RPF-0084-the_Alpha

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00:00:30.000 | Are you concerned with protecting yourself

00:00:33.000 | and protecting your wealth against the impact

00:00:35.000 | of long-term inflation?

00:00:38.000 | Today we're going to talk about the Alpha Strategy,

00:00:40.000 | which is an eminently implementable strategy

00:00:44.000 | that's very simple and straightforward

00:00:46.000 | that will allow you to protect your wealth from inflation.

00:00:49.000 | ♪

00:01:06.000 | Welcome to the Radical Personal Finance Podcast.

00:01:08.000 | My name is Joshua Sheets.

00:01:09.000 | Today is Monday, October the 20th, 2014,

00:01:13.000 | and on today's show we will be discussing

00:01:17.000 | the ins and outs of the Alpha Strategy,

00:01:22.000 | so-called because of a book written by John Pugsley,

00:01:25.000 | where he outlined his plan for protecting your wealth

00:01:28.000 | from inflation.

00:01:30.000 | ♪

00:01:38.000 | Like it or not, I think almost all of us live

00:01:41.000 | in an inflationary environment,

00:01:44.000 | and we know that to be the fact just simply

00:01:47.000 | as the standard assumptions that we use.

00:01:49.000 | Now, perhaps there's somewhere in the world

00:01:51.000 | where somebody listening is living

00:01:53.000 | in a deflationary environment.

00:01:55.000 | It does happen from time to time.

00:01:56.000 | It is possible, but it's unlikely in the Western context,

00:02:00.000 | and we all are comfortable and exposed

00:02:04.000 | to the risk of inflation.

00:02:07.000 | In financial planning, standard financial planning,

00:02:09.000 | we always put in usually somewhere between

00:02:11.000 | a 3% to 4% annual growth of prices

00:02:15.000 | to deal with the effect of inflation.

00:02:18.000 | So that's kind of the standard model that we use.

00:02:23.000 | Many people are concerned with the prospect

00:02:25.000 | of mass inflation.

00:02:27.000 | Many people are concerned with the prospect

00:02:29.000 | of hyperinflation.

00:02:30.000 | It's very rare, actually, that people will refer

00:02:33.000 | to mass inflation.

00:02:35.000 | Usually many people bat the term hyperinflation

00:02:38.000 | around quite readily without, I think,

00:02:40.000 | often understanding or defining what it is.

00:02:43.000 | Today we're going to talk about some strategy,

00:02:45.000 | a strategy that can work in any of those scenarios.

00:02:49.000 | Today's show is not going to be about

00:02:51.000 | economic prognostication, and today's show

00:02:54.000 | is not going to be about an investment strategy

00:02:57.000 | of how to build a portfolio that is resilient

00:03:00.000 | against the long-term effects of inflation.

00:03:02.000 | Both of those are interesting conversations,

00:03:04.000 | and I would love to discuss and debate those issues,

00:03:07.000 | but that is not today's show.

00:03:08.000 | We're going to be talking about protecting your wealth

00:03:10.000 | using the Alpha Strategy.

00:03:12.000 | And I will define the Alpha Strategy for you

00:03:14.000 | in just a moment, and I'll give it to you up front

00:03:17.000 | as part of the introduction for the show.

00:03:19.000 | Then I'm going to go through the details of it

00:03:22.000 | from John Pugsley's book upon which this show is based,

00:03:25.000 | and also then at the end, as we wrap up,

00:03:29.000 | we're going to be talking about some of the challenges

00:03:31.000 | of implementing the Alpha Strategy.

00:03:33.000 | Primarily my purpose in today's show

00:03:35.000 | is to give you a mental model to use

00:03:37.000 | as part of your financial planning mindset

00:03:41.000 | for your own situation or also for clients

00:03:46.000 | if you're working as a financial planner.

00:03:48.000 | This is a useful mental model that I keep in my head.

00:03:52.000 | You've heard me--it'll become apparent

00:03:54.000 | as we go through today's show--

00:03:55.000 | that you've heard me reference this

00:03:56.000 | in many of the interviews that I've done.

00:03:58.000 | I'm constantly looking for a way to decouple

00:04:01.000 | a financial plan from the monetary system,

00:04:04.000 | and the primary reason that I think that way

00:04:07.000 | is because I can't control the monetary system.

00:04:09.000 | I can't control what the Federal Reserve does.

00:04:11.000 | I can't control what the inflation rates are,

00:04:14.000 | what the interest rates are.

00:04:15.000 | I can't control any of those things,

00:04:17.000 | and I like to control everything I can control.

00:04:20.000 | So if I can decouple myself in a practical way

00:04:23.000 | from the monetary system,

00:04:24.000 | then that makes me a little bit happier

00:04:26.000 | because I can now exercise a modicum of control

00:04:30.000 | over my situation.

00:04:32.000 | If you are one who looks for black-and-white decisions

00:04:36.000 | and black-and-white, "Yes, this always works,"

00:04:38.000 | or "This doesn't work,"

00:04:39.000 | I think you'll probably be frustrated by today's show.

00:04:42.000 | So keep that in mind.

00:04:43.000 | This is a model that you'll have to figure out

00:04:45.000 | how to implement in your situation

00:04:48.000 | based upon whatever the specific circumstances are

00:04:50.000 | that you're facing.

00:04:51.000 | This is not something that is black-and-white,

00:04:54.000 | that here's what everybody should do.

00:04:56.000 | The way that you implement this strategy

00:04:58.000 | in your own life will vary

00:04:59.000 | depending on what stage you are in life.

00:05:01.000 | It'll vary over time.

00:05:04.000 | So I think, however, it'll be very useful for you.

00:05:07.000 | You'll hear me constantly refer to this in interviews.

00:05:09.000 | Sometimes I explain it for the guests,

00:05:11.000 | and I explain what I'm trying to accomplish

00:05:13.000 | and how I'm trying to apply it.

00:05:15.000 | Let me start with defining what the Alpha Strategy is.

00:05:18.000 | Basically, what the Alpha Strategy is

00:05:20.000 | is the idea that because we live in a scenario

00:05:26.000 | in most of the Western world,

00:05:27.000 | whether you're based in the U.S.

00:05:29.000 | or whether you're based in the Eurozone,

00:05:31.000 | we live in a scenario where inflation

00:05:33.000 | is almost a certainty over time.

00:05:36.000 | The rate of inflation is worth debating,

00:05:39.000 | and in just a moment,

00:05:40.000 | I'll give you my thoughts on that,

00:05:42.000 | but I am--

00:05:43.000 | again, this is not about economic prognostication today.

00:05:46.000 | So the rate of inflation is debatable

00:05:48.000 | as far as what it will be,

00:05:49.000 | but most of us assume and expect

00:05:53.000 | to live our lives in an inflationary environment.

00:05:57.000 | This is primarily due to how our currency system is structured

00:06:01.000 | and how the system of who benefits

00:06:04.000 | based upon being able to supply the money

00:06:07.000 | and profit from providing the money

00:06:09.000 | and also who benefits with making promises today

00:06:13.000 | and then paying off those promises

00:06:15.000 | in future cheaper dollars.

00:06:16.000 | That's where you get into the economic theory of this.

00:06:19.000 | And so from time to time,

00:06:20.000 | you'll see monetary policy and fiscal policy

00:06:23.000 | adjusted by the Federal Reserve,

00:06:25.000 | which is a private bank that has nothing to do

00:06:27.000 | with the federal government,

00:06:28.000 | in case you're unfamiliar with what the Federal Reserve is,

00:06:31.000 | but it operates under a charter

00:06:32.000 | from the federal government and also by Congress

00:06:35.000 | with how they adjust the spending of the government system.

00:06:40.000 | So we're not going into economics today, though,

00:06:43.000 | so we just assume that we're living

00:06:44.000 | under an inflationary environment.

00:06:46.000 | So what the alpha strategy is at its simplest form

00:06:50.000 | is simply saying,

00:06:51.000 | if you can purchase the things that you need

00:06:53.000 | to supply for the rest of your life,

00:06:56.000 | then you don't have to deal with

00:06:58.000 | the effects of inflation any longer.

00:07:01.000 | So as a simple example,

00:07:02.000 | let me use one way that we all commonly implement this

00:07:06.000 | in our culture of the idea of housing.

00:07:09.000 | So it's very common in the U.S. American system

00:07:12.000 | that people will buy houses,

00:07:14.000 | and one--

00:07:16.000 | maybe not the biggest reason why people buy houses,

00:07:18.000 | but one reason that some people might buy houses

00:07:21.000 | is because when you buy a house,

00:07:23.000 | you are now able to lock in a fixed price

00:07:26.000 | for the purchase of that dwelling.

00:07:28.000 | So ignore taxes and ignore the cost of insurance for a moment.

00:07:32.000 | Let's just focus on the fixed price of the housing.

00:07:35.000 | If you buy a house,

00:07:36.000 | and if you pay that house off and that debt is gone,

00:07:39.000 | or even if you don't,

00:07:40.000 | even if it's financed on a fixed-rate mortgage,

00:07:42.000 | you now have a steady, specific amount of money that you owe.

00:07:48.000 | And even if this is on a fixed-rate mortgage,

00:07:50.000 | then over time, as the general system--

00:07:53.000 | the currency system that we live in inflates,

00:07:57.000 | then you're paying off that mortgage in the future

00:08:00.000 | with cheaper dollars that are worth a lesser amount--

00:08:04.000 | not worth less, but that are worth less.

00:08:09.000 | Or I guess I should put the emphasis on the other syllable--

00:08:12.000 | not worthless, but worth less.

00:08:15.000 | We generally understand this.

00:08:16.000 | You may have had the experience in working with a parent

00:08:19.000 | or a grandparent where they're paying their mortgage payment,

00:08:22.000 | and they lived in a house for a very long time,

00:08:24.000 | and it was financed on a traditional 30-year mortgage,

00:08:26.000 | something like that,

00:08:27.000 | and they had never paid extra on it.

00:08:29.000 | And they're paying--in 2014,

00:08:32.000 | they're making a payment of $300 a month,

00:08:35.000 | something like that,

00:08:36.000 | on what amounts to be a fairly nice house.

00:08:39.000 | What that does--that is, in essence, the alpha strategy.

00:08:43.000 | You purchase a house today,

00:08:45.000 | and now you own that house on a fixed payment schedule,

00:08:49.000 | so that as the money supply increases,

00:08:51.000 | which leads to higher inflation over time,

00:08:54.000 | then you're paying back that debt

00:08:56.000 | with cheaper dollars, essentially.

00:09:00.000 | So the alpha strategy is basically,

00:09:02.000 | how can we apply that same thing to everything else in life?

00:09:05.000 | If you were to compare the cost of purchasing the house

00:09:09.000 | with the cost of rents,

00:09:12.000 | over time, if you're simply paying rent over a 30-year period,

00:09:15.000 | you would expect the cost of the rent that you're paying

00:09:18.000 | to adjust with the value of the money,

00:09:21.000 | because the cost of the rent--

00:09:22.000 | your landlord is going to be in a free market,

00:09:24.000 | assuming there's no rent controls of some kind.

00:09:27.000 | But your landlord, as the value of the money changes,

00:09:30.000 | your landlord is going to periodically adjust your rent

00:09:33.000 | so that the landlord can maintain his or her standard of living.

00:09:38.000 | So that's a model that we're very familiar with,

00:09:40.000 | except it's often that even though we know that,

00:09:43.000 | we don't actually apply it.

00:09:45.000 | What the alpha strategy is simply saying,

00:09:46.000 | how can we apply that in every area of life?

00:09:49.000 | So instead of applying it only to housing,

00:09:52.000 | can we apply it to housing,

00:09:54.000 | but also to protecting ourselves

00:09:57.000 | from the cost of increases in toilet paper cost,

00:10:03.000 | things like that, or food, or clothing,

00:10:06.000 | or things like that.

00:10:07.000 | That's it. It's as simple as that.

00:10:09.000 | Now, the reason why this is valuable

00:10:12.000 | is because we do this in some areas,

00:10:15.000 | but we're not-- oftentimes individuals

00:10:18.000 | are not thinking about this explicitly.

00:10:21.000 | So in financial planning,

00:10:22.000 | here are some of the areas

00:10:23.000 | that we commonly apply this strategy already.

00:10:25.000 | I already mentioned housing.

00:10:26.000 | That's the most common one that we apply it in,

00:10:29.000 | and we know that over time.

00:10:30.000 | Where the strategy doesn't work

00:10:33.000 | is that people oftentimes don't stay in a house.

00:10:35.000 | In our culture, in the U.S. American culture,

00:10:37.000 | people don't stay in a house for a long period of time.

00:10:40.000 | So the strategy actually is exactly the opposite.

00:10:43.000 | If every, say, 5 to 7 years,

00:10:45.000 | you're moving and upgrading your house,

00:10:47.000 | well, that house price is going to be primarily tied

00:10:51.000 | to general wages of the average worker

00:10:54.000 | or the supply and demand in a local area,

00:10:58.000 | which is driven by the general wages

00:10:59.000 | of the average worker in that area.

00:11:01.000 | And so that house price is going to be

00:11:04.000 | relatively closely tied to the rate of inflation.

00:11:09.000 | So over time, as the rate of inflation increases,

00:11:12.000 | the money supply grows, the price of houses goes up.

00:11:15.000 | There's not a substantial difference

00:11:16.000 | in the value of the house.

00:11:17.000 | The price is primarily increasing

00:11:19.000 | based upon the general rates of inflation.

00:11:22.000 | There are always exceptions to this.

00:11:24.000 | There's local markets.

00:11:25.000 | I'm just simply talking from a macro perspective

00:11:27.000 | at the moment.

00:11:28.000 | So if you're continually moving every 5 to 7 years,

00:11:30.000 | as is, I believe, on the latest statistics that I saw,

00:11:33.000 | which I didn't verify before today's show,

00:11:35.000 | if you're continually moving,

00:11:36.000 | you're continually increasing the cost of the house

00:11:39.000 | as is applied to inflation.

00:11:42.000 | So in order to benefit from this,

00:11:43.000 | you would have to stay in the house

00:11:45.000 | for a long period of time.

00:11:46.000 | Another area--so we know that with housing.

00:11:49.000 | Another area where common--

00:11:50.000 | this is a common part of our thought--

00:11:52.000 | would be something like college.

00:11:54.000 | So many of you would be familiar with the idea

00:11:56.000 | of a prepaid college tuition program.

00:11:58.000 | Most states have this.

00:12:00.000 | This is based--this is a Section 529 plan.

00:12:02.000 | Which, by the way, for your general knowledge,

00:12:05.000 | oftentimes people think of a 529 plan

00:12:08.000 | as the plan that allows you to save money

00:12:12.000 | and pay for college tuition

00:12:13.000 | out of that tax-sheltered account.

00:12:15.000 | It is that, but it's also a prepaid tuition program.

00:12:18.000 | So there are two types of 529 plans.

00:12:20.000 | Both of them are established

00:12:21.000 | under that section of the code.

00:12:23.000 | One is a prepaid tuition program,

00:12:25.000 | and one of them is a tax-deferred savings program.

00:12:28.000 | So if you're familiar with the idea

00:12:29.000 | of a prepaid tuition program, it works like this.

00:12:31.000 | Basically, if I have a--I do have a son.

00:12:34.000 | I have a one-year-old son, so I live in Florida.

00:12:36.000 | I could go to the state of Florida,

00:12:38.000 | and I could say, "State of Florida,

00:12:40.000 | "I would like to buy a college education

00:12:42.000 | at a state school system,

00:12:44.000 | and I would like to buy it at today's prices."

00:12:47.000 | So the state of Florida says,

00:12:48.000 | "Okay, we're going to charge you X amount of dollars

00:12:51.000 | for that school system."

00:12:52.000 | And I say, "Okay, as long as I pay that,

00:12:53.000 | I've locked in the college education--

00:12:55.000 | the price of the college education today

00:12:57.000 | for a fixed dollar amount."

00:12:59.000 | Then that transfers the risk of the actual price

00:13:02.000 | of the college tuition

00:13:04.000 | over to the educational institution.

00:13:08.000 | And these are extremely popular here in Florida,

00:13:10.000 | and throughout much of the country, they're very popular.

00:13:13.000 | I think their popularity may be decreasing a little bit.

00:13:15.000 | That's my own personal experience.

00:13:17.000 | Simply due to the adjustments of the rates,

00:13:20.000 | a lot of the school systems and the states

00:13:22.000 | have adjusted their rates

00:13:23.000 | and increased them substantially.

00:13:25.000 | But these are very popular.

00:13:26.000 | So it allows people to lock in a future cost today

00:13:29.000 | for a specified, defined amount.

00:13:32.000 | This could also be applied

00:13:34.000 | in things like the purchase of a car.

00:13:36.000 | We're all familiar with the fact

00:13:37.000 | that cars increase in price over time.

00:13:40.000 | So we say, "How can we buy a car

00:13:43.000 | that's going to last a long period of time

00:13:45.000 | and lock in that cost today?"

00:13:47.000 | Most people don't think about it quite as much with vehicles,

00:13:49.000 | but it does apply.

00:13:51.000 | It would also apply in specific aspects

00:13:54.000 | of mainstream financial planning.

00:13:56.000 | So we would look at,

00:13:57.000 | "How do we put an inflation option

00:13:59.000 | on an insurance policy?"

00:14:01.000 | So if you were going to have

00:14:02.000 | a long-lasting insurance policy

00:14:04.000 | that didn't adjust with inflation over time,

00:14:07.000 | that insurance benefit would grow

00:14:10.000 | to become basically irrelevant as inflation continues on.

00:14:14.000 | Or things like long-term care planning.

00:14:16.000 | So you'll see this with-- in long-term care planning,

00:14:19.000 | there's a type of planning

00:14:20.000 | called a continuing care retirement community.

00:14:22.000 | So this would allow you to buy into a community today

00:14:25.000 | at a fixed rate of-- fixed cost,

00:14:27.000 | and then the risk of the increasing cost for inflation

00:14:32.000 | is borne by the community.

00:14:34.000 | So my point in those examples is to show you

00:14:37.000 | that there are a number of areas

00:14:38.000 | in which this strategy is applied.

00:14:40.000 | But how can we apply it to other strategies?

00:14:44.000 | Now, a little bit of historical context for the book.

00:14:46.000 | The book that I'm referring to was written in 1980,

00:14:49.000 | and it's called "The Alpha Strategy."

00:14:51.000 | Again, it was written by a man named John Pugsley.

00:14:53.000 | And he was a basic economist.

00:14:55.000 | I'm not sure if he was formally trained.

00:14:58.000 | He wrote a book called-- what was it?

00:15:03.000 | Okay, "Common Sense Economics."

00:15:06.000 | He wrote a book called "Common Sense Economics,"

00:15:08.000 | in about the 1960s, sold over 150,000 copies.

00:15:12.000 | And in his book, "The Alpha Strategy"

00:15:14.000 | was published in 1980,

00:15:15.000 | and it was listed on the New York Times bestseller list

00:15:18.000 | for nine weeks in 1981.

00:15:20.000 | And the interesting thing about this,

00:15:23.000 | the reason I like the book--

00:15:24.000 | I first read it when I was a teenager,

00:15:26.000 | and I like it because of the historical context.

00:15:29.000 | This book was written in 1980.

00:15:31.000 | It was on the bestseller list in 1981.

00:15:34.000 | Now, I was born in 1985,

00:15:37.000 | and this is actually a tremendous challenge

00:15:39.000 | for me being so young,

00:15:40.000 | is to gain an idea of historical context

00:15:45.000 | for inflation and monetary policy

00:15:48.000 | and things like this.

00:15:50.000 | The period of the 1970s

00:15:51.000 | was a period of tremendously high inflation

00:15:54.000 | in the general American economy.

00:15:57.000 | And the only reason that--

00:15:59.000 | and John Pugsley, in my best understanding,

00:16:02.000 | expected this period of high inflation to continue.

00:16:06.000 | And essentially, the only reason that it didn't

00:16:09.000 | was because Paul Volcker came in, ran the Fed,

00:16:12.000 | and the Fed dramatically tightened the money supply

00:16:15.000 | and completely reversed the inflationary trend

00:16:20.000 | that had been continuing.

00:16:21.000 | So looking back at it, interestingly,

00:16:24.000 | Pugsley wound up being wrong with his economic forecast

00:16:27.000 | because Volcker came in and made the change.

00:16:29.000 | When he wrote the book,

00:16:30.000 | there wasn't any indication that Volcker would come in

00:16:33.000 | and become chairman of the Federal Reserve Board

00:16:36.000 | and make those changes.

00:16:38.000 | So he turned out to be wrong,

00:16:40.000 | but at the time,

00:16:41.000 | this was a pretty compelling strategy.

00:16:44.000 | Some historical context for you,

00:16:46.000 | in case you're unfamiliar with.

00:16:48.000 | Let me pull right from the Bureau of Labor Statistics.

00:16:51.000 | They're historical indicators of consumer price index.

00:16:54.000 | So I'm using specifically here--

00:16:56.000 | I just chose to use the CPIU,

00:16:59.000 | which is the Consumer Price Index for all urban consumers.

00:17:03.000 | So in 19--let's go to 1970,

00:17:05.000 | you had 5.7% annual--

00:17:08.000 | so average annualized inflation rate,

00:17:10.000 | '71, 4.4--

00:17:12.000 | and I'm just going to go through the years from '70 to '82 now

00:17:15.000 | without listing the years--

00:17:17.000 | 5.7, 4.4, 3.2, 6.2,

00:17:21.000 | 11.1--2.0% inflation in 1974,

00:17:26.000 | 9.1--75, 5.8, 6.5, 7.6,

00:17:31.000 | and 11.3% in 1979.

00:17:35.000 | In 1980, 13.5%,

00:17:38.000 | and 1981, 10.3%.

00:17:41.000 | Then here's the drop--

00:17:42.000 | '82, 6.2, '83, 3.2% inflation.

00:17:47.000 | So you're coming off of a decade of an extremely high

00:17:51.000 | inflation rate in the Consumer Price Index,

00:17:53.000 | and so that's the context in which this book was written.

00:17:56.000 | Now, when you're someone like me who was born in 1985,

00:17:59.000 | I've never known a high inflation period.

00:18:01.000 | So when I started paying attention to the world--

00:18:03.000 | let's call it late '90s--

00:18:05.000 | '98, 1.6% inflation rate,

00:18:08.000 | '99, 2.2%, 2000, 3.4%.

00:18:11.000 | So you start to get this concept

00:18:13.000 | that 2% to 3% is the only possible inflation rate,

00:18:16.000 | and it's only through studying history

00:18:18.000 | that you actually find that that's not accurate.

00:18:21.000 | So Pugsley's book is written in that context.

00:18:25.000 | Now, today in 2014, when you're looking forward,

00:18:28.000 | it's very easy to see how it seems much more possible

00:18:33.000 | and much more likely that we are facing a period

00:18:36.000 | of higher than normal inflation.

00:18:39.000 | Now, as far as the timing,

00:18:41.000 | people are always wrong on timing.

00:18:43.000 | As far as the general trend,

00:18:45.000 | it seems as though the general trend

00:18:47.000 | would continue in that way.

00:18:49.000 | Who knows when? Who knows how big?

00:18:51.000 | But that's why I'm covering this strategy,

00:18:53.000 | because it may provide a strategy

00:18:55.000 | that would be helpful and useful for you.

00:18:59.000 | You may be interested in economic prognostication.

00:19:02.000 | As I said earlier, I am not making a prognosis

00:19:05.000 | of what I think is possible,

00:19:07.000 | but I'll tell you my personal opinion.

00:19:09.000 | I think that probably it's more likely

00:19:12.000 | that we will wind up sometime in the next decade or two

00:19:16.000 | in a system of mass inflation,

00:19:19.000 | probably not hyperinflation,

00:19:21.000 | because that would be against the self-interest of the Fed,

00:19:24.000 | probably not deflation,

00:19:26.000 | and basically normal inflation up to mass inflation.

00:19:30.000 | If you're interested in more,

00:19:32.000 | I'll share one article on that written by Gary North

00:19:34.000 | in the show notes.

00:19:36.000 | He has an article entitled

00:19:38.000 | "Inflation, Mass Inflation, Hyperinflation, and Deflation."

00:19:42.000 | I think it's one of the more intelligent, succinct

00:19:46.000 | series of arguments and points

00:19:49.000 | that is along the lines of what I think is more likely,

00:19:53.000 | what I think is possible and more likely.

00:19:55.000 | I'll share that in the show notes if you're interested.

00:19:58.000 | But the Alpha strategy doesn't depend on what actually happens.

00:20:02.000 | It's a system that works no matter what.

00:20:05.000 | Let's go through some details of it.

00:20:07.000 | In essence, the Alpha strategy is basically the idea

00:20:10.000 | of buying all the things that you're going to need

00:20:13.000 | for the rest of your life today.

00:20:16.000 | If you simply buy the things that you're going to need

00:20:18.000 | for the rest of your life today,

00:20:20.000 | then you've locked them in at today's prices.

00:20:23.000 | I recognize the problems with this.

00:20:25.000 | I will, at the end, point out some of the problems with this.

00:20:28.000 | But let's walk through the strategy and see how it can be applied.

00:20:32.000 | And also, I forgot to say, if you haven't read this book

00:20:35.000 | and you're interested in reading it,

00:20:37.000 | it's commonly available online as a PDF.

00:20:40.000 | I will link to one location of the book.

00:20:43.000 | I need to re-find it because I have it saved in my files.

00:20:47.000 | But I'll find one online and I'll link to that in the show notes.

00:20:50.000 | Pugsley actually published it for free online

00:20:53.000 | at the end of his life. He died a few years ago.

00:20:56.000 | He published it for free online.

00:20:58.000 | You can also easily find it on Amazon.

00:21:00.000 | Quick little savings tip for you.

00:21:02.000 | I find that it's important to me to have physical copies of books,

00:21:05.000 | especially if they're books that I need to wrestle with

00:21:07.000 | so that I can mark them up and deal with them.

00:21:11.000 | Amazon used books is the best place to go for copies of books.

00:21:15.000 | You can print them out yourself if you have a PDF or something like that.

00:21:19.000 | Or you can find dozens of copies of this book for one cent on Amazon.

00:21:23.000 | One cent for the used book plus the cost of shipping

00:21:26.000 | ends up being a couple of bucks worth a couple of bucks to get it and read it.

00:21:33.000 | In the first part of the book, the entire first part is going over

00:21:37.000 | basically the problem. He explains the monetary system,

00:21:40.000 | how it works with the Federal Reserve, things like that.

00:21:43.000 | I would suggest it to you if you are not familiar with

00:21:46.000 | how the monetary system works and the long-term problems

00:21:49.000 | with the current system.

00:21:51.000 | But in the second half, he goes through the Alpha Strategy.

00:21:54.000 | Let's start with, I'm going to read you about two pages from this,

00:21:58.000 | which will lay it out for you.

00:22:01.000 | And then also I'm going to read about three pages.

00:22:04.000 | And then also we're going to talk through some of the ideas

00:22:09.000 | for different categories of it.

00:22:14.000 | The Alpha Strategy.

00:22:16.000 | With a couple of exceptions, all of the savings and investment assets

00:22:19.000 | discussed in the last chapter have one glaring fault in common.

00:22:23.000 | Each is a claim on wealth, not the real thing.

00:22:26.000 | Modern paper money is not a real commodity.

00:22:29.000 | Paper money is a claim on real wealth.

00:22:31.000 | A claim on money, such as a bond or a passbook for a savings account,

00:22:35.000 | is the same thing doubled.

00:22:37.000 | A share of stock is a paper claim on business profits.

00:22:40.000 | Interrupting the book here for a moment, think back, if you would,

00:22:43.000 | to Episode 21. And if you haven't listened to that,

00:22:45.000 | go and listen to Episode 21 of this show,

00:22:48.000 | where it was entitled "Stocks, Bonds, and Derivatives--

00:22:51.000 | What They Actually Are and How They Actually Work--

00:22:53.000 | Foundational Knowledge for All Investment Decisions."

00:22:56.000 | The idea is that stocks and bonds are only a claim

00:23:01.000 | on the real underlying wealth.

00:23:03.000 | So you have the paper wealth, and then you have the real wealth underneath.

00:23:07.000 | This is important that you understand this,

00:23:09.000 | because you're constantly going back and forth

00:23:11.000 | when building an investment plan for yourself.

00:23:13.000 | You're constantly going back and forth and saying,

00:23:15.000 | "On what areas is it better for me to go ahead and buy the claim on wealth,

00:23:22.000 | and on what areas is it better for me to go ahead

00:23:24.000 | and get the actual real wealth underneath?"

00:23:27.000 | The performance of the real wealth underneath

00:23:30.000 | is what affects the performance of the stocks and bonds.

00:23:34.000 | Essentially, I like also, earlier in the book,

00:23:37.000 | Pugsley points out that there are only three ways to store wealth.

00:23:44.000 | You can lend your money, you can invest your money, or you can buy.

00:23:49.000 | Lending and investing are the most popular methods

00:23:53.000 | that we use to save for the future.

00:23:55.000 | We lend money in various forms.

00:23:58.000 | We buy bonds in a bond portfolio,

00:24:00.000 | we lend money to other people, and we collect interest.

00:24:04.000 | We store money in the bank, thus lending our money to the bank

00:24:07.000 | and collect interest on that.

00:24:08.000 | And then we also invest our money.

00:24:10.000 | So we buy stocks, which are ownership in various companies.

00:24:15.000 | That's the primary way that many people invest their money.

00:24:18.000 | We can buy other types of investments.

00:24:21.000 | So we lend and we invest, or we can buy.

00:24:24.000 | And so what he's talking about is buying real wealth.

00:24:28.000 | And so instead of lending and investing, buying real wealth.

00:24:33.000 | Continuing with the reading.

00:24:34.000 | As was pointed out in Chapter 1, wealth is made up of real things.

00:24:39.000 | It is hammers, lathes, shovels, typewriters, windows, doors, walls, pencils,

00:24:44.000 | shirts, shoes, rugs, apples, automobiles, and bread.

00:24:47.000 | Wealth comprises all those things we use, enjoy, and benefit from.

00:24:52.000 | It should be obvious by now that real wealth is your objective.

00:24:56.000 | Paper, once it is printed into money, cannot be consumed.

00:25:00.000 | It can only be traded for real wealth.

00:25:02.000 | Stocks, bonds, and savings accounts are only ways in which to store purchasing power

00:25:08.000 | until you are ready to use it.

00:25:10.000 | They are an intermediate step between earning wealth and consuming it.

00:25:15.000 | As long as you have your wealth in the form of paper claims,

00:25:18.000 | you are prey to swindlers and con men,

00:25:21.000 | both those who work through government and those who work outside the law.

00:25:25.000 | Since almost all of the manipulation, subterfuge, and theft of your wealth

00:25:29.000 | occurs while it is in paper claims, you have a simple and obvious defense.

00:25:34.000 | Keep your wealth in real goods instead of paper claims.

00:25:37.000 | The only safe, rational investment program for the average person

00:25:41.000 | in today's turbulent economy is to eliminate the intermediate step.

00:25:45.000 | Instead of converting labor into money, money into investments,

00:25:50.000 | investments back into money, and money into real goods once again,

00:25:55.000 | convert your surplus earnings directly into real goods.

00:25:59.000 | Simply stated, invest your savings in those real things

00:26:04.000 | that you will be consuming in the future.

00:26:06.000 | Save only real wealth.

00:26:09.000 | The production and savings parts of the Alpha Strategy

00:26:12.000 | are plans by which an individual completely avoids conventional investment markets

00:26:16.000 | and instead invests his surplus wealth in real, tangible, and intangible goods

00:26:22.000 | and stores these goods until he is ready to consume them

00:26:25.000 | or until it is convenient to trade them for goods he wants to consume.

00:26:29.000 | Goods to be saved will include, 1) the knowledge and skills of his trade,

00:26:34.000 | 2) the tools, supplies, and inventory for his business,

00:26:39.000 | 3) the regular consumer products he uses in his everyday life,

00:26:43.000 | and 4) raw materials and finished products that he can store for later trade with others.

00:26:50.000 | In the area of the knowledge and skills of your trade,

00:26:54.000 | it means investing as much as you can in education

00:26:57.000 | in order to increase your rate of production.

00:27:00.000 | In your business, it means converting surplus cash into tools, supplies,

00:27:05.000 | raw materials, parts, and inventories.

00:27:08.000 | In your home, it means saving real goods such as soap, underwear, tires,

00:27:14.000 | laundry detergent, toothpaste, and light bulbs,

00:27:17.000 | rather than paper claims in the form of bank savings accounts, bonds, and stocks.

00:27:22.000 | If you still have money left after investing to the maximum in these three areas,

00:27:27.000 | then it means converting your paper claims into real goods

00:27:30.000 | by buying and saving things that others will need in the future.

00:27:34.000 | This could mean finished, manufactured goods,

00:27:37.000 | but more logically it means the raw materials used by industry.

00:27:41.000 | The Alpha Strategy has one primary purpose--to protect wealth.

00:27:45.000 | As such, it will work for any amount of capital.

00:27:48.000 | If you have only $100, you can protect it completely against inflation

00:27:53.000 | and all investment risks by simply buying things now

00:27:57.000 | that you know you will have to buy next week, next month, or next year.

00:28:02.000 | If you have $1,000 or $10,000, the same thing holds true.

00:28:06.000 | As the amount of capital you have available increases,

00:28:09.000 | it becomes less practical to store items for your own personal consumption

00:28:13.000 | and more sensible to store things that you can eventually trade or sell.

00:28:18.000 | Only when your assets exceed the amount you can conveniently store

00:28:21.000 | in education, business assets, and consumption goods

00:28:25.000 | should you consider saving tradable goods.

00:28:28.000 | The Benefits

00:28:30.000 | There are multiple benefits to the Alpha Strategy.

00:28:33.000 | First, on the level of storing future consumables,

00:28:37.000 | you are totally and permanently insulated from inflation.

00:28:40.000 | A case of aluminum foil, once purchased and stored away, cannot go up in price.

00:28:45.000 | The same aluminum foil on the shelf in the store will continue to rise in cost every year.

00:28:51.000 | The difference between the price you pay now

00:28:53.000 | and the price you would have to pay in the future is yours to keep.

00:28:57.000 | There is no investment that is a complete and total hedge against inflation,

00:29:01.000 | but saving and storing consumables for the future is.

00:29:06.000 | Second, you avoid tax on the inflationary increase.

00:29:10.000 | Even if you earned a rate of interest on your bank account

00:29:13.000 | equal to the rate of inflation, which is improbable,

00:29:16.000 | income taxes on your interest would still throw you into a lost position.

00:29:20.000 | Buy a set of towels for $20, however.

00:29:23.000 | Use them five years later when the price of same towels has risen to $40,

00:29:27.000 | and you will have completely avoided the tax on your $20 inflationary gain.

00:29:33.000 | Third, you avoid all risk inherent in the investment markets.

00:29:37.000 | There is no risk that $500 invested in tires for your car

00:29:41.000 | will be lost if the stock market crashes

00:29:44.000 | or if the dollar plunges on foreign exchange markets.

00:29:47.000 | No broker can absorb your $500 by working your account for commissions,

00:29:52.000 | and no inept management company can dissipate it.

00:29:55.000 | When you put your money into real things,

00:29:57.000 | your reliance on the performance of others is reduced dramatically.

00:30:01.000 | The Alpha strategy also provides protection from risks other than inflation.

00:30:06.000 | Storing consumption items for the future is the ultimate hedge against recession or depression.

00:30:12.000 | When your job becomes insecure, what better assets could you own

00:30:16.000 | than a roof over your head, food in the cupboard, and clothes to wear?

00:30:20.000 | Your real goods savings account will see you through good times and bad.

00:30:24.000 | Recession may hit, your income may be cut off,

00:30:27.000 | and yet prices probably will continue to rise.

00:30:31.000 | In a recession, you are better off holding consumable goods

00:30:34.000 | than holding depreciating currency.

00:30:37.000 | If the nation is thrown into a crisis in which the chain of supply breaks down,

00:30:41.000 | that is, if strikes, revolution, anarchy, natural disaster,

00:30:45.000 | or even war interrupted your ability to buy goods,

00:30:48.000 | then your cash of consumables would prove extremely valuable.

00:30:52.000 | Even if our social problems do not result in a breakdown of the production system,

00:30:56.000 | we will still have shortages.

00:30:58.000 | Inflation will lead us into price controls,

00:31:00.000 | and these will lead to shortages in rationing.

00:31:02.000 | A few years ago, I would have had to explain how rapidly controls can disrupt supplies,

00:31:07.000 | but today it is not necessary.

00:31:09.000 | We are living among those very conditions.

00:31:12.000 | Everyone reading this book, in the context of 1981,

00:31:16.000 | is familiar with the meat, plastic, paper, and gasoline shortages of the past decade.

00:31:21.000 | Most people are not familiar with those things today.

00:31:24.000 | All of which were induced by government controls and regulations.

00:31:28.000 | As inflation worsens, controls will expand and shortages will spread to other products.

00:31:34.000 | The alpha strategist will have some protection against these shortages,

00:31:37.000 | a protection which is merely a fringe benefit,

00:31:40.000 | an insurance policy without cost,

00:31:42.000 | that accrues to anyone wise enough to store consumables.

00:31:46.000 | Benefits, however, extend far beyond the fact that you beat inflation,

00:31:50.000 | avoid taxes on gains, eliminate the risks of fluctuating markets,

00:31:54.000 | and insure yourself against recession and shortages.

00:31:57.000 | You enjoy a substantial initial profit when common items are purchased in quantity.

00:32:02.000 | You can't expect a discount from your local grocer when you buy two bars of hand soap.

00:32:07.000 | Buy a case, however, and he might offer you a 10% to 20% discount.

00:32:11.000 | Buy multiple cases, and you may find you can bypass the retail merchant

00:32:16.000 | and order direct from the wholesaler.

00:32:18.000 | It's not worth your time to shop around for a 10 cent per box savings on facial tissue

00:32:23.000 | if you're only buying two or three boxes.

00:32:26.000 | If you buy four or five cases, however, a little shopping time is handsomely rewarded.

00:32:31.000 | The alpha strategist will usually enjoy an immediate profit of 10% to 40%

00:32:36.000 | through bulk purchasing.

00:32:38.000 | Money isn't your only savings.

00:32:40.000 | You also save time and effort.

00:32:42.000 | Merchants are acutely aware of the costs of handling individual items.

00:32:46.000 | They must hire personnel to open the cases, stock the shelves, count and price each item,

00:32:51.000 | ring up each one on the cash register, and then place them in paper bags.

00:32:55.000 | Selling merchandise by the case saves them time.

00:32:58.000 | Think for a moment about the time you spend on a single purchase, such as dish soap.

00:33:02.000 | You note that you're low and add it to your shopping list.

00:33:05.000 | You locate it in the supermarket, peruse the brands, check the price, and decide which size to buy.

00:33:11.000 | You pick it up, put it on the cart, and unload it again at the checkout counter.

00:33:15.000 | You wait while the checker rings it up and bags it.

00:33:18.000 | Then you tote it to the car, into the house, take it out of the bag, and put it in the cupboard.

00:33:22.000 | Mixed in with all the other purchases, the time you spend on one item seems insignificant.

00:33:28.000 | Multiply this time by all the products you buy, and over all the years you buy them, however,

00:33:33.000 | and it is not insignificant at all.

00:33:36.000 | If you analyzed your time as a cost, as does any sensible businessman,

00:33:41.000 | then you would be forced to devise a more efficient system.

00:33:45.000 | The alpha strategy include the system.

00:33:49.000 | The Problems

00:33:51.000 | If the benefits of this aspect of the alpha strategy jump to my mind,

00:33:54.000 | I imagine that the problems jump to yours.

00:33:58.000 | Let's look at a few of the things that might seem to make saving real goods impractical.

00:34:03.000 | Not everything you use in your daily life can be purchased in advance.

00:34:07.000 | It would be wonderful if you could store everything that you are ever going to use for the rest of your life.

00:34:12.000 | You could buy it all at today's prices, perhaps even on credit, put it away, and live happily,

00:34:17.000 | forever protected from money manipulators.

00:34:20.000 | It would be the perfect plan, provided you could figure out how to buy all the movies,

00:34:24.000 | legal services, milk, automobiles, magazines, electricity, lettuce, vacations, and so on,

00:34:29.000 | that you'll ever consume.

00:34:31.000 | The problems with such a plan are obvious.

00:34:35.000 | The truth is that the majority of goods and services you consume cannot be stored away.

00:34:41.000 | The limits on your choice of alpha strategy items are as follows.

00:34:45.000 | Many items have short shelf lives.

00:34:47.000 | If you do not consume them in time, they disintegrate, rot, or spoil.

00:34:52.000 | Shelf lives vary. Some things last a day, and some for centuries.

00:34:56.000 | Only items with a long shelf life will do.

00:35:00.000 | Many items become technologically obsolete.

00:35:03.000 | Most of the items we use today were not even manufactured 50 years ago.

00:35:08.000 | Look in a Sears catalog from the turn of the century,

00:35:10.000 | and you'll find few things that you would still buy today, other than for their value as antiques.

00:35:16.000 | In the same way, many of the things we buy and use today won't be used 10, 20, or 30 years from now.

00:35:22.000 | They will have been replaced by improved versions,

00:35:25.000 | or will no longer be necessary at all because of changes in technology.

00:35:29.000 | Just as it would have been folly for me to have purchased a lifetime supply of radio tubes

00:35:34.000 | for my original tube-type hi-fi set 20 years ago,

00:35:37.000 | so it would probably be stupid of me to buy a lifetime supply of wristwatches today.

00:35:42.000 | Who knows what technology will come up with?

00:35:45.000 | There is no sense in preventing yourself from being able to enjoy the benefits of change

00:35:49.000 | just because you are trying to use up an outdated item.

00:35:53.000 | Many things go out of style.

00:35:56.000 | In addition to technological obsolescence, we must also avoid design obsolescence.

00:36:01.000 | How dreary it would be to have a case of brand-new bow ties tucked away,

00:36:05.000 | or five cases of hair oil, or two dozen pairs of pedal pushers.

00:36:09.000 | I don't even know what a pedal pusher is.

00:36:11.000 | You might not live long enough for them to come into fashion again.

00:36:15.000 | Many things are bulky.

00:36:17.000 | Since space costs money, most people don't have an excessive amount of it.

00:36:22.000 | The physical bulk of some items adds to this problem.

00:36:25.000 | For example, it might cost more to store a 10-year supply of toilet paper

00:36:29.000 | than the inflation protection would be worth.

00:36:32.000 | In addition to the cost of storage space, there are other costs.

00:36:36.000 | You must prepare for the risk that all or part of your hoard may be stolen,

00:36:40.000 | less likely but still a risk is that a fire, flood, hurricane, or earthquake

00:36:44.000 | may wipe out your cash.

00:36:46.000 | There is a further cost in the event you move.

00:36:49.000 | Once you have a cache of consumables, you'll have to show some restraint

00:36:53.000 | to avoid increasing your rate of consumption.

00:36:55.000 | My first adventure into stockpiling came when I bought what I thought

00:36:59.000 | would be a 2-3 year supply of wine.

00:37:01.000 | The convenience of having it on hand each time we had a nice meal

00:37:05.000 | turned it into a 1-year supply.

00:37:07.000 | It's easy to use something that is handy, especially when you have a great quantity of it.

00:37:12.000 | Like the child who eats the whole shopping bag full of Halloween candy,

00:37:16.000 | you may get sick when you realize your cost of living has risen

00:37:19.000 | due to the convenience of your stockpile.

00:37:22.000 | Finally, you'll need to recognize that a plan requires forethought,

00:37:26.000 | planning, and record-keeping, and these must be considered costs.

00:37:31.000 | You'll need to review those things you consume regularly

00:37:33.000 | in order to decide what to buy.

00:37:35.000 | You'll need to figure out how much you use and how large a supply to save.

00:37:39.000 | You'll want to spend time looking for the best places to buy,

00:37:42.000 | and you will have to create storage space.

00:37:44.000 | If all of these potential limitations tend to check your enthusiasm

00:37:48.000 | for the first level of the alpha strategy, bear with me.

00:37:51.000 | I'm going to cover each problem in detail in the pages to come,

00:37:54.000 | and in many cases you will find that an apparent drawback

00:37:57.000 | turns into a very real benefit.

00:38:00.000 | So I think that provides a decent--what's the word--

00:38:07.000 | a decent preview, a decent overview of, in general, the alpha strategy.

00:38:13.000 | Perhaps it will whet your appetite to go and read the book.

00:38:17.000 | I'm going to continue to talk through some of the specific recommendations

00:38:20.000 | that he gives, and after that section he goes in and talks about

00:38:24.000 | the morality of the plan, both from an economic perspective

00:38:28.000 | and from an abundance and selfishness perspective.

00:38:34.000 | A lot of times the idea of hoarding comes into problems

00:38:37.000 | when you get into times of shortages, and so that's worth reading.

00:38:42.000 | But he talks about how to implement the strategy in terms of four levels,

00:38:46.000 | and I'm going to primarily spend time on levels one and two.

00:38:50.000 | I don't find as much interest for me personally in levels three and four,

00:38:56.000 | but I think level one and two are extremely applicable.

00:39:00.000 | You could stop here, and without any further instruction or discussion,

00:39:07.000 | you could apply that system of thinking to your own life.

00:39:10.000 | And an easy way to do it would just simply be to look and say,

00:39:13.000 | "What do I use every day, and what do I do every day,

00:39:16.000 | and what do I spend my money on, and is there a way for me

00:39:19.000 | to disconnect this from a constant money supply?"

00:39:25.000 | This is one of the things that's at the foundation of a lot of frugality strategies,

00:39:29.000 | to be able to live on less.

00:39:31.000 | That's why I'm spending time on it.

00:39:33.000 | I'll give you a simple example.

00:39:35.000 | Most of us--I'll pick on the men.

00:39:37.000 | I know the women often need to shave consistently as well,

00:39:40.000 | but most of us who are men, oftentimes we shave every day,

00:39:43.000 | and in general there's a cost for that shaving in terms of razors.

00:39:48.000 | Now, there would be a couple of ways to implement the alpha strategy.

00:39:52.000 | What the average person might do in our society is buy razors

00:39:55.000 | from time to time as they need them.

00:39:57.000 | So you go down, and whatever razors you want to get,

00:40:01.000 | you just pick up a package every couple of months,

00:40:03.000 | depending on the size of the package, depending on how frequently you go through them.

00:40:07.000 | So traditional savings perspectives would be,

00:40:09.000 | "How can I extend the life of this razor?"

00:40:11.000 | Which, by the way, if you use a razor, there are a number of ways to do that.

00:40:15.000 | There are a couple of tricks.

00:40:17.000 | One that I've used is you can store your razor in a jar of oil.

00:40:21.000 | That will help to extend the life because it keeps the--in my understanding of it,

00:40:27.000 | it keeps some of the bits of hair from staying stuck to the side of the razor blade.

00:40:34.000 | You could strop the razor on a pair of blue jeans.

00:40:36.000 | Go on YouTube and just look how to make your razor last longer, and you'll find that.

00:40:40.000 | I've found some benefit from doing some of those things.

00:40:44.000 | But you could also say, "Well, how could I stock up on a supply of razors?"

00:40:48.000 | So maybe you could figure out what your supply of razors would be.

00:40:51.000 | Maybe you could find a coupon and you could make an intelligent buy,

00:40:54.000 | and you could purchase a massive amount.

00:40:56.000 | So using the alpha strategy, there's little reason to believe that with the--maybe I'm wrong--

00:41:02.000 | but there's little reason to believe that with the advancement of razor technology,

00:41:05.000 | if you use a three- or four-blade razor, I mean, how is it going to get better?

00:41:08.000 | Maybe I'm wrong, but I would feel comfortable saying,

00:41:11.000 | "I could shave every day with a three- or four-blade razor,

00:41:13.000 | so why don't I go ahead and buy a lifetime supply of them?"

00:41:16.000 | And maybe you could get a deal on them.

00:41:18.000 | You could also switch. Some people would say, "Well, I switch from using disposable razors

00:41:21.000 | to using something that's not disposable."

00:41:24.000 | So the idea here, switch to an electric razor.

00:41:26.000 | Some men have done that, and that allows them to save the money on that.

00:41:31.000 | Another option would be, "Maybe I could switch to an old-fashioned type of razor, a straight razor."

00:41:36.000 | So if you buy a good straight razor, maybe it costs you $100 today to get one that you really like,

00:41:41.000 | but if that works for you as far as knowing how to use it and it's a comfortable shave,

00:41:46.000 | that $100 purchase may last you for the rest of your life.

00:41:49.000 | Your grandfather's straight razor, if it's properly cared for and sharpened,

00:41:53.000 | could function every bit as effectively today as it did for him.

00:41:56.000 | There's not a lot of difference between them.

00:41:58.000 | And you go down--I know in my mall they have the Art of Shaving store,

00:42:02.000 | and you can go in there and you can spend hundreds of dollars on a straight razor,

00:42:05.000 | or you could get the one that your grandfather carried with him.

00:42:08.000 | Or you could go to a system where you said, "I just don't shave," and eliminate the cost entirely.

00:42:13.000 | So perhaps that would be a useful way for you to say, "I can look at something that's an ongoing expense.

00:42:19.000 | Maybe perhaps I spend $4 a month on razors, and I could figure out a number of ways to eliminate it."

00:42:25.000 | If you just simply apply that thinking to every area of your life,

00:42:29.000 | then you'll start to figure out what works for you.

00:42:32.000 | And it's as simple as that.

00:42:34.000 | You could also build an investment fund that funded your cost of razors, I guess, over time.

00:42:38.000 | The trick is for you to remember that the cost of razors over time,

00:42:41.000 | with the exception of the straight razor or perhaps the electric razor,

00:42:44.000 | if it lasts for a long time--and many of those, there's no reason to think that a good electric razor couldn't last for decades.

00:42:50.000 | I know--I watched my grandfather had one. He used his for decades.

00:42:54.000 | It was--I think he bought it in the '80s, and it lasted him for 30 years.

00:42:58.000 | The key is that if you're just continually going to the store every month and buying razors,

00:43:04.000 | then in general it's likely that the cost is going to go up because of the underlying labor component.

00:43:11.000 | Unless the company can eliminate the underlying labor cost,

00:43:16.000 | or unless the company can figure out how to produce a substantially better and more efficient product

00:43:21.000 | where the price will actually fall over time,

00:43:24.000 | then the price in general of the cost of that item is going to go up.

00:43:28.000 | This is why it gets so tricky, is that some things fall in price over time and some things rise in price.

00:43:34.000 | Computers, if you were going to try to store--and he makes this clear, Pugsley does in his book--

00:43:38.000 | if you were going to try to store a lifetime supply of computers starting in 1992, that would have been foolish,

00:43:44.000 | because the cost of computers, dictated by Moore's Law, has substantially fallen, and everything associated with them.

00:43:50.000 | I haven't done the research for this show, but I would bet that the cost of razors has actually dropped

00:43:57.000 | between what you can go and get today--I go and buy the Target brand three-blade razors,

00:44:03.000 | they're awesome and they're cheap as anything--I bet that the cost of those has probably fallen since 1982.

00:44:09.000 | But yet it's also apparent that as you go on continuing to buy razors, that the cost does increase in the short term.

00:44:17.000 | So the trick, one of the big ones, is figuring out what's going to actually happen with this price.

00:44:22.000 | Apply your own system to it and figure out what it is in your life and think through that,

00:44:26.000 | and then you'll be able to figure out how to actually apply this strategy.

00:44:35.000 | And again, it has limits, it's more useful as a mental model.

00:44:37.000 | So let's go through the four levels of how to apply Pugsley's strategy.

00:44:41.000 | Level one is to invest in production. And I'm going to read here for you a quick introduction.

00:44:48.000 | "The affluence of our modern world is the result of two things.

00:44:51.000 | We have accumulated a tremendous store of knowledge that has enabled us to design better and better tools,

00:44:56.000 | and we have saved a major part of our production and invested it in these tools.

00:45:01.000 | The only difference between the shirt maker of 300 years ago, who turned out two shirts per day,

00:45:06.000 | and the shirt maker of today, who turns out ten shirts per hour, is their tools.

00:45:11.000 | One used scissors and a needle and the other uses sophisticated cutting and sewing machines.

00:45:16.000 | In the long run, the highest and best use of money is to invest it in the tools of production.

00:45:24.000 | The more of our surplus that we devote to building tools, the higher our production rate will go,

00:45:29.000 | and the higher will be our standard of living.

00:45:32.000 | Each individual must attempt to ascertain what is the optimal tradeoff between placing his surplus earnings

00:45:38.000 | into more tools of production or into goods that will increase his enjoyment as he consumes them.

00:45:44.000 | Since this book deals with methods of accumulating wealth for future consumption,

00:45:48.000 | investment in the tools of production is the most logical starting point."

00:45:54.000 | So no matter what job you now perform, whether you are a garbage collector, a mechanic,

00:45:59.000 | an electronics engineer, a dentist, or a corporate executive,

00:46:02.000 | you are producing a product and selling it to someone else.

00:46:05.000 | To produce your product, you have invested time and money in learning your skill

00:46:09.000 | and in acquiring the necessary tools of production.

00:46:12.000 | In general, the greater the investment you make in education and tools,

00:46:16.000 | the more you will produce and the higher your income and standard of living will be.

00:46:20.000 | This investment in education and tools is the very best investment anyone can make.

00:46:25.000 | Once you have invested in an education, no one can take that investment away from you.

00:46:30.000 | Once you have invested in tools, those tools will produce more wealth for you.

00:46:35.000 | These investments will not be affected by inflation, nor by all the swindlers and conmen we have identified.

00:46:41.000 | Only the changing tastes of the market and the competition from other producers will affect your investment.

00:46:48.000 | Education. Logically, the first investment that anyone should make is in education.

00:46:52.000 | He goes on and talks about education using it in the broad sense,

00:46:55.000 | not in the narrow sense of earning a college degree.

00:46:58.000 | This is where in the past, anytime what I have built from,

00:47:01.000 | and I had forgotten, I read this book when I was a teenager, I forgot he talked about this,

00:47:05.000 | I just observed this from doing financial planning.

00:47:07.000 | The key variable that no one talks about in financial planning is everyone talks about,

00:47:11.000 | well, the first thing is, what's the most efficient way to save your money?

00:47:17.000 | Should we use an IRA or should we use a taxable investment account?

00:47:21.000 | Then everyone talks about, well, what's the rate of return that you can put into your money?

00:47:24.000 | Are you going to outperform the market or are you going to get the market?

00:47:28.000 | No one talks about the number one thing, which is how much money do you make?

00:47:32.000 | Some people do, but the key difference is that in general,

00:47:35.000 | notice that the people who are most likely to be rich are probably the people who make the most money.

00:47:42.000 | So start there and figure out what can you do to invest in your own education

00:47:49.000 | and in your own tools of production.

00:47:52.000 | This should apply either in the context of formal education or informal education.

00:47:57.000 | It's likely that going to Amazon and buying one of these books,

00:48:01.000 | The Alpha Strategy, for one cent and paying for used plus whatever, $3.99 of shipping,

00:48:07.000 | so you've got a $4 book, investing in your education and figuring out how could I avoid inflation,

00:48:13.000 | that will make a far higher impact in your life than many other things that you could do.

00:48:18.000 | Four bucks to buy a book and read it and invest the time into reading it

00:48:22.000 | versus other things that you could do.

00:48:25.000 | So you have to invest in your education.

00:48:27.000 | He goes on from there and he talks about investing in a second trade.

00:48:30.000 | So your current trade is not the only place you should look to invest.

00:48:34.000 | There are compelling reasons for almost everyone to invest in a second or third skill.

00:48:39.000 | Much of the turmoil in our world can be traced to the strain that individuals felt

00:48:44.000 | when their primary source of income is threatened by competition.

00:48:47.000 | So oftentimes this happens is that something happens in our current job or profession,

00:48:52.000 | and if we're not resilient enough to move on to another job or profession, then we have problems.

00:48:58.000 | So invest some of the savings and effort now in acquiring the skills to improve your personal output,

00:49:04.000 | which is your product, and lower its cost so that the market will continue to choose it

00:49:08.000 | over your competitors' products.

00:49:10.000 | This happens a lot of times, and so on Friday's show I'd released the interview with Justin,

00:49:15.000 | and at the end we got into talking about sports,

00:49:18.000 | and I shared probably some pretty radical things that probably upset a lot of people.

00:49:23.000 | And here in this context I want to just make a comment on that.

00:49:27.000 | If you heard that--and it's okay if you didn't--basically I said I think sports are destructive

00:49:31.000 | because what happens is that in general they're destructive,

00:49:34.000 | and by that I mean formal, organized, like high school sports,

00:49:38.000 | is because what happens to the individual playing them oftentimes is they wind up with only one skill--

00:49:43.000 | academics during the day maybe, and then sports--instead of having a varied number of skills.

00:49:48.000 | And this is really tough because it sucks up all of their time.

00:49:50.000 | If you're spending every afternoon playing basketball and football,

00:49:53.000 | you may become very excellent at sports, but your summer camps might be all around sports,

00:49:58.000 | and when are you going to have the time to have some confidence as an adult

00:50:01.000 | with your ability to work in various areas and to learn various things?

00:50:05.000 | Now, every tool--and everything has to be applied in the context of an individual situation.

00:50:11.000 | It's very possible that for many of you listening,

00:50:15.000 | sports was something that made a dramatic difference in your life--

00:50:18.000 | a coach's influence, an ability to learn self-discipline, teamwork, something like that.

00:50:22.000 | And there may be many situations, and I have several in my personal life,

00:50:26.000 | where you look at a scenario and say, "What this situation or this young person needs

00:50:31.000 | is exposure to formal, organized sports."

00:50:34.000 | But what I was actually talking about on Friday's show is that if you only have one skill,

00:50:40.000 | you are not very resilient.

00:50:42.000 | And look at this happening--look at this as it happens through every recession that we go through,

00:50:46.000 | when unemployment rises.

00:50:48.000 | And people who only have one skill are stuck trying to figure out,

00:50:52.000 | "How do I get going in this business?"

00:50:55.000 | And the competition tightens, and if the only skill you have is doing corporate marketing

00:51:00.000 | or something very, very focused, if that market changes,

00:51:04.000 | and if you haven't adapted and led that change, then you become obsolete.

00:51:09.000 | And this is a real problem for people, especially as they age,

00:51:12.000 | because as they age, they often decrease their flexibility,

00:51:18.000 | and they stop learning and stop adapting.

00:51:21.000 | And so that's why you sometimes have higher unemployment, many times,

00:51:24.000 | with older generations than you do with younger generations,

00:51:27.000 | because sometimes people stop being resilient.

00:51:29.000 | They stop making the change, and as the change happens to them,

00:51:33.000 | then they get pushed to the sidelines.

00:51:35.000 | So you can't be obsolete.

00:51:37.000 | But the benefits of being able to work in many different industries

00:51:41.000 | and having a wide degree of interests is tremendously important.

00:51:45.000 | If you have 30 or 40 potential careers that you could function effectively in

00:51:50.000 | and 30 or 40 different ideas, business ideas, that you've developed--

00:51:53.000 | and I don't care if the number is 5 or 50, it doesn't matter--

00:51:56.000 | if you have multiple careers, multiple businesses that you could develop,

00:52:00.000 | multiple skills that could be applied, you're never at a loss for words,

00:52:04.000 | for work, you're never at a loss for income.

00:52:06.000 | You can always figure something out.

00:52:08.000 | And I'm constantly amazed by some people that I know in my life

00:52:11.000 | of how much money they make without ever having a job.

00:52:14.000 | I mean, they're buying and selling stuff on Craigslist,

00:52:16.000 | they're fixing things here, they've got a handyman job there,

00:52:19.000 | they go fishing and they sell their fish for money,

00:52:21.000 | and they make six figures and do nothing--

00:52:23.000 | excuse me, by not doing one single thing.

00:52:25.000 | And that's incredible resilience.

00:52:27.000 | In order to do that, though, you have to invest in your education,

00:52:31.000 | invest in your knowledge, invest in your interests.

00:52:35.000 | One of the things that I really love is from the success literature--

00:52:40.000 | and I can't think of a specific book to cite,

00:52:42.000 | but I've heard Darren Hardy say it, he's the publisher of Success,

00:52:46.000 | I've heard, I think, Jim Rohn say it, I've tried to apply--

00:52:49.000 | invest 10% of your income back into yourself.

00:52:52.000 | So constantly buying books, constantly buying courses,

00:52:56.000 | constantly buying seminars, going to things that you're interested in

00:52:59.000 | and enhancing your ability and your skills and your knowledge.

00:53:02.000 | And that makes you a much more well-rounded person.

00:53:05.000 | Now, it's up to you whether you want to do it or not,

00:53:07.000 | but I think it's a useful concept to say,

00:53:09.000 | "I'm going to invest in my education."

00:53:12.000 | The next category that Pugsley goes on with is talking about tools.

00:53:15.000 | And he says, "Education is one factor in production, and tools are the other.

00:53:19.000 | Whether you are an accountant whose only tools are a calculator,

00:53:22.000 | an accounting pad, and a pencil"--

00:53:24.000 | that's a bit of a--I've never seen an accountant who uses those three tools anymore--

00:53:28.000 | "a mechanic who uses wrenches, drills, and hammers,

00:53:31.000 | or a manufacturer who needs warehouses, lathes, presses, and automatic screw machines,

00:53:36.000 | the principle is the same.

00:53:38.000 | The latest equipment increases production, and production equals wealth.

00:53:41.000 | The critical advantage you have by purchasing tools and facilities now,

00:53:46.000 | rather than holding money or other investments,

00:53:48.000 | is that while your paper wealth will decline in value, your tools will not.

00:53:52.000 | Once you buy an education, a pencil, a wrench, or a warehouse, you have it.

00:53:56.000 | No matter how rapidly inflation accelerates, you are protected.

00:54:00.000 | You have permanently avoided the fall in the value of money on that amount of your wealth."

00:54:05.000 | So consider investing in tools,

00:54:08.000 | and you'll have to figure out what are those tools that you could apply for.

00:54:11.000 | That's level one, and that's very important,

00:54:14.000 | because as you're looking in the future toward times of economic uncertainty--

00:54:19.000 | uncertain whether there are times of great prosperity coming

00:54:23.000 | or whether there are times of great hardship,

00:54:26.000 | uncertainty whether you're looking at "normal" inflation,

00:54:30.000 | defined in what we understand as historically normal,

00:54:33.000 | high inflation, defined as what we'd face maybe perhaps in the '70s in the U.S.,

00:54:40.000 | and much of the world has faced in other places,

00:54:42.000 | mass inflation--I define mass inflation using Gary North's argument

00:54:46.000 | of up to 20 to 30 percent inflation per year--

00:54:49.000 | hyperinflation, far higher than that, which has happened in some places,

00:54:53.000 | has not happened in the Western world in almost a century that I'm aware of,

00:54:57.000 | or in a developed industrial economy, but that's an argument for another day.

00:55:02.000 | Or deflation or stagflation or whatever the otherflation that someone's going to make up

00:55:07.000 | and apply in a time of economic uncertainty.

00:55:10.000 | If you have the tools of production, then you can be well insulated.

00:55:14.000 | So the tools of production, education, knowledge, and specifically physical tools--

00:55:19.000 | multiple trades, multiple businesses, things like that. Consider that.

00:55:23.000 | So that's level one of the alpha strategy.

00:55:25.000 | Level two of the alpha strategy is to save consumables.

00:55:28.000 | So reading here the introduction,

00:55:31.000 | "Once you have invested as much of your available capital as you can in education,

00:55:35.000 | tools, supplies, and facilities for production,

00:55:38.000 | the next logical place to put your savings is into those goods

00:55:41.000 | that you and your family will consume in future years.

00:55:44.000 | Each individual's choices will be different.

00:55:46.000 | Your tastes and values are unique, and your consumption of goods reflects this.

00:55:50.000 | To take maximum advantage of this strategy,

00:55:53.000 | you must survey the products you regularly consume

00:55:56.000 | and select from those items that can be purchased in advance and stored.

00:56:00.000 | If it were possible to create a perfect savings account,

00:56:03.000 | it would consist of a lifetime supply of every item you'll ever use--

00:56:07.000 | food, shelter, clothes, transportation, recreation, medical care, everything.

00:56:14.000 | With such a stockpile, you would have reached financial independence

00:56:18.000 | and eliminated forever the risks of external economic forces

00:56:21.000 | such as inflation or recession.

00:56:24.000 | The nature of goods makes such a savings account impossible to attain,

00:56:28.000 | but you should try to acquire one that is as close to perfection as possible.

00:56:32.000 | Let us review once more those characteristics that we want."

00:56:35.000 | We're going to go through the characteristics of some of these items.

00:56:39.000 | "If you simply apply that to your mind,

00:56:41.000 | and if your mind can be flexible going between financial assets--

00:56:45.000 | money, investments, savings, loans that you've made,

00:56:49.000 | various things that are denominated as financial assets--

00:56:52.000 | and real wealth, which is physical products,

00:56:55.000 | you'll create a much stronger and more resilient plan.

00:56:59.000 | Also, you need to bring in skills to that.

00:57:02.000 | But financial independence could be achieved, as he said,

00:57:04.000 | if you had all those things--

00:57:06.000 | if you had food, if you had shelter, if you had clothes, transportation,

00:57:10.000 | enjoyment, recreation, medical care, everything that you needed--

00:57:13.000 | you could now be considered financially independent.

00:57:16.000 | Now think of all the different ways that that could be applied.

00:57:18.000 | Perhaps you would have those things through the provision of somebody else.

00:57:23.000 | So an example of this is that my wife and I, she has those things

00:57:28.000 | because I work to provide them for us, our family.

00:57:30.000 | We are one family unit. We are one.

00:57:32.000 | And so therefore, she does not have to work to earn money to pay for clothes.

00:57:37.000 | She's providing--we have a division of labor in our family--

00:57:40.000 | she's providing a certain type of labor.

00:57:42.000 | I'm providing the financial assets to provide the clothes.

00:57:44.000 | So she's provided that.

00:57:45.000 | And historically, this is how marriage historically has been important.

00:57:49.000 | Marriage historically wasn't for love.

00:57:51.000 | It was for economic strength and economic power.

00:57:55.000 | And there are needs of various partners in a marriage

00:57:58.000 | that are met in the context of marriage.

00:58:01.000 | This has historically happened in the family unit.

00:58:03.000 | So we provide this for our children.

00:58:05.000 | Your children, you're providing everything for them,

00:58:08.000 | so therefore, they are financially independent--excuse me,

00:58:11.000 | they're financially dependent on you, but they're not dependent on earning a job.

00:58:14.000 | And the same way that historically this is what happened in families

00:58:17.000 | where we cared for our parents and parents cared for us.

00:58:20.000 | Now that's different today, but you still can keep that as a mental concept.

00:58:25.000 | Say that's different today.

00:58:27.000 | Now additionally, this is applying--

00:58:29.000 | you can create a savings account with things like education.

00:58:32.000 | So once you have an education, once you understand how to reach financial independence,

00:58:36.000 | or once you understand how to do financial planning,

00:58:39.000 | or once you understand how to do taxes,

00:58:41.000 | you now have bought all of the education that you need

00:58:43.000 | to be able to provide a basic level of the service.

00:58:46.000 | If you know how to lay tile as an economic concept, you can now lay tile.

00:58:51.000 | So you've bought what you needed.

00:58:53.000 | So you're financially independent of the need to go back to tile school, as it were, if it existed.

00:58:58.000 | Usually tile would be learned on the job as a trade.

00:59:01.000 | So apply that concept that you've created.

00:59:05.000 | Many of us have created a perfect savings account with a lifetime--

00:59:09.000 | I've supplied now a perfect savings account of a lifetime supply that I'll ever need

00:59:13.000 | of a bachelor's degree and a master's degree.

00:59:16.000 | I've finished those two degrees.

00:59:17.000 | So if ever a job requires a bachelor's degree, as long as it's not a specific perhaps engineering,

00:59:22.000 | which I'm unqualified for or something like that,

00:59:24.000 | I've provided a lifetime supply of the bachelor's degree that I ever need.

00:59:28.000 | So we already use this concept.

00:59:30.000 | We just don't usually enumerate the concept in our lives.

00:59:35.000 | Consider that.

00:59:37.000 | Consider how you've already applied this in purchasing a lifetime supply of every item you'll ever use.

00:59:42.000 | I've purchased a lifetime supply of love that comes from my spouse.

00:59:44.000 | As long as I give to her, she gives to me.

00:59:46.000 | We have a lifetime agreement until death do us part.

00:59:49.000 | That's it. Done.

00:59:50.000 | I've purchased a lifetime supply of marriage.

00:59:52.000 | I don't need to go out and woo somebody else in the future.

00:59:55.000 | I don't need to go out and court someone and set aside a fund for buying another engagement ring.

00:59:59.000 | I've purchased a lifetime supply.

01:00:01.000 | I'm using these examples, by the way, and I'm kind of being a little edgy, kind of for fun,

01:00:06.000 | but I want to illustrate to you that we apply this concept already,

01:00:10.000 | but it's grossly lacking oftentimes in financial analysis.

01:00:14.000 | I mean, the engagement ring is a perfect scenario.

01:00:16.000 | I don't ever have to supply another engagement ring to my spouse.

01:00:20.000 | She's got one. It's done. It's been supplied.

01:00:22.000 | I don't need another wedding ring.

01:00:24.000 | It's sitting right here on my finger. It's done. It's supplied.

01:00:26.000 | So we already do this.

01:00:28.000 | Now, could it be applied to other things?

01:00:30.000 | Could it be applied to food?

01:00:31.000 | It's tough.

01:00:33.000 | Food is a consumable thing, and we'll get to food in a minute.

01:00:36.000 | Could it be applied to shelter?

01:00:37.000 | I think it could be.

01:00:38.000 | So think back to last week when I interviewed Rob Roy,

01:00:43.000 | and Rob Roy--I think it was Tuesday's show--he's already supplied all of the housing that he needs.

01:00:49.000 | He built his house completely debt-free with no mortgage.

01:00:52.000 | He has no need for insurance.

01:00:54.000 | He no longer has to provide another housing requirement,

01:00:58.000 | so he's now free of the need to pay a mortgage payment.

01:01:01.000 | So if you come to me as a financial planning client and you say,

01:01:04.000 | "Joshua, I need to provide for this rental payment of $1,500 a month,"

01:01:08.000 | or "I need to provide for this mortgage payment of $1,500 a month,"

01:01:11.000 | we have to account for that in financial terms.

01:01:14.000 | Rob Roy has already accounted for that, and many of you have as well if you have a house paid for.

01:01:18.000 | So he's already accounted for that.

01:01:22.000 | He's bought a lifetime supply of shelter.

01:01:24.000 | Now, could things change?

01:01:25.000 | Yes, he might need to move to another place.

01:01:27.000 | Perhaps if he were to fall and break his legs and maybe his house were multi-story,

01:01:30.000 | in that case it's no longer appropriate and suitable for him.

01:01:36.000 | But he's already applied it.

01:01:38.000 | Clothes--could you provide a lifetime supply of clothes?

01:01:41.000 | I bet you could.

01:01:42.000 | That one--we're going to go through that in a minute.

01:01:44.000 | Transportation--lifetime supply of transportation.

01:01:46.000 | Well, you already have a lifetime supply of ambulatory transportation, right?

01:01:50.000 | You have the ability to walk, and I know that--we don't usually think about that,

01:01:53.000 | but you have a lifetime supply of that.

01:01:55.000 | Now, transportation, different--we'll get to that.

01:01:58.000 | Recreation, medical care.

01:01:59.000 | So in some ways I think these things could be applied, and some things I think they can't.

01:02:03.000 | But I think there's value in just pursuing it.

01:02:05.000 | So you'll hear--I recorded on Friday an interview with Stephen Harris.

01:02:09.000 | Stephen Harris is an energy expert and an alternative energy expert especially,

01:02:14.000 | and I'll be releasing that interview for you tomorrow on Tuesday, October 21, 2014.

01:02:19.000 | And that will be episode 85 of the show.

01:02:22.000 | And in that show I asked him, and I said, "How could we supply this for ourselves?

01:02:27.000 | And how could we supply housing that's perfect?"

01:02:30.000 | And he talked about a monolithic dome.

01:02:32.000 | But we could supply a lifetime supply of electricity.

01:02:37.000 | Rob Roy talked about his lifetime supply of electricity.

01:02:40.000 | He has solar panels.

01:02:41.000 | He formerly had a wind generation unit.

01:02:43.000 | He had a battery bank, so he has an amortized cost from doing those things.

01:02:46.000 | But he has a lifetime supply of energy.

01:02:48.000 | And he's got his bicycle pump to pump the water for his washing machine.

01:02:53.000 | So a lifetime supply of energy was purchased.

01:02:55.000 | Now, we have to then judge the cost of that,

01:02:57.000 | which you'll hear Stephen Harris talk about the cost of solar panels

01:03:00.000 | versus the cost of grid-tied electricity, and it's a worthy discussion.

01:03:05.000 | But just consider the economic concept.

01:03:08.000 | So I think that's enough examples for you to get it.

01:03:11.000 | But we can provide a lifetime supply of certain things,

01:03:14.000 | and we may be able to get closer if we have that as a concept,

01:03:17.000 | depending on what our situation is.

01:03:20.000 | So what are the characteristics that we should consider?

01:03:24.000 | Well, it starts with shelf life.

01:03:26.000 | The item should have a long shelf life.

01:03:28.000 | Hard goods, such as tools, pots and pans, auto parts, et cetera, are best

01:03:31.000 | because their quality and usefulness does not deteriorate with time.

01:03:35.000 | Soft goods, such as underwear, sheets, and towels,

01:03:37.000 | may suffer some small deterioration over long periods,

01:03:40.000 | but probably not enough to make a measurable difference to the user.

01:03:44.000 | Most foods suffer significant change in taste, consistency,

01:03:47.000 | and nutritive value over time, but a few do not.

01:03:50.000 | For example, sugar, if properly stored, will last indefinitely

01:03:53.000 | with no discernible change, as will raw grains, such as wheat and rice.

01:03:57.000 | Canned goods, on the other hand, have relatively short lives,

01:04:00.000 | and their quality declines continuously over time.

01:04:04.000 | So he goes on and just talks about that,

01:04:06.000 | that we need to understand the shelf life of it.

01:04:09.000 | So before you go out and buy some 10- or 20-year supply of something,

01:04:12.000 | you've got to be certain it's going to last that long,

01:04:14.000 | and you need to actually know.

01:04:16.000 | Sometimes appearances are deceptive.

01:04:18.000 | Take paper towels as an example.

01:04:20.000 | One would assume that they would last for decades if properly stored.

01:04:23.000 | In practice, manufacturers often add resins to increase the wet strength of the paper,

01:04:28.000 | and these resins undergo chemical changes over time,

01:04:31.000 | causing the paper to gradually harden.

01:04:33.000 | Therefore, treated paper towels may become brittle after five years or so.

01:04:38.000 | On the other hand, some items that might appear to have a short shelf life

01:04:42.000 | can be stored indefinitely.

01:04:44.000 | I have a gallon bottle of white glue that is over 20 years old.

01:04:47.000 | I've used it from time to time on woodworking projects

01:04:50.000 | and find its quality has not changed at all in two decades.

01:04:54.000 | So consider the shelf life of the products.

01:04:57.000 | Number two, functional obsolescence.

01:04:59.000 | The item must not become functionally obsolete.

01:05:03.000 | Advancing technology brings improvements in design

01:05:05.000 | and lowers the manufacturing cost of many items,

01:05:08.000 | and the alpha strategist should avoid stockpiling those

01:05:11.000 | in which this change is likely to be dramatic.

01:05:14.000 | To have the optimum standard of living,

01:05:16.000 | you'll want to be in a position to take advantage of technological improvements.

01:05:20.000 | Certainly you would avoid stockpiling things from high technology fields,

01:05:23.000 | such as electronics, cameras, kitchen appliances,

01:05:26.000 | and other electromechanical devices are also subject to abrupt design improvements.

01:05:32.000 | Because it is not always possible to anticipate technological improvements,

01:05:35.000 | occasionally you'll make a mistake.

01:05:37.000 | However, just because you buy something today

01:05:39.000 | and later are offered a better model at a lower cost,

01:05:42.000 | your investment is not lost.

01:05:44.000 | The original item will still give you the same rewards

01:05:46.000 | and utility that is offered when you made the purchase.

01:05:49.000 | What you have lost is the improved features

01:05:51.000 | that you could have enjoyed had you waited.

01:05:54.000 | Then design obsolescence.

01:05:56.000 | The item should be fashion-proof.

01:05:58.000 | Social pressure inclines most of us to keep up with the latest styles,

01:06:01.000 | and if this is true in your case,

01:06:03.000 | it disqualifies a great number of items for your stockpile.

01:06:06.000 | Many clothes, except for work clothes, underwear,

01:06:08.000 | and a few staples such as men's dress shirts,

01:06:10.000 | quickly go out of style and would be poor long-term investments

01:06:13.000 | for the fashion-conscious alpha strategist.

01:06:16.000 | This is also true of such things as handbags, jewelry, wallpaper,

01:06:19.000 | and even automobiles.

01:06:21.000 | Size.

01:06:22.000 | The item should present no serious transportation or storage problems.

01:06:26.000 | Estimate the cost of storings,

01:06:27.000 | as well as the problems of handling and moving each asset.

01:06:30.000 | Crystal is going up in price,

01:06:32.000 | but it is fragile and therefore more costly to move and store.

01:06:35.000 | Paper towels may be safe from damage by rough handling,

01:06:38.000 | but take up so much room that the storage costs eat into profits.

01:06:42.000 | On the other hand, a person who doesn't plan to move

01:06:44.000 | and who has ample storage space can consider stockpiling these things

01:06:47.000 | without regard to the costs of storage and moving.

01:06:51.000 | To the stable family with plenty of storage room,

01:06:53.000 | even such bulky items as firewood, bricks, and lumber can be considered.

01:06:57.000 | So you'll need to consider what to do and what to apply in your situation.

01:07:03.000 | He goes on, talks about reviewing your needs, discusses your home.

01:07:07.000 | The most sensible purchase of all is the home.

01:07:09.000 | It represents the largest investment you can make in consumption goods

01:07:13.000 | and the most logical.

01:07:14.000 | Inflation will continue, and rents will be forced higher and higher.

01:07:17.000 | Furthermore, even if rent controls are instituted,

01:07:20.000 | the renter's situation will only become worse,

01:07:22.000 | as shortages will make rentals difficult, if not impossible, to find.

01:07:26.000 | Unless there is doubt as to how long you intend to live in an area,

01:07:30.000 | buy your home, do not rent.

01:07:32.000 | And he goes on and talks about if you own your home,

01:07:35.000 | how do you figure out tools?

01:07:37.000 | This is something, if you buy a house, for example,

01:07:39.000 | I need to go get a new garden hose.

01:07:41.000 | I'm thinking about buying--I want to make sure that I buy a quality garden hose

01:07:44.000 | that can not only last predictably for 20 or 30 years,

01:07:48.000 | but I want to make sure that I store it well and care for it,

01:07:51.000 | care for the hose that I buy,

01:07:54.000 | and also I want to make sure that it's repairable.

01:07:57.000 | So I'm less likely to buy something that is--

01:08:00.000 | I want to buy something that I can repair,

01:08:02.000 | so if I run over the end of it, that I can put on a new end of it.

01:08:07.000 | If you want to buy a wheelbarrow or trash cans, things like that,

01:08:12.000 | buy things of a quality and plan to have them for multiple decades.

01:08:18.000 | Foods, he talks about foods.

01:08:20.000 | I'm going to skip the conversation on foods, because food is its own thing.

01:08:23.000 | It's difficult to store food for a long period of time.

01:08:27.000 | There are foods that you can save.

01:08:29.000 | He goes through detailed discussion.

01:08:31.000 | Wines, he talks about wines.

01:08:33.000 | If you're a--what's it called? A winophile?

01:08:35.000 | I don't know how to say that word, but there's a name for it.

01:08:38.000 | If you're a wine lover--I love his paragraph here--

01:08:42.000 | there is no investment quite so appealing as that which yields a dividend

01:08:45.000 | of personal pleasure to the investor.

01:08:48.000 | For those who enjoy the taste and ritual of wine,

01:08:51.000 | investment in a substantial personal wine cellar offers the best of everything,

01:08:55.000 | low-risk protection against inflation, no taxes on the gain,

01:08:59.000 | and an interesting and pleasurable avocation.

01:09:02.000 | In other words, it is the perfect asset for saving.

01:09:05.000 | Consider that. I think it's fun.

01:09:07.000 | I enjoy wine, but I'm not a big drinker.

01:09:10.000 | He talks about spirits, stockpiling spirits, health and beauty aids,

01:09:14.000 | cleaning supplies, paper products, clothing and soft goods,

01:09:17.000 | automobiles, gasoline and accessories,

01:09:19.000 | the advantages, the drawbacks, things like that,

01:09:22.000 | and then various miscellaneous items.

01:09:24.000 | He talks about where to get them from,

01:09:26.000 | brand name versus private label, large containers, savings, etc.,

01:09:30.000 | and then how to store them, figuring out how to maximize storage.

01:09:33.000 | All worth reading, and then finally how to ensure the assets.

01:09:38.000 | All of those things are worth reading.

01:09:40.000 | So consider how you could apply that

01:09:45.000 | and consider how you could save the things that you need for the rest of your life.

01:09:51.000 | Now, I don't think everybody has to be saved,

01:09:54.000 | and I'm going to finish up his alpha strategy real quick

01:09:57.000 | before I go on to the last thing I was going to say.

01:09:59.000 | Level three he talks about is save real money,

01:10:02.000 | and here he talks through various options for savings.

01:10:08.000 | He is very pessimistic on investing

01:10:11.000 | and very much focusing on purchasing real assets,

01:10:14.000 | defined as commodities,

01:10:16.000 | talks some about gold and silver as a real asset, etc.,

01:10:19.000 | and then the level four is interesting,

01:10:21.000 | where he talks about level four alpha strategy

01:10:24.000 | is basically working toward a theft-free future.

01:10:29.000 | So all of us exist in every economy that I'm aware of,

01:10:34.000 | every major large economy,

01:10:36.000 | and the likelihood is that those of you listening are living in one of those.

01:10:39.000 | All of us exist in an economy where theft is the standard.

01:10:43.000 | So not only is the production of our labor stolen consistently through tax,

01:10:49.000 | consistently, again, through the force of tax,

01:10:52.000 | but all of our money is consistently stolen through inflation.

01:10:56.000 | So if you have worked and earned $100,

01:10:59.000 | and this year there's a 3% inflation,

01:11:01.000 | well, $3 is stolen from you,

01:11:03.000 | and it's transferred from your pocket into a number of other pockets,

01:11:07.000 | and whether you want to say that's transferred into the pocket

01:11:09.000 | of the owners of the Federal Reserve Bank

01:11:11.000 | and of those who profit from its existence,

01:11:13.000 | whether you want to say that it's transferred into the politicians

01:11:16.000 | who have arranged for the system

01:11:18.000 | and are enjoying power based upon the theft of the loss of value of your money,

01:11:24.000 | or whether you want to say it's just simply lost into thin air

01:11:27.000 | and stolen from you by some random chance,

01:11:31.000 | the point is it's gone.

01:11:33.000 | It's stolen.

01:11:34.000 | It's completely disappeared.

01:11:36.000 | So he talks about level four is investing and exposing it

01:11:39.000 | so that we can work toward a theft-free future,

01:11:42.000 | and I would love that too.

01:11:44.000 | I'd love that.

01:11:45.000 | It's the shortest part of the book and just kind of more of an afterthought,

01:11:47.000 | but that would be wonderful,

01:11:48.000 | and I'm working towards that best I can,

01:11:50.000 | but I would be surprised if anything changed in our lifetime.

01:11:54.000 | I don't see any--

01:11:58.000 | to look at the general society,

01:12:01.000 | and I don't see any outcry from the general society about it.

01:12:04.000 | Rather, everyone seems pretty pleased with it,

01:12:06.000 | so I don't see any reason to expect it not to continue.

01:12:10.000 | However, that doesn't mean that you or I have to play the same game.

01:12:15.000 | You or I--you and I can simply step out,

01:12:17.000 | and this is kind of one of my personal philosophies,

01:12:19.000 | is there's never been a time that I can see of greater mass theft of people's assets

01:12:26.000 | and greater mass theft of people's livelihood and greater oppression,

01:12:30.000 | and yet there's never been a time of greater individual freedom,

01:12:33.000 | and all of the trends in my mind point toward the long-term trend of increasing freedom,

01:12:38.000 | and you can see that happening in many areas, which I won't go through today,

01:12:41.000 | but you can just simply step out.

01:12:43.000 | You know, Rob Roy can still build his house up there in northern New York

01:12:46.000 | and sit there and just simply not participate in much of the society.

01:12:51.000 | Now, he didn't sound like a great political activist.

01:12:53.000 | I'm not turning this into political activism.

01:12:55.000 | I'm just saying step out.

01:12:56.000 | There's no reason to continue.

01:12:58.000 | If you've bought everything you need, why continue funding the system if you don't want to?

01:13:02.000 | If you've bought everything you need and want with your life, put your labor toward something else,

01:13:06.000 | and there's no reason to contribute any further if you don't want to.

01:13:10.000 | Put your contribution in another area where you can control the results.

01:13:13.000 | So let's wrap up with a couple of ideas and a couple of the challenges.

01:13:18.000 | My goal of today's show is to provide you with an outline and a thought process,

01:13:24.000 | and you will find that, as I have found, this is a thought process that's easy to apply in some areas,

01:13:31.000 | but it's completely not easy to apply in other areas, but it's a useful model.

01:13:38.000 | This will be very individualized depending on what stage you are in life.

01:13:45.000 | If you are a perpetual traveler and you are enjoying traveling the world with a minimal amount of possessions,

01:13:52.000 | whether that's you're doing like the Schulte family that I interviewed on the show

01:13:55.000 | who have been traveling the world with--you know, he worked and they retired in their 30s

01:13:59.000 | and have been traveling the world for 12 years, and now they're on a boat, now they're in an RV,

01:14:04.000 | they're not going to be able to stockpile all of these things that they need for the rest of their life.

01:14:08.000 | There's no room in an RV for that, and it would be antithetical to their lifestyle.

01:14:12.000 | If I were in college and I would focus on living--not stockpiling these things,

01:14:18.000 | I would focus on stockpiling education.

01:14:20.000 | So this is more a mental model that you can apply to your situation

01:14:23.000 | than it is something that everybody needs to do.

01:14:26.000 | But, you know, an example would be in the situation that I am right now where I'm fairly stable,

01:14:31.000 | I don't expect to move from where I live.

01:14:33.000 | Many of you are in the same place, you own a house.

01:14:36.000 | This is something that you can apply.

01:14:40.000 | Don't just apply this in the idea of stockpiling, but don't just apply it in the idea of stockpiling.

01:14:47.000 | So I mentioned a moment ago my example of buying a garden hose.

01:14:50.000 | You can apply this in the sense of buying quality.

01:14:52.000 | Can you buy an item that has a long expected lifespan?

01:14:58.000 | Instead of buying Ikea furniture that is likely to fall apart in three or four years,

01:15:03.000 | can you buy a well-made piece of wooden furniture?

01:15:07.000 | And even better, can you buy actual wood instead of a particle board?

01:15:11.000 | Even better, can you buy a piece of furniture that's of a brand that's likely to actually appreciate in value?

01:15:18.000 | Many of you have probably seen there are people who are watch fans, you know, that love watches.

01:15:22.000 | And one of these days I'm going to find some people who are experts in this.

01:15:27.000 | I know some people who do watches.

01:15:29.000 | There are some listeners to the show.

01:15:30.000 | I think Steve from Steveonomics, he's a watch fan.

01:15:33.000 | And like people who know, hey, if I buy this Rolex it's going to last forever and it's going to have the same value.

01:15:38.000 | To me that's an application of the alpha strategy.

01:15:41.000 | So whether it's with watches, with furniture, with all the items that you buy,

01:15:46.000 | you can buy them in such a way that they're likely to last and pay attention to quality.

01:15:51.000 | There's good evidence to show in Tom Stanley's work that paying attention to the quality of an item is one of the characteristics of the wealthy.

01:16:00.000 | So consider just simply buying quality.

01:16:04.000 | When it comes to actually applying the alpha strategy, I think you have to consider the opportunity cost of buying the item as well.

01:16:12.000 | And Pugsley doesn't cover that in his book.

01:16:14.000 | He's coming at things from a perspective that basically the long-term benefits from investing,

01:16:22.000 | he basically is saying the long-term benefits from investing are not going to be there,

01:16:26.000 | from investing your money and lending your money are not going to be there.

01:16:29.000 | Well, if that's the case, if that were to happen in the future, most aspects of our financial planning paradigm would break down.

01:16:36.000 | If we cannot produce by owning great companies, if we cannot produce ongoing higher returns by owning the great companies of America and of the world,

01:16:46.000 | then all of our mental models surrounding financial planning are going to break down.

01:16:51.000 | So if Pugsley is correct, it turns out that he hasn't been correct for the last 25 years,

01:16:57.000 | but if he were correct going forward, for example, many people feel that the same challenges he identified in 1980

01:17:04.000 | are the same challenges that exist in 2014.

01:17:07.000 | If he were correct, then our other plans would fall apart.

01:17:10.000 | I'm not convinced personally.

01:17:12.000 | I don't get it.

01:17:14.000 | I don't believe it.

01:17:15.000 | I don't get it.

01:17:16.000 | But I think it's valuable to look at.

01:17:18.000 | And so I look at it in terms of how can I apply this in a measured way.

01:17:22.000 | I think it's very likely that the cost of many of the real goods that I do enjoy will decrease as related to the percentage of my income over time.

01:17:33.000 | And I simply can't right now at 30 years old, I can't stockpile an expected 70-year supply of toilet paper.

01:17:42.000 | That doesn't work for me.

01:17:45.000 | But I could stockpile a year or two or three, and that's a little hard.

01:17:49.000 | I don't have the room for a bulk stockpile like that.

01:17:51.000 | But I could stockpile something like that.

01:17:53.000 | And here's how I could see them integrating.

01:17:56.000 | One of the rules by which we often in the financial planning profession, we often talk to people is don't invest your money that you're expecting to use in the next five years.

01:18:05.000 | So I've applied that concept in my thinking sometimes and say, what could I stockpile that may be affected in price over the next five years?

01:18:13.000 | And then how can I invest to restock that product going forward after five years?

01:18:20.000 | So instead of saying, what can I buy for the rest of my life, I say, what could I buy for the next five years?

01:18:25.000 | Don't always apply it.

01:18:26.000 | Just simply one of those other mental questions that I ask and can apply.

01:18:30.000 | Pugsley also doesn't talk about producing and actually the factors of production.

01:18:37.000 | He does in the beginning where he talks about education.

01:18:39.000 | But I also think of this in terms of my own personal situation is, what can I apply in my life where instead of having to be a consumer of this product going forward, I can actually be a producer of this product?

01:18:52.000 | So a good example of this would be food.

01:18:55.000 | It's very difficult for me.

01:18:57.000 | I don't know of any possible way that I could stockpile a lifetime supply of avocados.

01:19:04.000 | I've used avocados as an example on the show before.

01:19:08.000 | So maybe that'll be the radical personal finance model of food, avocados, because Joshua likes avocados.

01:19:14.000 | They're a wonderful food and they grow so easily down here.

01:19:18.000 | But, of course, mangoes are also one of my favorite fruits, so maybe we'll switch to that.

01:19:23.000 | Continuing on, I don't know any way that I could stockpile a lifetime supply of avocados.

01:19:29.000 | Maybe they're cannibal or maybe I could make them into guacamole.

01:19:32.000 | Maybe that would last.

01:19:33.000 | I don't know.

01:19:34.000 | I've never tried to preserve them.

01:19:35.000 | But I can plant an avocado tree.

01:19:39.000 | And it's certainly reasonable that that avocado tree could provide me with a lifetime supply of avocados.

01:19:46.000 | And planting a $20 tree, if I couldn't get one for free, that provides me with avocados every week at a much lower cost,

01:19:56.000 | whether they're a buck an avocado in the store for the California ones, that's a good thought.

01:20:06.000 | So something as simple as planting some fruit trees and stripping out the stupid decorative trees that don't bear any fruit

01:20:15.000 | and replacing them with a good fruit tree, that's an investment strategy.

01:20:18.000 | So the articles, the items of production are valuable.

01:20:23.000 | And so by investing in that, sometimes, many times that could be an excellent long-term supply for us.

01:20:35.000 | Or -- so I think that's most of it.

01:20:40.000 | There are many other examples.

01:20:41.000 | I'll give you one other example.

01:20:42.000 | I just bought a bunch of rechargeable batteries.

01:20:44.000 | So I bought some -- they're called the Sanyo Eneloops.

01:20:47.000 | They're really well rated.

01:20:48.000 | I bought a nice charger.

01:20:49.000 | I've been going through a lot of batteries recently.

01:20:51.000 | So how can I -- these batteries are rated for 1,500 discharges and charges.

01:20:56.000 | So let me just invest in the battery charger and the batteries instead of constantly replacing them.

01:21:01.000 | So consider these things and how you could apply these concepts to your life.

01:21:06.000 | I think it's valuable.

01:21:07.000 | Although it's -- you can't just implement the alpha strategy in every area.

01:21:12.000 | I think you could adapt it to your situation, and that's my hope for what you --

01:21:19.000 | that's my hope for what I wanted you to get out of today's show.

01:21:23.000 | I think I feel pretty good with that for today.

01:21:25.000 | I'm sure that I missed some things.

01:21:27.000 | I'm sure that there are probably some other comments that you would have.

01:21:32.000 | I would encourage you to come by and let me know about them.

01:21:35.000 | Today's show notes will be found at RadicalPersonalFinance.com/84.

01:21:41.000 | There's a link to the alpha strategy book in the show notes.

01:21:44.000 | I think you would enjoy reading it.

01:21:46.000 | And, unfortunately, Jon Pugliese is dead now,

01:21:49.000 | but I know there are a lot of others who have taken up this concept,

01:21:52.000 | and I still think his book is well worth reading, especially because it's a historical book.

01:21:57.000 | I love to search out the historical books and see how they've fared with the test of time.

01:22:05.000 | As far as predictions, non-predictions, things like that,

01:22:08.000 | you can develop quite a nose for distinguishing rats if you spend enough time studying some of the older works

01:22:17.000 | and seeing how they fared when you actually know the history.

01:22:20.000 | This week I'm going to be bringing you a few more interviews.

01:22:22.000 | Tomorrow's show for Tuesday will be an interview with Stephen Harris, All Things Energy.

01:22:27.000 | We're going to talk specifically about how to save money on your house.

01:22:30.000 | That's another alpha strategy.

01:22:32.000 | Save money on utility bills in your house.

01:22:34.000 | That's another alpha strategy that can be fully implemented immediately.

01:22:37.000 | Every dollar saved on an ongoing basis is going to be a major benefit.

01:22:42.000 | So by building, again, a more energy-efficient house or investing in the appropriate types of appliances,

01:22:48.000 | it's a lifetime savings, and that's additional money that's not subject to inflation.

01:22:51.000 | I think you'll enjoy that.

01:22:53.000 | Wednesday I will probably continue another teaching show.

01:22:58.000 | I've kind of gotten away.

01:22:59.000 | I need to keep going with some of the CFP curriculum because I know many of you really value that.

01:23:03.000 | Those are my least popular shows, but I know many of you really value that.

01:23:06.000 | And it's important to me that I continue to do that.

01:23:09.000 | I'm still working on some big projects this week, so I'm not sure that I'll be able to for sure finish that by Wednesday,

01:23:15.000 | but we'll see.

01:23:17.000 | Time will tell.

01:23:18.000 | Thank you for listening.

01:23:20.000 | Let me pick one review.

01:23:21.000 | Thank you for these awesome reviews that many of you have left me.

01:23:24.000 | Let's pick one here from Phuoi.

01:23:27.000 | It says, "A really wonderful alternative way of living, a five-star review,

01:23:30.000 | a really wonderful podcast that shows that there is a different way to live one's life.

01:23:33.000 | I look forward to every new podcast."

01:23:35.000 | Thank you.

01:23:36.000 | That's what I am doing.

01:23:38.000 | I appreciate that so much.

01:23:40.000 | Leave a review.

01:23:41.000 | I love getting those.

01:23:42.000 | They encourage me.

01:23:43.000 | Tell your friends about the show.

01:23:44.000 | That would mean the world to me, and have an awesome week, everybody.

01:23:48.000 | Thank you for listening to today's show.

01:23:50.000 | This show is intended to provide entertainment, education, and financial enlightenment.

01:23:58.000 | Your situation is unique, and I cannot deliver any actionable advice without knowing anything about you.

01:24:06.000 | This show is not and is not intended to be any form of financial advice.

01:24:14.000 | Please, develop a team of professional advisors who you find to be caring, competent, and trustworthy,

01:24:24.000 | and consult them because they are the ones who can understand your specific needs,

01:24:29.000 | your specific goals, and provide specific answers to your questions.

01:24:35.000 | Hold them accountable for your results.

01:24:38.000 | I've done my absolute best to be clear and accurate in today's show,

01:24:42.000 | but I'm one person, and I make mistakes.

01:24:45.000 | If you spot a mistake in something I've said, please come by the show page and comment

01:24:49.000 | so we can all learn together.

01:24:51.000 | Until tomorrow, thanks for being here.

01:24:54.000 | With Kroger Brand products from Ralphs, you can make all your favorite things this holiday season

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01:25:21.000 | [MUSIC PLAYING]

RPF-0084-the_Alpha_Strategy