Russell Simmons’ rules for getting “super rich”

From music to fashion to flim, TV and other businesses, Russell Simmons — who is worth more than $100 million — seemingly has the “Midas Touch”. In his new book, Super Rich: A Guide to Having it All, he wants to show you how you too can achieve super richness.

Diversification

I was talking to a friend over the weekend and he told me a story about a person he knows who made hundreds of millions of dollars of net worth in his career and then lost it all. I asked my friend how that could happen. He said “he made a lot of risky bets and none of them worked out.”

I don’t get how anyone could do that to be honest. I don’t understand how someone gives Madoff all of their money to manage for them. When someone has very little to lose, I totally get betting it all and going for it. But when you have accumulated a nest egg or more, you must be diversified in your investments and assets. You cannot put all of your eggs in one basket.

Last week on MBA Mondays, we talked about Risk and Return. I made the point that risk and return are correlated. If you want to make higher returns, you must take on higher risk. But you can mitigate that risk by diversification. And this post is about that strategy.

US Debt Clock

US Debt Clock

2008 Market Crash Chart

Herding and Markets’ “Irony and Paradox”

Market Herding

Have you ever watched a dog interact with its owner? The dog repeatedly looks at the owner, taking cues constantly. The owner is the leader, and the dog is a pack animal alert for every cue of what the owner wants it to do. Participants in the stock market are doing something similar. They constantly watch their fellows, alert for every clue of what they will do next. The difference is that there is no leader. The crowd is the perceived leader, but it comprises nothing but followers. When there is no leader to set the course, the herd cues only off itself, making the mood of the herd the only factor directing its action.

102 Year Dow Jones Industrials Chart

Have a look at this 100 year (actually, 105-Year) chart. I colored each “Market” appropriately — Green for Bull, and Red for Bear — to more clearly show what happens.

Bull markets get ahead of themselves. At their ends, they tend towards excesses that take a very long while to recover from.

Simon Johnson

Why I am an Optimist

I admit that of late my writings have had a rather dark tone. There are certainly a number of severe long-term problems that we must deal with, and they’re going to serve up a lot of economic pain. But the Thanksgiving weekend with the kids has me in a reflective mood, and one that has only served to underscore my long-term optimism. 

Why Jim Rogers Isn’t Buying The Equity Rally

This week’s guru outlook brings you Jim Rogers.  Rogers has become infamous in recent years for his prescient calls on the global meltdown and the commodity boom, but long before that Rogers became famous for co-founding the Quantum Fund with George Soros.  

Citi Is Forfeiting $8 Billion Per Year By Hoarding So Much Cash

Bloomberg does a quick and dirty estimation of how much profit a bank like Citigroup (C) is giving up each year by keeping so much cash as “excess reserves,” rather than lending it out.

Bloomberg: The $244.4 billion Citigroup holds in cash and deposits is $131.4 billion more than it had as of June 30, 2008. That’s five times as much as the $47.1 billion cash hoard Warren Buffett’s Berkshire Hathaway Inc. had at its peak in the third quarter of 2007. Financial firms typically keep more liquid assets than other companies to comply with regulatory requirements.

“In my 44 years in the business, I have never seen a company with remotely as much cash as this,” said Richard X. Bove, an analyst at Rochdale Securities in Lutz, Florida.

If Citigroup’s cash and deposits, which earn 0.63 percent, had been put into loans, which fetch 7.2 percent, the bank would be getting at least $8.65 billion more in annual interest revenue. The risk is that some of those loans go bad, and the bank ends up losing more than the incremental revenue.

We think comparisons to Berkshire are a tad misleading, but regardless, the conclusion analysts are coming to is that banks must be fearful of a second round of the crisis (more writedowns, etc.) and know that that 7.2% rate of return is a pipe dream.