Tag Archives: Thales

How to Press Olives, Part Two

In part one of this series, I discussed some methods by which a poor Thales could accumulate the capital with which to rent all the olive presses in the area, cornering the market on olive oil production. However, monopolies are illegal and difficult to create in the current day, which raises the question, once a contemporary Thales raises his capital, what on earth is the guy supposed to do with it?

Like Thales’ character in Aristotle’s anecdote, we invest the capital. But since the olive oil market has expanded into a global monstrosity since the fourth century B.C. we need to find a different financial vehicle. No, we won’t be rolling in a drop-top ’64: classic cars are a bad investment vehicle. I’m a fan of boring vehicles, when it comes to finances.

I suppose, at this point, I ought to make the disclaimer: I am not a financial adviser. I am not offering professional advice, and I do not offer any information on this website as a suggestion on which people should act. Check out the Good Reads page, if you want actionable advice.

Stocks, bonds, real estate, and the riskier cousins of these asset classes, are the closest thing we’ll get to olive presses in this century. I suppose you could invest in olive orchards, if you want to get closer, but if you care to read a bit about diversification, you’ll hopefully see why that’s impractical for most individual investors. So, we’ve waded further into the dry desert of personal finance, to talk about stocks, bonds, and real estate. For anyone who hated their philosophy and their economics classes in college, stop reading right now — I may have alienated at least eighty percent of the English speakers on the planet by marrying these two subjects in one blog post.

If you really want to learn How to Press Olives, Part Two, read A Random Walk Down Wall Street. That will give you an in-depth primer in what to do with the pile of money you’re scraping together after you’ve read How to Press Olives, Part One. But since we don’t all have the drive or time to wade through nearly 600 pages of financial analysis, and since we don’t all think of charts and graphs as the same as “pictures” in a book, I’ll try to digest 600 pages into one blog post, starting now.

So, Thales lands in 2014 with his small pile of money that he accumulated in Aristotle’s story. He finds the olive oil market overwhelming. Where does he go? What does he do? If you’re like Thales, and you’re new to investing, start simple. Index funds are diversified investment vehicles, and they’re usually lower risk than related actively managed funds because they’re diversified across an entire asset class that they represent. I’ll leave it to Dr. Malkiel in A Random Walk… to explain the details of why index funds outperform other mutual funds, but for our Cliff’s Notes reduction, suffice it to say that index funds are the place to put your money in today’s investment landscape — at least until you plow through The Intelligent Investor, Security Analysis, and Margin of Safety. After reading those three books, you might try picking individual stocks, but don’t expect to beat your index fund portfolio.

We’ve established that Thales, and you, ought to invest in index funds, but which funds do you buy with your money? There are dozens of options. Fortunately, picking an index fund is easy: 1) Choose your asset class, e.g. what kind of asset do you want to buy? 2) Find the index fund with the lowest expenses for that asset class. 3) Buy that index fund. William Bernstein has a “No Brainer” portfolio that has performed surprisingly well for as naive as its asset allocations appear to be. The No Brainer portfolio is only .09% behind the S&P500 index over a 10 year period. What is this portfolio? 25% of your money in the following four index funds: the S&P 500, U.S. small cap stocks such as the Dow Jones Total Stock Market Completion Index (DWCPF), the MSCI EAFE International Large Cap Stock Index, and a 5-year bond index. Bernstein recommends this portfolio in the opening pages of his book, The Intelligent Asset Allocator. It’s on my good reads page for a good reason. Check it out when you get A Random Walk from the library. They’re a nice pair.

A note about mutual fund expenses, you’ll find many folks touting the virtues of Vanguard’s index funds, and they’re generally very good. The company’s business model is admirable. However, Fidelity also has many low-cost, no load index funds. Either company will serve you well, and there may be other low-cost index funds or ETF’s out there that I’m not aware of, so do your own research as well. Leave a comment if you’ve found funds that are lower than those of Vanguard or Fidelity.

In the third part of this series we’ll cover managing investments and spending them. With these three parts, you’ll have the rudimentary tools you need to accumulate, invest, and use your capital to live the Good Life. Although, I highly recommend further research. These posts are far from exhaustive on the topic.

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How to Press Olives, Part One

This series of posts seeks to analyze Thales’ actions, as described in Aristotle’s fragment about business monopolies. I’ll connect Thales’ actions with contemporary practices one can use to gain financial independence.

Olive Pressing is a three-part practice. Like so many useful things in life, it has a beginning, middle, and end. The first part is what we’ll consider in this post: the beginning. In other words, how do we raise “a small sum of money”, as Thales did?

In contemporary economics, we’re talking about capital accumulation, and there are at least three ways to accumulate capital, as the popular aphorism states: beg, borrow or steal. However, I intend to maintain at least a semblance of ethics and dignity here, so we’ll discard the first and third options right out of the gate. That leaves borrowing, which is a less desirable option than saving, so let’s add saving to the list for two good options of capital accumulation: saving and borrowing.

Now that we have our methods of capital accumulation, let’s explore the details of their use. Aristotle says that Thales lived in poverty, so let’s assume he had no capital to start with. Let’s also assume that Thales had enough dignity and ethical stature to discard stealing and begging too. I think these are reasonable assumptions of most good philosophers, but a defense of this is a topic for another blog post. So, we have conveniently positioned our hypothetical character of Thales such that he has to save or borrow his “small sum of money” that he’ll later use to rent the olive presses. How does he do it?

Option 1 — Saving: Americans, the cohabitants of my country, are notoriously poor savers generally speaking. This needs to change, for more reasons than I care to list here, but the primary reason for this change is to “rent olive presses”. In other words, we need to make enough money to fund the good life, like Thales did. If you looked at the graph on the linked Economist article, and if you’ve read Early Retirement Extreme, then you know where I’m going: the easiest way to accumulate capital is by increasing one’s saving’s rate. This works for all individuals, corporate and biological.

How do you increase your savings rate? There are two time-tested methods to increase your savings rate: increase income and decrease expenses. For the first option, think of squirrels hoarding food for the winter — you work harder, you earn more. For the second option, think about the stereotypical  swami living in a cave in the Himalaya — you consume less, you have more resources left at the end of the day. Now, these examples aren’t to suggest that you should be a squirrel or an advanced yogi, although thinking about advanced yogi squirrels makes me smile. These are two ways you can positively affect your fiscal position, without anyone else’s help.

If you don’t believe me, check this out. This blog post shows the effect of one’s savings rate on how quickly one will be financially independent, it also analyzes different results of decreasing spending versus increasing income. Although, it is perfectly acceptable to use both strategies, decreasing your spending is the simpler and more powerful option: see the MMM article for details.

The second way to accumulate capital involves the help of someone who already has capital: we plebs call this borrowing. Unlike saving, Americans are very familiar with borrowing capital. However, we are bad at borrowing in a fiscally responsible way. Generally, we borrow to buy assets that depreciate before we throw them away: successful businesses don’t borrow in this way, and neither should you. The only time one ought to borrow is to buy an asset that will appreciate faster than the interest rate of the loan, which is known as leveraged investing: it’s risky and complicated. I can’t recommend it for most situations.*

Well now, where did we leave Thales? He’s waiting for us to accumulate capital: how does he do it? First, he reduces his spending, by buying no unnecessary items, such as the Pre-Socratic equivalent of iPads, new cars, and expensive designer food. He’s a rice-and-beans-and-6-year-old-laptop kind of guy until he gets enough money to lease the olive presses. If he can find good terms on a loan, and he can mathematically show that his return on investment (ROI) will be greater than his cost of loaning money, then he may borrow some capital to lease more olive presses too. However, the brunt of his capital should be accumulated by saving, since this is the least risky and most profitable capital available to him. The next article will cover part 2 of olive pressing, how Thales invests his capital when he leases the olive presses. Stay tuned.

* One example where leveraged investing may be useful involves the current housing market in the USA. It’s been touted for years that home loans are at record lows, and there’s no time like the present to buy a house. Enter leveraged investing: being a savvy investor, you reduce your expenses enough to save a 20% down payment and buy your house with a 15-year fixed-rate mortgage at 3.33% APR, which is the current national average mortgage rate as of this writing (bankrate.com). A survey of the various mortgage types are outside the scope of this post, so let’s assume this is the safest, lowest APR you can get. You now have a pathway to owning real estate at a low interest rate: since you’re already an expert saver, you have extra money piling up at the end of each month — even after you pay your mortgage. You can pay off the mortgage more quickly than this, or you can invest the leftover capital in asset classes that historically return a higher rate of interest over the long term. In this case, you’re leveraging your mortgage to invest in something like the stock market: rather than pay off your mortgage more quickly, you’ve effectively borrowed the cost of your house at 3.33% so you can invest money at 7% over the next 15 years. Note that there is risk in leveraging your mortgage to invest in stocks: if you lose your stream(s) of income, then you cannot pay your mortgage; and if the stock market also declines when you lose your income stream(s), you’ll be unable to sell stocks to pay the mortgage — when this happens, like it did for many in 2008 and 2009, you’re at risk of defaulting on your leveraged mortgage. What’s more, most loans available to individual investors don’t have such agreeable interest rates as current home loans, which makes leveraged investing even more risky because you need to invest in ever higher-returning assets to make the leverage work.

The Olive Presser Explained

I want to be an Olive Presser. But what does that mean?

Aristotle tells a story about Thales of Miletus, where a local business person accuses Thales of wasting his time with philosophy. In response to this, Thales goes out in the winter and leases all of the olive presses in town for the next olive harvest. Since it’s the off-season, Thales gets the presses for cheap. The same local mocks Thales further for renting olive presses in the middle of winter. But next spring, this guy needs to process his olive harvest, and Thales sublets the olive presses to him and the other olive merchants for a nice profit. After which, he continues his philosophical pursuits. You can read the whole story here and more about Thales here.

An Olive Presser is someone who knows the marginal utility of money. An Olive Presser also knows how make money work for them, rather than simply working for money. Finally, Olive Pressers go out and live their lives; they don’t set around wringing their hands over financial reports.

So stay tuned, and we’ll figure out this whole business of Olive Pressing together. If you already cornered the market on Olive Pressing, let us know about it: leave a comment.