A new documentary Directed by Michael Covel has been released that takes a hard look at the decisions we as a country make about money. Broke: The New American Dream is a study in Behavioral Finance – how and why people do the things they do with their money – or avoid it all together. The result is a shocking expose on the belief systems behind how Americans handle their money and what drives our decisions from the the regulator, the money manager, the guru, and the end-user…the American public.
This is not a partisan film. This is a film about personal responsibility, and he blames everyone for the financial meltdown – including me and you. Greed, ego, and arrogance overcame everyone from the most sophisticated financier to the most rural participant…especially in real estate. Greed took over the buyer, the mortgage broker, the seller, the agents, and Wall Street. To Covel, all are responsible: if you’re broke, it’s because you have a lot to do with it.
When I first viewed the DVD, I thought Covel was being confrontational and controversial to have such inflammatory remarks. You can sit and blame everyone – it will feel good – but is that going to help you retire? Financial literacy is more about knowing how to handle risk than quoting Suze Orman or knowing how to “dollar-cost average” – which only pays off in rising markets. It’s about managing risk and that starts with diversification – a technique to minimize risk – but not an “investment edge” to make money.
You think the government has your back? Guess again. Covel quotes statistics that show that 40% of those who make $35,000 and less feel that playing the lottery was the best way to amass $500,000 for retirement. Lotteries are marketed heavily to the poor — people who can least afford them. Wanda Sykes comedy routine about saving for retirement is both hilarious and sad. Problem is, state lotteries are a game of negative expectation.
That means over the long run you’ll never win. As Professional Poker player Chris “Jesus” Ferguson states in the film, “your odds of winning the lottery aren’t that much better if you buy a lottery ticket than if you didn’t. There very close to the same (zero). I don’t try to play too fancy…I just keep my dollar.” Ferguson, who is one of many professional poker players quoted in the movie, created games for California lotteries before pro poker, so he would know. Some of the other players who appear are Evelyn Ng, Antonio Esfandiari, Howard Lederer, and his sister Annie Duke.
But someone always “wins” you say? That’s true, the government.
Playing investigative journalist, Covel gets a Virginia gaming commission member to say off camera, “we don’t even want people to marry the words investment and lottery – we try to discourage that.” And 2 weeks later, Covel found a Cramer look-alike in a VA Lottey ad!
Congressman Chris Van Hollen (D-MD) explains, “you can try to get rid of the lottery, but you have to replace it with tax income.” So you have the poor thinking the lottery is an investment and at the same time the lawmakers knowing that it is a voluntary tax.
Something is rotten in the state of Denmark.
Online poker, a game of skill, is banned. Lotteries are not. As Congressman Barney Frank (D-MA) insists in the film, “In areas where we need to act together to protect our quality of life and the environment…in transportation and public safety…we abstain. But in those areas where individuals ought to be able to make their own choices, we intervene.” Regardless of your political leaning, you’re going to have a tough time blaming the “other side” for financial calamity because Covel has covered his bases, which supports his argument that the problem is you.
Michael Mauboussin says, “Warren Buffett has more in common with a professional poker player than he does with investor.” And Legg Mason’s Bill Miller chimes in “they ought to teach poker in business school. In poker, you can make all the right moves and still lose.” Buffett is more lucky than talented. As a professional trader interviewed for this movie, I can attest that self-awareness and emotional intelligence have as much to do with risk management as the rules themselves. Learning to lose deliberate, small amounts of capital, are a staple of winning the money game – something that is echoed again and again in the movie – whether you’re a trader or investor.
Maybe you believe that everybody on Wall Street are barren robbers…that the stock market is legalized gambling…that all mortgage brokers and real estate agents are unethical. Covel argues that does not give you a hall pass to leave your money unattended. You are responsible for the results you get even if you’ve hired a financial advisor – a provocative statement, but one that I believe is true. It’s your money – no one is going to care about it more than you.
In the end, Covel argues you cannot legislate behavior. Like water, capitalists will always seek a new level. Congress and the Regulators will always be a day late and a bailout short in filling loopholes. Religion doesn’t anchor anyone any better: Religious beliefs cannot legislate morality: Madoff committed a white-collar crime against people of his own religion.
Covel believes that you have to contend with the fact that Social Security is in dire straits. We are paying into a system that might not pay out benefits. He challenges you by asking “What are you doing to about it?” If you’re doing what the folks he interviewed are doing, you need a lot of help. As Barry Ritholtz said, “if in 20 years you’re eating cat food, don’t look at me.” In other words, it’s your money. Own it. Do something about it. The solutions lies with Financial Literacy: know how to take small, consistent losses.
Admittedly, our educational system does play a role in conditioning our way of thinking. Human beings are not built to manage risk. We want to know “why” things happen. We want to understand things. And smart people don’t like being wrong. Their self-esteem is heavily invested in being smart. A great example of this is illustrated from an interview Covel had with a Georgetown student: “I bought Blackstone on the IPO (at $35) and I’m staying in because I don’t want to be wrong. I’d rather lose the 3,500 bucks and be wrong. I am waiting for it to come back.”
Blackstone is about $11 now. Sometimes they don’t come back.
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