The 90/10 rule shows up in a variety of ways in all fields of life.

In money management and investment the 90/10 rule says that—over long periods of time (think your lifetime or 100 years) you will come out on top 90% of the time by following conventional wisdom, known also as the wisdom of the crowd. It follows that in the other 10% of the times you are better off going with the contrarians and against the crowd. The 90% represent periods when the trend is your friend. In the other 10% of the time, markets go through inflection points of trend reversals. Recent months represent just such an inflection point of trend reversal where the contrarian position is wiser and safer than the crowd.

Study your options. Explore a range of ideas and strategies. Make decisions that fit your situation. Position yourself with the 90/10 rule in mind.

© Aviv Shahar

Aviv Shahar :: Oct.14.2008 :: Money & Market Behavior :: No Comments »

The greatest tax increase is neither in McCain’s programs, nor in Obama’s plans.

The greatest tax increase is in the breakdown of communication and civil discourse, the breakdown of trust and the ability to work through differences to find optimal solutions. Breakdown of trust and leadership is going to cost individuals, families, organizations and the economy as a whole, and the consequences will be greater than any tax change we will see under either presidential candidate.

The arts of conversation, of trust building, of open collaboration and of true leadership bring the greatest gains. These are the kind of gains the government cannot penalize. Developing the Three Pillars of Trust and collaboration is the ultimate leverage – it produces dividends that cannot be taxed.

© Aviv Shahar

Aviv Shahar :: Oct.10.2008 :: Leadership, Money & Market Behavior, Organizational Development :: No Comments »

This KEY can save your life. It saved mine. As a young fighter pilot I read with keen interest the investigation reports of accidents. I figured it was going to help me stay alive. Pilots who were better than I, with more experience and whom I admired crashed. I was scared. It made me ask: “What is the anatomy of accidents? Can I learn something from what happened to them that will help me stay alive?”

I have rarely spoken about this in my 25 years of teaching and never wrote about it until now, as the Wall Street meltdown unfolds before our eyes. Click here to learn about The Lethal Jackpot and to find out what you can do to intercept and avert it.

© Aviv Shahar

Aviv Shahar :: Sep.29.2008 :: Money & Market Behavior, The Key :: 1 Comment »

The three Ds—the three legged stool of the prosperity economics since WWII—were: the Dollar, the Debt economy and the Drive of entrepreneurialism.

1. The Dollar offered a stable monitory framework. Its universal reserve currency status based on the Bretton Woods agreement and the belief that “the dollar was as good as gold” made for monetary stability.
2. The Debt driven economy produced a framework in which everyone could profit. It was designed in two layers. Any person or business taking a loan (going into debt) could find creative ways to turn this leverage into profit by producing goods and services that returned more than the cost of the debt. The banks were at the top to manage this leverage of borrowing money. They, of course, made the greatest profit. The banking system utilized the fractional system and monetary inflation controlled by the Federal Reserve to create opportunity for all and made profit in the process.
3. The third leg of the prosperity was the eternal Drive of ingenuity and optimism embodied in the entrepreneurial spirit. Drive was unleashed in the market of opportunities and ideas, supported by a stable dollar, debt and property rights.

Suddenly, it appears that the first two legs are breaking down. The dollar status has been shaken. The debt derivatives economy has been stretched to the point where it had no choice but to snap. It snapped like the Yellowstone Fire of 1988. This is the meaning of the Fannie and Freddy government takeover this weekend. All of a sudden everyone is deleveraging – trying to exit debt and replace it with cash and the system crumbles.

Why did it take 60-80 years for the big stock market cycle to suddenly change? Active earning and investing life spans usually average some 40 years. One and a half to twice this duration is enough to eradicate institutional memory. That’s when the system snaps and the rules of the game shift.

What can the Yellowstone Fires of 1988 teach us?
On August 20, 1988, a day now referred to as “Black Saturday”, gigantic firestorms in Yellowstone sent flames as high as 200 feet into the air. These fires grew so large that they created their own wind. Smoke plumes pushed up to 30,000 feet. Many people, including leading ecologists thought that Yellowstone would never recover or that it would take hundreds of years for its fauna and flora to populate the park again. Here is what scientists learned and what it can teach us about the deleveraging fire storm on Wall Street.

1. Expect a lot more pain as a result of the great deleveraging of Wall Street – The Yellowstone fire burned more than half the total acreage of the park. 793,000 acres were affected by fire and bout 300 large mammals perished.

2. The Treasury efforts to contain the crisis will help some come out better but it’s overall impact will be limited - The 1988 firefighting efforts included 25,000 people, the largest in U.S. history. 120 million dollars were spent. This huge effort saved human life and property, but had little impact on the fire itself.

3. The natural cycle of deleveraging will run its natural course - The advance of the 1988 fire was finally stopped in September by rain and snow.

4. An amazing new cycle of innovation and opportunities will be unleashed - The Yellowstone fires created a mosaic of burned and unburned areas that provided new habitats for plants and animals and new realms for research.

5. When the deleveraging cycle has finally run its course and everybody is exhausted and depressed, recovery will be faster and stronger than anyone imagines – In Yellowstone Park, seeds released from pinecones took root almost immediately. Lodgepole pine seedlings began to grow at the rate of an inch or two per year. Wildflowers were abundant by the following spring, and the grasses and shrubs were green and flourishing.

6. Certain sectors and businesses will benefit from the deleveraging cycle and will come out on top – In Yellowstone some of the grasses that the elk needs were more nutritious after the fire. Bears grazed more frequently in burned sites than they did in unburned sites. The fires have had no observable impact on the number of grizzly bears in greater Yellowstone. Cavity-nesting birds, such as bluebirds, had more dead trees for their nests. Nutrients from the ash caused the vegetation to prosper and grasslands returned to pre-fire appearance within a few years. Aspen reproduction has increased because fire stimulated the growth of suckers from the aspen’s underground root system and left behind bare mineral soil that provided good conditions for aspen seedlings.

7. A major economical shift takes place every 60 to 80 years. This is part of the cycle of life – In Yellowstone, the fires turned out to be a necessary and beneficial part of the natural cycle of life, death, and re-birth.

© Aviv Shahar

Aviv Shahar :: Sep.09.2008 :: America, Money & Market Behavior :: No Comments »

The lessons of newly emerging champions in the global economy from a Davos CEO forum:
• You have to have a mission. A mission of creating a better world for your children.
• Make impossible things happen.
• Be bold and persevere.
• Be a bridge.
• Rethink cultural biases.
• Rethink where talent is – create talent.
• Empower women.
• Rethink where innovation comes from.
• Create diversity and inclusivity.
• Leverage technology.
• Be flexible and open to the best ideas.
• Keep high ethics and high standards.
• Have a heart to your country.
• Generate business model innovation.
• Don’t be rigid, be adaptive, be open, listen, see, learn and embrace.
• Articulate a clear corporate social and environmental responsibility.
• You need a cause in life. Use business as a model for change.
• Vision comes first. Be a transforming force.

© Aviv Shahar

Aviv Shahar :: Jan.28.2008 :: Entrepreneur, Money & Market Behavior :: No Comments »

I clearly remember my first landing practice in Fighter Pilot course. My flight instructor demonstrated the pattern around the airbase from take off, upwind, crosswind, downwind, base and final approach to landing. He then handed the control over to me. My first approach to landing the plane was a huge overshoot. I was so surprised that in my next attempt, I seriously overcorrected. My second approach resulted in a substantial undershoot. We needed to push the throttle hard to get to the runway and not land in the sand, six hundred yards short. Apparently, I was not very original in my miscalculations. In fact the Overshoot—Undershoot error seems to be a pattern for most people on many fronts. Perhaps it is human nature or the nature of our brains. I was reminded of my overshoot – undershoot landing experience by Paul Saffo, Six Rules for Effective Forecasting, July 2007 edition of Harvard Business Review who writes:

“Ironically, forecasters can do worse than ordinary observers when it comes to anticipating inflection points. Ordinary folks are simply surprised when an inflection point arrives seemingly out of nowhere, but innovators and would-be forecasters who glimpse the flat-line beginnings of the S curve often miscalculate the speed at which the inflection point will arrive. As futurist Roy Amara pointed out to me three decades ago, there is a tendency to overestimate the short term and underestimate the long term. Our hopes cause us to conclude that the revolution will arrive overnight. Then, when cold reality fails to conform to our inflated expectations, our disappointment leads us to conclude that the hoped-for revolution will never arrive at all—right before it does.”

In essence this is the pattern behind every boom and bust cycle. Here is what Richard Russell author of The Dow Theory Letters says about this: “In all history, stocks have always been subject to two major forces. These two forces are as follows - the first force is the one that takes stocks ever-higher to overvaluation. The second force is the one that reverses at the top, and then takes stocks down to undervaluation. How stocks get from undervaluation to overvaluation and then back to undervaluation, that’s what we struggle with. We call the move from undervaluation to overvaluation a primary bull market. We call the journey back to undervaluation a primary bear market.”

Luckily I’ve learned to land the Fuga and then the Skyhawk safely and had many good landings with an occasional little undershoot or overshoot. Still, I observe all around me the tendency of people to vacillate from over optimism to over pessimism. The auto industry followed this pattern in the early 20th century with companies appearing like mushrooms after the rain. Later, the story became how most of them failed and went bankrupt. Then, within a few years the Big Three (GM, Ford, Chrysler) had taken on a much bigger chunk of the American economy than anyone could have imagined just few decades earlier. The same identical pattern played out in the dot com bust.

Where is the cycle now? Are we now in an overestimating or an underestimating phase? What is mass psychology underestimating or overestimating today? Where are you overshooting or undershooting? Here are 10 areas to reflect on:

1. Internet 2.0 - How will it change the nature and character of participative democracy? Are you underestimating the long term societal and geo-political change the Internet will bring?
2. The Chinese Dragon – are we in the overestimation phase to be followed by a bust of the Shanghai stock market? Or is mass psychology underestimating the power of the dragon?
3. The Indian Tiger – is the tiger’s ability to catch up with the dragon underestimated?
4. The Commodities Bull market – Started in 2001 but is it still in its infancy?
5. The crash of the dollar – is its impact and future deterioration underestimated or overestimated at this time?
6. Peak Oil – is the energy crisis and peak oil an underestimated challenge? Are the innovation and economical opportunities these challenges will unleash under or overestimated?
7. The Golden Years – are we over or underestimating the societal transformation and the redefinition of the golden years by the Boomers entering the fourth phase of life:
   1st: birth to 21
   2nd: 21-42
   3rd:42-65
   4th: 65-105
8. A New, “New Age” – What is the power of new pragmatic and integral idealism that is beginning to appear with young people all around the world?
9. Peace in the Middle East – Is the possibility of peace and its power to transform the region and the whole world over or underestimated?
10. Latin America – Is it currently highly underestimated in its social, economic and spiritual power?

Please add and share your thoughts about what we might be over or under estimating at this time.

© Aviv Shahar

Aviv Shahar :: Jan.01.2008 :: Future, Money & Market Behavior, Strategy :: No Comments »

The Roman Empire ruled the world by conquering land. It came undone not by an external enemy but because it crumbled from the inside, at its core. The British Empire did not need to conquer land to rule the world. It controlled the sea with its navy and thereby controlled commerce and the world at that time. The beginning of the end of the British Empire was the innovation of aviation. Aviation made naval power less important and helped unleash America’s power.
How did America gain an empire-like hegemony in the 20th century? The answer is a 3-legged stool.

1. American high moral ground originated by the constitution, progressed by American idealism and demonstrated by America’s role in WWII and the rebuilding of Europe.
2. American innovation and entrepreneurial edge, demonstrated by its productive drive and a series of scientific, medical, and technological breakthroughs.
3. The unique, never before in history, universal reserve currency status of the Dollar.

This third leg has been the more invisible instrument of American dominance. It did not need to control the land, nor the sea. America controlled the universal currency. Three things allowed the Dollar to become the universal currency.

1. The Dollar was good as gold and was backed by gold as the ultimate currency that has never been tarnished. The gold window was closed in 1971 by Nixon.
2. The great engine of American industrial and technological development became the fountain of wealth creation that backed up and gave deep support to the unique Dollar status.
3. America’s role in WWII created tremendous trust in both its strength and in the benevolent ideal demonstrated by America in not reducing Europe and other parts of the world to conquered states. In essence this was a second George Washington moment in not assuming the kingship role that was available. Instead America did something smarter. It made the Dollar the King.

The machination of the dollar’s crowning is found in the Bretton Woods Agreements .

On September 20, 2007 the Dollar broke down a critical technical resistance by cutting through it’s all time low. A few days later the Canadian Dollar achieved and surpassed parity. The deterioration continues further. The third leg of the American stool is being challenged very seriously. The strength of an economy is in the soundness of its currency. The last five years have seen the first leg of the stool - the American high moral ground - being criticized and tarnished in the world. Thomas Freedman tells us that the second leg of entrepreneurial and innovative edge is also being challenged by a flattening world. Some would claim that the 3-legged American Hegemony stool is no more because of the triple deficit coupled with many trillions of Dollars in what is called by some a nuclear derivative cloud.
I propose that it is too early to conduct an American Requiem. That instead this can be a moment for America to transcend its crisis to discover and unleash the even greater potential waiting in this land. This potential is in the form of a new release of brilliance. Brilliance not aimed at preserving old hegemony but toward leading the family of nations on the path of true world and planetary citizenship.
Great nationhood in the 21st century is offering leadership of a global planet-wide nature. The task for young and bright minds of America and of China, India, Latin America, Russia, and Africa – the task and challenge for the young people of the Earth is to discover the ingredients of such global, local and personal leadership. This is bigger than climate change or any one issue and includes societal, cultural and spiritual maturation. The task is to identify, build and lead the three or seven legs of world citizenship and leadership wherein individuals, families, groups and sovereign nations can choose their destiny and thrive without bringing this planet back to some dinosaur age. Any ideas?

Aviv Shahar :: Oct.16.2007 :: America, Money & Market Behavior :: No Comments »

The recent Futurist, the World Future Society magazine offers 70 forecasts for 2008 and beyond. The first forecast is: The world will have a billion millionaires by 2025. It says that according to James Canton, author of The Extreme Future globalization and technological innovation will drive this increased prosperity. I have not read yet the book but I have a few quick reflections.

1. First, I bet before there are billion millionaires there will be million billionaires. Now if you are like me struggling with big numbers here is how it works:

1 Million	1,000,000	106
1 Billion	1,000,000,000	109
1 Trillion	1,000,000,000,000	1012
1 Quadrillion	1,000,000,000,000,000	1015
1 Quintillion	1,000,000,000,000,000,000	1018

A million seconds is 13 days.
A billion seconds is 31 years.
A trillion seconds is 31,688 years.

2.This means according to this forecast it will look like this: Billion (10⁹) x millionaires (10⁶) = Quadrillion Dollars or 1000 trillion dollars. Now add to it: million (10⁶) x Billionaires (10⁹) = which is another 1000 trillion or Quadrillion dollars. This is without calculating that many of the millionaires will have 10 or 25 or 55 million and that many of the billionaires already have 5 or more than 35 billion. Whichever way you do the math you are talking about a hell of lot of money.

3. Where is this money going to come from? How is it possible for there to be so much money sloshing around? Okay, I get it. We have three billion people joining now the market economy and the capitalist society in China, India, Russia, Brazil, Mexico and soon Africa and they are all going to want a better life style. Therefore we will all be creating such wealth. Right? No, it still doesn’t make sense unless you factor in hyper-inflation.

4. In the last 80 years the Dollar lost about 80% of its value. This means that to buy the amount of bread, milk, clothing, oil or gold that you could buy in 1920s with 10 dollars you now need to pay $50 or a lot more. In the early 20th century an ounce of gold was about $20. Today its $750, which is 37 times $20. A similar thing has happened with food and real-estate. We all have a lot more dollars to pass around but most people are not richer. This is what it means when you hear that the dollar is losing its purchasing power. Inflation is more money chasing goods. Hyper inflation is a lot more money chasing goods.

5. Here is another way to put it. A million dollars in the 70s made you a millionaire. To be a millionaire today with a purchasing power of a millionaire in the 70s you need
to have a lot more than a million dollars.

6. How is this possible? What causes such hyper inflation? Central banks work overtime to print money. In a global economy every country wants to devaluate its currency because it makes it more competitive as the goods it manufactures become cheaper. How does a country devaluate its currency? It prints more of it. We are now living through a great competitive devaluation of most currencies. The Central Banks of most nations are printing tremendous amount of currency. They can print as much as they want because in most countries fiat currency doesn’t have to be backed by anything. This means that the $100 bill you hold in your pocket has less value or can buy less today than a week ago and will have even less purchasing power next year. Heck, you better be a millionaire 20 years from now or sooner because the $100 in your pocket today will not buy much tomorrow.

© Aviv Shahar

Aviv Shahar :: Oct.12.2007 :: Money & Market Behavior :: No Comments »

(This was written during the August Market reaction when we were preparing the blog).

What has caused the stock market to suddenly pull back in the August of 07? What are the possible scenarios involved? What will history say about this:

1. Credit meltdown?
2. Vanishing liquidity in the markets?
3. “Predatory lenders” selling mortgages to collect commissions and pass on the loans knowing full well they will never be paid?
4. Too many computerized hedge funds deep on margin with only 10% collateral, all betting on the same side, facing forced liquidation?
5. A contracting Real Estate bubble or possibly a beginning of a crash?
6. Unwinding of the Yen carry trade as the simplest money making game for the last few years?
7. A 20+ trillion dollars derivatives default bomb that no one seems to exactly understand?
8. A sudden shift in mass psychology from mass greed to mass fear?
9. A dollar crisis
10. A tremor in a bigger global dislocation?

It is said that the five most dangerous words in Wall Street are: “This time it is different.” Every new generation of money managers brings new suckers ready to declare that we are experiencing a new “new economy” that defies the laws of nature. Natural Laws determine that day follows night and night follows day; that after winter comes spring, summer and then the fall; that birth precedes childhood, and then comes youth, adulthood and old age. Stock markets oscillate from over optimism to over pessimism, from mass greed to mass fear, from over valuation to under valuation.

What is different now? Never before have there been so many computerized “black boxes” automating the market based on blind mathematical equations and momentum trends replacing human judgment and decision. Plus, only recent decades of computing advances enabled such a rapid and explosive growth of derivatives. So is this time different? Will the natural oscillation of the market be averted? Probably it won’t. It was said before: “Markets can be irrational longer than you can stay solvent.” Markets can be manipulated in the short term to reflect a distorted picture and computers may create sharper and faster shifts. Primary trends and natural laws may be suspended for only a brief time but cannot be stopped and cannot be changed. It’s difficult, but the best time to buy is when everyone is selling and the best time to sell is when all are buying.

© Aviv Shahar

Aviv Shahar :: Oct.10.2007 :: Money & Market Behavior :: No Comments »