrokers would charge 2% fees for the amount traded.

That’s buying and selling.

Meaning: When you purchased, you were immediately 2% in the negative. And when you sold, you lost 2% of your total stake.

Now we’re entering an era where trading fees are almost non-existent for the vast majority of self-directed online brokerages. (This hasn’t begun happening all over the world. But in America? It is now almost impossible to find a brokerage that has trading fees.)

However, wealth managers will still charge up to 1% of your assets that they manage per year.

And many mutual funds, closed-end funds, and ETFs will charge management fees and expense ratios.

Consider something like the Invesco KBW High Dividend Yield Financial ETF (KBWD), which lures investors in with its 12%+ dividend yield.

What most investors fail to notice is the fund’s 3.84% expense ratio!

Just to illustrate the comparison, let me show you how this can impact your wealth.

The chart above shows how much $25,000 would grow to if you achieved a 10% return for 20 years with no fees. That’s investment A.

But investment B shows you the same investment, the same returns, but with a 3.84% fee.

As you can see, adviser and fund fees are a major drag on the performance of your portfolio. And it only gets worse over time.

So not only is it important to avoid trade commissions and wealth management fees, it’s also important to avoid mutual fund expense ratios – especially if they’re greater than 0.6%.

 

Back to the Idea of Estate Planning… 

I began this chapter by telling you what I learned about the dangers of dumping a ton of money on your family after you die and hoping it will make everyone happy.

When the wife-and-husband team we hired to help us avoid a trap that so many other wealthy families had fallen into joined us in our first official family meeting, they arrived with countless stories and facts confirming our worry that leaving our heirs lots of money would only create anger and family fragmentation.

And they arrived with at least a half-dozen techniques that they said they had used with other families with good results.

The first was a test designed to identify our individual work or “leadership” styles – to match each of us with one of four profiles: directors, persuaders, counselors, or analysts.

You should understand that neither side of our family – neither the Fords nor the Fitzgeralds – are comprised of people that would be comfortable with these sorts of psychological assessments. Especially any that sought to suggest that our individual personalities could fit into some sort of universal type. Speaking for myself, I would say that the test seemed more akin to astrology than to science.

Nevertheless, we all agreed to suspend our suspicions for the moment and take it.

Each of the leadership types, we were told, tends to approach decision-making in different ways.

Directors are quick to take the lead, suggest solutions, and are impatient to see their solutions carried out.

Analysts are uncomfortable with quick decisions, preferring to mull over questions and opportunities, considering what might go awry before coming to a conclusion.

Like directors, persuaders are quick to come up with solutions. But unlike directors, they are not necessarily impatient when it comes to implementing them. They prefer, as their title suggests, to first achieve consensus through persuasion.

As for counselors, they are not much interested in solutions per se. Their main interest is in keeping the group dynamics pleasant.

None of us was particularly optimistic that this test would be at all applicable to us. But when we saw the results, we were surprised.

I was identified as being strongly in the “director” corner. And everyone agreed that “director” matched very well with my actual work style.

K and our first two boys were labeled “analysts,” and our third son was somewhere between “persuader” and “counselor.” Again, we all agreed that the test’s conclusions were right.

The next step was about recognizing the challenges that each personality type has in communicating effectively with the other three.

We learned that of the four types, the greatest natural conflict tends to be between directors and analysts. And it was clear to all of us that if we wanted to succeed as a family unit, our director and our three analysts had to learn how to get along with one another, without the constant squabbling and subsequent bad feelings.

Which brings me back to the reason we got involved in this program in the first place…

 

Overcoming Friction to Make Good Financial Decisions 

I eventually realized that what we were dealing with here – the tension caused by a clash of personalities within the family – was a form of friction that would inevitably thwart the estate planning I was trying to put in place to benefit them. To overcome it, the group came up with several suggestions.

One example: When I have an idea about something we should or shouldn’t do as a family, instead of simply stating it as a “done deal” (which is what I usually did) and then being forced to defend it against the barrage of criticisms that would always follow, they told me to present the idea as soon as I come up with it, and then give them some time to consider it.

At first blush, this seemed unnecessary and artificial. But when we put it into practice, it worked very well.

I didn’t feel attacked. And they didn’t feel pressured to have an immediate opinion. They could go home and take a day or two to do the analytical thinking they liked to do.

The net result was that decisions involving the family were made with more cooperation and less stress. Better yet, we learned that when decisions were made by consensus, it immeasurably improved the likelihood that they would work long-term.

The Takeaway 

Almost everything you do to build wealth – either by starting or investing in active businesses or by investing – is going to meet with some sort of resistance or “friction.” It’s The Third Natural Law of Wealth Building. And like Newton’s Laws of Motion, it is governed by internal and external forces.

You can’t avoid it, but you can overcome it.

It will be challenging, but that’s a good thing. The fact is that the universe is designed in such a way that nothing worth having is easy to get.

 

An Excerpt from The Art of Collecting Art 

Introduction

I fell in love with art when I was twelve.

That’s not exactly right. I fell in love with Gabriella, a petulant 14-year-old beauty.

She was the daughter of German aristocrats – Jewish intellectuals who had emigrated to America before World War II. Our parents knew one another through part-time teaching jobs they had at St. John’s University on Long Island, New York.

Gabriella’s father was an art critic and historian, and both of her parents were collectors of art. Their home was a museum of paintings and drawings and sculptures – much of it done by (I now know) early 20th century modernists – as well as curiosities and collectibles of every possible kind.

They lived in a neighboring town, and once a month or so, our family would spend a day visiting them. I loved being there, mostly to be in the Gabriella’s aura. But my love was not requited. She was more interested in spending time with my elder sister. And so, I spent a fair amount of time in that house by myself, looking at all the art.

Thinking back now, I don’t know if Gabriella’s family was wealthy or merely upper-middle class. But their house, with all its art, felt like wealth to me. Later, in my teens and twenties, whenever I would dream about becoming “rich,” the image that would come to mind was always some version of that house.

And that may be why, as soon as I could afford to, I began collecting art.

At first, I bought from street fairs and flea markets – whatever I could afford that pleased me. And what I could afford back then wasn’t much. As the years passed and my income rose, what I was willing and able to spend on art rose along with it.

Eventually, I experimented with buying art at auctions. That was an entirely different experience. Very fast. Very exciting. And, usually, a lot of fun. Auctions are tailormade to appeal to buyers like I was then: enthusiastic, overconfident, and ignorant.

But there was an upside to buying at auctions – at least at the bigger auction houses like Christie’s and Sotheby’s. They were public. That meant there were published evaluations of the art they were selling. And those estimates could be validated by the bidding. So long as I didn’t let myself get carried away and kept my bids at or below the estimated ranges, I could feel reasonably confident that what I was buying had some legitimate market value. So long as I didn’t chase any piece too far into the bidding, I could feel comfortable knowing that, if I won it, the price I paid was realistic.

That was my thinking. And in retrospect, it was mostly correct. Later in my collecting career, I came to understand more about how art is priced from the inside. And how much auction houses make on selling it. And how they participate in buttressing certain artists and types of art.

Still, buying at auction the way I was doing it then was giving me some protection against being swindled. That was something that surely happened to me time and again when I did all my buying at street fairs and flea markets, with no understanding of what I was buying and no idea how to determine its actual worth.

I have come a long way since then. And, based on my experience, I believe that it is possible for anyone, even a rank amateur like I was, to assemble, over time, a first-class collection that will not only provide decades of enjoyment, but also an appreciating store of wealth and a lasting legacy for their heirs.

It can be used to balance a conventional portfolio of stocks, bonds, and real estate, help protect that conventional portfolio from inflation, insure against economic or political instability, and even contribute to a retirement income.

I did it, and you can, too.

Let’s get started…

Part I: I Dip My Toe into the Art Business and End Up with My First Collection… and Then Another One… and Another One

In 1989, I bought a half-interest in an art gallery in my hometown of Delray Beach, Florida. It was a way for me to live out a fantasy that had been materializing in my imagination for many years. I had this image of myself owning a boutique gallery and spending many happy hours there surrounded by beautiful things, reading books, and occasionally chatting about art with potential customers that would stop by. I thought of it as something I could enjoy in my free time while I was still working and eventually do full-time when I retired. (My main job was in publishing, but I had also started to develop several entrepreneurial businesses.)

Reality did not comport to my imagination.

In my role as co-owner, I learned that the art business was 80% about selling and only 20% about the art. And one needed to work just as hard to sell art as one would work to sell anything in any other industry.

So, instead of the leisurely hours of enjoyment I had imagined, I was spending all my time there trying to make sales.

I stuck with it for more than a year. But I finally had to admit to myself that it wasn’t for me.

I took my partner out for drinks one evening and told him that I wanted out. He wasn’t happy. But he wasn’t surprised. “What the hell did you think this was?” he said, shaking his head sadly. “It’s a business!”

He was right. The gallery business – at least the way he did it – was intense and non-stop person-to-person selling. He expected me not only to close a sale with every warm body that wandered into the gallery but also to harass my family and friends into spending money there.

The deal that we worked out was interesting. Rather than buy me out with cash, he would give me artwork from the gallery with a retail value equal to my original investment. I understood the difference between retail and wholesale was considerable, but I figured that was the tuition I owed him for learning two very important lessons: One about what sort of work I was willing to do at that point in my life. And the other about the day-to-day business of buying and selling art.

I had closed the door (at least temporarily) on my dream of living out my retirement years as an art dealer. But I had opened the door to the equally enticing dream of becoming a collector.

 

An Excerpt from Wealth Culture 

Introduction

In The Wealth of Nations, the 18th-century Scottish moral philosopher Adam Smith said that “wherever there is great property (private wealth), there is great inequality.” And “for every rich man… there must be at least five hundred poor.”

When Smith wrote those lines in 1776, the English and American economies were still largely agrarian. And notwithstanding a rising middle class consisting of artisans, merchants, and traders, the aristocracy owned 90+% of the farms and virtually all the large industries of that era, including textiles, shipbuilding, and metalworking.

The “First” Industrial Revolution 

In the 60 to 65 years that followed the publication of that book, the economies of England, America, France, Spain, and Portugal grew rapidly. Buoyed by trade with and investments in their colonies, the middle classes of these countries (merchants, artisans, shipbuilders, textile manufacturers, metalworkers, and traders) grew even more. Along with this growth in their gross domestic product (GDP), PCI (per-capita income) grew as well.

And yet, the gap between the richest and the poorest grew wider. Not because the poorest got poorer (that would have been nearly impossible) but because the middle and upper classes became considerably richer.

Fact: In the years leading up to the 1789 French Revolution, the top 10% of the country’s population held around 90% of the wealth, and the top 1% held up to 60%.

 

The Second Industrial Revolution 

Beginning in about 1880, a second Industrial Revolution occurred. This one lasted only about 40 years. But it was larger than the first one because it was spurred by the advent of modern technology, the availability of natural sources of energy, and the globalization and sophistication of banking, including the expansion of free-market Capitalism, which allowed entrepreneurs and business visionaries to finance their profit-making dreams.

During this Industrial Revolution, the aristocrats and wealthy families that had occupied the highest strata of wealth for hundreds of years were replaced by industry leaders – i.e., the factory owners, oil diggers, coal miners, railroad builders, and bankers that rose to the top of their industries.

The middle classes also grew and prospered during the second Industrial Revolution, as merchants, tradespeople, and small business owners profited from the ever-increasing flow of money that was generated by the now much richer and more populous upper class.

The Working Classes 

Much has been written about the plight of the working classes during the second Industrial Revolution – most of it depicting working 12-hour days, six days a week, for meager wages.

In fact, the working classes saw financial improvements during the second Industrial Revolution. Their incomes and savings went up – not as much as those that employed them, but enough to provide them with slightly more comfortable lives.

What has been talked about considerably less in discussing the economics of the time was a new and fast-growing group of people. I’m talking about the “unemployed.”

These people were largely penniless, like the working classes before them, But one could argue that they were worse off because they were forced to rely on scarce charitable sources (mostly religious organizations) to survive.

There is no doubt that for most people at the time, the two Industrial Revolutions produced more economic opportunity for more people than anything else that had ever happened. But the wealth gap between the richest and the poorest was even greater than it had been in the previous hundred years.

In the 20th Century…

Wealth and income inequality was far higher in some parts of the world than others. Nevertheless, the wealth gap between the richest and poorest within each country did not disappear. In some cases, depending on how you measured it (median vs. mean incomes, for example), it widened.

The Communist revolutions of Russia, Eastern Europe, China, Cuba, and some African countries were, in theory at least, an attempt to narrow the gaps. And they succeeded, although not greatly, with the gaps between the middle classes and working classes. But the gaps between the richest and the poorest remained wide.
In the 21st Century… 

In 1989, the total household wealth in the US had been $32.87 trillion.

* The top 10% of Americans owned (67%) of US wealth.
* The next 40% owned less than a third (30%).
* The bottom 50% owned only 3% of the wealth.

In 2016, 27 years later, total household wealth in the US nearly tripled, to $86.87 trillion.

* The top 10% of Americans owned (77%) of US wealth.
* The next 40% owned less than a quarter (22%).
* The bottom 50% owned only 1% of the wealth.

And in 2024, the top 10% of Americans owned 67% of the country’s wealth, while the bottom 50% owned only 2.5%.

Observations on Historical Patterns 

In free-market economies, when countries grow richer, so, too, do their populations. The degree of enrichment is never even.

Those at the top – the entrepreneurs, owners, and leaders of high-growth industries – generally become vastly wealthier, proportionately, than everyone else.

Those that directly support economic growth (bankers, lawyers, CEOs, senior marketing executives, brokers, etc.) are usually next in terms of the disproportionate advancement in net worth.

Next are the high-earning professionals, such as doctors, lawyers, analysts, engineers, real estate brokers, art and collectible dealers, and others who service the wealthy.

Then comes the larger middle and working classes, whose incomes rise at a rate equal to or a bit above the general escalation of wages and products.

And finally, there are classes that, for whatever reasons, are unemployed and/or depend on private charity or public welfare. These people are generally unaffected by the trickle-down growth of the economy. Thus, in terms of relative income and wealth, the gap between them and the rest of the population increases.

In countries whose economies are agrarian or oligarchical or centralized and controlled, there is usually little or no advancement in personal wealth among any of the classes except for the government officials and bureaucrats that tax the GDP growth and take most of it for themselves.

In short:

* In agricultural economies, the richest are those who inherit power or seize it.

* In Socialist economies, the richest are those that garner the most political power.

* In Capitalist economies, the richest are those that create industries.

However, this is not the whole story. What is more interesting for the purposes of this book is that within all countries with free-market economies, there is always a significant disproportionality between cultural groups.

And that is because some cultural groups are already positioned, in terms of where they are in the hierarchy of income and wealth, to enjoy the disproportionate increase in the growth of their economy’s overall increase in wealth.

This book is about those cultural groups. Why is it that they are almost always positioned to see their individual incomes and rates increase over everyone else’s?

And why is it that even if they emigrate from a middling economy to a strongly growing one, they move quickly into higher positions in the wealth hierarchy and almost always rise faster than others at the same higher levels?

My research suggests that there are certain groups of people in the world – ethnic, religious, and cultural – that have ingrained values and habits that give them a significant advantage to not only get into superior positions of wealth advancement, but also move up the ladder of income and wealth accumulation faster.

Thus, my thesis is that by learning what these values and habits are, and by adopting them into one’s own values and habits, anyone can have the same wealth-accumulation advantages as those at the top of the hierarchy, regardless of their race, ethnicity, religion, or the financial position they’re in at the beginning of their income and wealth-building transformations.

In the first chapter of this book, I will identify the cultural groups that are predisposed to building wealth. I will provide data to support the conclusions of my research – that these values and habits are the essential factors in capturing higher incomes and accumulating wealth.

In the second chapter, I will identify what I believe those values and habits are and provide evidence to support my claims.

And in subsequent chapters, I will attempt to create a template that can serve groups of people, large and small, as well as individuals to move rapidly up in the income and wealth hierarchy, regardless of where they begin.

 

A Quick Video Course on Economics in 8 Lessons 

The ABCs of John Maynard Keynes and Keynesian Economics

John Maynard Keynes and Milton Friedman were the two most important and influential economists of the 20th century. I published my first quick video course on economics – on Friedman – in the Nov. 1 issue. This one is about Keynes.

But before we get to the videos, let me give you a brief history of the man and an explanation of why his ideas are necessary if you want to understand how the world works today.

Who Was John Maynard Keynes?

John Maynard Keynes was born on June 5, 1883 in Cambridge, England, into a well-to-do academic family. His father was an economist and a philosopher; his mother became the town’s first female mayor. He excelled academically at Eton College and then at King’s College, Cambridge, where he studied mathematics.

After graduating, Keynes worked in the civil service, joining the Treasury when WWI broke out. In 1919, following signing of the Versailles peace treaty, he published The Economic Consequences of the Peace, in which he criticized the exorbitant war reparations demanded from a defeated Germany and predicted that it would foster a desire for revenge among Germans. The book became a bestseller and made him world famous.

Keynes amassed a fortune from the financial markets. He became a prominent arts patron and board member of several companies and was part of the Bloomsbury group of intellectuals. In 1926, he married Lydia Lopokova, a Russian ballerina.

In 1942, he was made a member of the House of Lords, and in 1944 he led the British delegation to the Bretton Woods conference in the United States. At the conference, he played a significant part in the planning of the World Bank and the International Monetary Fund.

He died on April 21, 1946.

“Keynesian economics,” as his theory is called, has become a cornerstone of modern economics theory and undergirds the structures of most advanced economies in the world.

Keynes’s best-known book, The General Theory of Employment, Interest, and Money, was published in 1936. In it, he challenged what economists call Classical Economics Theory, a philosophy derived from the ideas of David Hume and John Stuart Mill and realized in Adam Smith’s The Wealth of Nations, published in 1776.

The core tenets of Classical Economics Theory were:

1. The concept of private property
2. The establishment of laws to protect private property
3. The establishment of free markets absent of government interference or regulation
4. The employment of private capital to fuel economic growth through industry and trade

Keynes believed in three of those ideas, but not the third. He believed that there was a role for government in smoothing out market fluctuations and preventing massive economic downturns.

“For my part I think that Capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight, but that in itself is in many ways extremely objectionable. Our problem is to work out a social organisation which shall be as efficient as possible without offending our notions of a satisfactory way of life.” – John Maynard Keynes

And now for the video lessons…

Lesson One: An Introduction to Keynesian Economics

Part 1
Watch Time: 11 min.
Watch it here.

Part 2
Watch Time: 10 min.
Watch it here.

Part 3 
Watch Time: 12 min.
Watch it here.

Notes: 

* Keynes’s economic theories existed in the space between the theories of Adam Smith and the ideology of Marx and Engels.

* Keynes believed that government should play a role in managing its economy to avoid major recessions and depressions and to smooth out the smaller economic ups and downs.

* The government tools for limited intervention that Keynes recommended were industrial and business regulation and stimulating the economy by borrowing and spending money to increase demand.

Lesson Two: Key Distinctions Between Keynesian and Classical Economics Theories

Watch Time: 13 min.
Watch it here.

Notes: 

* Keynesian Economics is not a refutation of Classical Economics, but an addendum.

* Classical Economics (Adam Smith) argued that economies work best if governments leave them alone and that any attempt to regulate or manipulate an economy will only make matters worse. Keynes believed this was wrong and that there was a place for “judicious” limited involvement.

* “The invisible hand” is a metaphor for the unseen forces that move a free-market economy. Because of flexible prices and wages, it naturally correct itself. As consumption increases, inflation takes place and prices rise. Consumption slows and prices go down (deflation). Aggregate demand slows and the economy decreases. Prices get lower and, because prices are lower, consumption increases.

* Keynesian Economics says that during a deflation, some point prices “stick” and won’t go down. The same is true of wages. If they go too low, they stop falling. The GDP may decrease but prices and wages won’t move.

 

Lesson Three: Keynes’s Supply & Demand Theory

This video lesson comes from the Kahn Institute. The approach here is technical. Other lessons in this course cover the same material, but this one provides extra value in acquainting you with some of the easy-to-understand-but-fancy phrases used by economists.

Watch Time: 12 min.
Watch it here.

 

Lesson Four: Demand-Side Economics in 60 Seconds

The same information as Lesson Three… but in only one minute!

Watch Time: 1 min.
Watch it here.

 

Lesson Five: The Aggregate Supply Curve (The Keynesian Curve) 

Watch Time: 13 min.
Watch it here.

 

Notes: 

* Why it is that when there is an economic recession or depression costs don’t increase as you grow out of it?

* A difference between Classical Economics and Keynesian Economics explained through “the silly story of a young couple.” The lesson is about spare capacity vs. full capacity and undercapacity.

Lesson Six: Keynesians vs. Monetarists on Macroeconomy

From Enhance Tuition, a brief lesson on the difference between Keynesian and Monetarist theories.

Watch Time: 5.5 min.
Watch it here.

Notes:

* Classical Economics Theory (Milton Friedman) believed that the financial markets would adjust themselves to economic irregularities naturally in time because of the natural fluctuation of interest rates and the decisions of individual economic actors pursuing their best interests.

* Keynes believed that sometimes – during stubborn recessions and depressions – the free-market solution can take too long. And that government spending can speed up that process and thus obviate the worst conditions.

 

Lesson Seven: Problems with Keynesian Economics in Action 

From The Kahn Academy: In this video, the narrator identifies the primary weaknesses of “Keynesian Thinking.” You may find it, as I did, a bit too technical. B ut it has the advantage of identifying the problems with specific and pragmatic examples.

Watch Time: 8 min.
Watch it here.

Notes: 

* When governments spend large sums of money to stimulate a stagnant economy, the rise in wages and prices that follows is nearly impossible to reverse.

* Over the long run, priming the economic pump can work. But when that government spending is fueled by debt, the long-term result is almost certainly bad – a choice between high inflation or a crushing recession.

 

Lesson Eight: Other Schools of Economic Thought 

From Crash Course Economics, a brief summary of different economic theories from Malthus to Friedman to Hayek to Marx and Engels to Keynes.

Watch Time: 10 min.
Watch it here.

Notes: 

* Thomas Robert Malthus: Predicted world population growth would lead to inevitable global famine. He was wrong. He didn’t factor in technological advancements.

* Adam Smith: A person following their own self-interest will produce a greater common good.

* David Recardo: Free trade is better for everyone.

* Marx and Engels (Communism): A natural conflict between workers and capitalists.

* Principles of Economics by Alfred Marshall (published in 1890): introduced the concepts of supply & demand and the diminishing marginal utility of income and wealth.

* Keynes: Governments needed to interfere by using monetary and fiscal policies.

* The Great Depression was caused by bad monetary policy.