Monday, April 5, 2010

Discovering Hidden Treasures, by Dan Thompson

Today's review is a bit off from my normal reading fare. A local financial planner has written a book, available at The Banking Concept, and a mutual friend made it available for me to read and review. Mr. Thompson has written a book that is, for the most part, easy for the financial layman to understand, with a lot of good basic and more advanced financial concepts.
Thompson begins with an anecdote about being on a bicycle careening down a hill - a situation I encountered all too frequently as a boy, just ask my cousin about Mr. Toad's Wild Ride - and draws the parallels with our recent experience with the U.S. economy.
The recent stimulus package instituted by the government, according to Thompson, cannot be paid for at current levels of tax revenue, and will most certainly increase taxation for us and for our children in the near future. The government's passage of the massive health care reform bill will also likely increase costs for all Americans, whether they are still able to use private sector insurance, or are forced to move to a yet to be revealed government option. These new government regulations will stifle competition; increased competition creates lower costs in a free market system. At some point, taxes must rise to cover increased spending and public debt service. I take no issues with any of these assumptions, in fact, he may be preaching to the choir here.
Depending on what dates you look at, there is between $6.7 and $14.9 trillion in tax-deferred retirement accounts like 401k and IRA plans in the U.S. Thompson reminds us that taxes deferred are not taxes eliminated, and that when we begin to withdraw money on these plans, we will pay the taxes. The premise used to sell these plans to the American public has been that we would all be in a lower tax bracket in retirement than in our earning years. Do you believe that the government, faced with rising costs and deficits, avoid the temptation to tack on extra "excise tax" to pay for our entitlement programs? And, come to think of it, do you really want to make less money to spend when you retire, so that you're in a lower tax bracket? I'm just sayin'.
He has a great analogy about competitive water skiing and our financial lives. There is a point when a competition skier rounds a buoy, and begins to ski towards the next one. The skier's actions at this point are called the PULL. If the PULL is properly executed, making the turn around the second buoy becomes much easier. If we spend the right amount of preparation, effort and energy during our earning and wealth accumulation years, or the PULL, we will better weather unforeseen financial events in our lives, and likely enjoy a higher standard of living in retirement. Incidentally, as an avid, if not competitive, skier, I was glad to finally find out what terms like "36 at 15 off" meant.
Thompson recaps the stock market crash of 1987's Black Monday, which I remember primarily because I was wishing I had some cash to buy Micron at $3 a share right then (it went to $33). This was followed by a lingering recession in the 90s, and when things seemed to have turned around during the Internet or Tech boom, we were all stunned when the bubble collapsed in 2001. I can tell you from personal experience all about how to lose 76% of your investment in an internet stock mutual fund, if you're curious. In each one of these crises, we were told to "sit tight and ride it out". Has anything changed now that we've seen another huge market meltdown in 2008, and watched real estate prices plummet as a result of the sub-prime lending debacle?
He gets into some basic concepts of investing, like compound interest, real rates of return, and so forth, to lay the groundwork for proposals he puts forth in the latter half of the book. One of the things I don't believe I'd seen before, though it sounds vaguely Buffet-esque, was the three criteria for successful investing. First, you should understand what you're investing in. Second, you should have some control over the investment's outcome. Third, you must have a predetermined holding period, an exit strategy, if you will. According to these three criteria, the best choice Thompson sees is owning your own business.
The latter half of the book gets into his strategies for legally transferring wealth from a business while avoiding taxation permanently. He explains the concept of a private banking system, which allows a business owner to finance capital improvements and assets out of their own "bank", reaping the profits that would ordinarily go to a commercial lender, and avoiding the negative effects of asset depreciation. He gets into a fair amount of detail in his strategies for setting up this system, but I'll let you read the book to find out those details. He does include a handy worksheet at the end of the book for addressing your personal finance planning goals, which reminded me of a few things I need to take care of before I get too much older.
The only problem that I had with the book, as a whole, was trying to figure out how I, as a W2 wage earner, rather than a business owner, could benefit from Thompson's Private Banking concepts. Over all, this was a thought-provoking and educational read, about 90 pages long. If he has other financial planning ideas he's likely to share in another book some day, I'll definitely want to read it.

1 comment:

dantho said...

Thanks for the review.

You are correct in your assumption that the book was directed more for business owners, however, many W-2 wage earners can implement with great success many of the strategies, particularly the banking process.

Thanks again for the review.

Dan Thompson