“Erfahrung” Knowledge – Where I Got My Ideas About “Automatic Wealth”

“I found this book slightly disappointing,” ML, a Sand Diego reader, said of “Automatic Wealth.” “To me, the book was more of a ‘how I succeeded’ book than I was expecting.”

I have read very few of the reviews for “Automatic Wealth.” Generally, what I do is glance at the stars. If it gets four stars on Amazon.com (the maximum allowed), for example, I read no further. And the great majority of the reviews have been three or four stars.

I do read the negative reviews. I can’t resist the urge to find out what someone didn’t like about a book I put so much into.

Happily, the negative reviews have been few and far between – maybe four or five altogether. Of those, two were downright stupid – lunatic comments that seemed to have nothing to do with the book. Another two were clearly written by financial planners and/or stockbrokers who didn’t like my very guarded attitude toward the place they earn their money – the stock market.

But I could not dismiss a two-star review by this California reader, because he seemed like a bright, fair-minded guy who thought “Automatic Wealth” had some serious flaws.

His first criticism – that “Automatic Wealth” is fundamentally a “how I succeeded” book – is accurate. But that’s something he should be happy about.

There are two kinds of books about success: those written by analysts (i.e. people who study the success of others) and those written by achievers (i.e. people who have been successful). ML seems to think that my ideas about building wealth have less value than, say, Thomas Stanley’s in “The Millionaire Next Door.” Why? Because my ideas spring from my experience, whereas Mr. Stanley’s ideas come from his research, which covers a much wider base.

Two points that I want to make on that. First, “Automatic Wealth” is based not just on my success but also on the success of about two dozen people who I’ve mentored. Not only have my ideas worked for me, they have worked for other people too. They worked for FJ, who went from bankruptcy to earning $450,000 in less than 6 years … for SB, who went from a dead-end job making $35,000 to being able to buy a $1.6 million home with cash … and for SP, whose income rose from $16,000 when I met him to more than a million today. And they worked for more than a dozen other friends, colleagues, and family members. (At the next ETR  Wealth Building Conference, we are going to show a video in which each of these people tells their story.) So it’s not just a sample of one.

Second, it’s good that “Automatic Wealth” is based on personal experience, rather than research. Research is second- and third-hand information. Nietzsche called that “wissen” knowledge and contrasted it to experience-based knowledge, which he called “erfahrung.”

Wissen is the kind of knowledge you get by reading books and analyzing data. Erfahrung is the kind of knowledge you get from going out into the world and actually accomplishing something.

The problem with wissen knowledge, Nietzsche said, is that it can be easily manipulated. In the hands of a clever arguer, statistical and other secondary information can be shaped to prove almost any point. Anyone who has ever spent any time in politics or inside a courtroom can understand the truth in that.

Nietzsche warned that in the future, wissen knowledge would be preferred. Rather than relying on what they have actually experienced … what they have actually seen with their own eyes, smelled with their own nostrils, touched with their own hands, and heard with their own ears … he predicted that future citizens of the world would doubt themselves and rely, instead, on what they were told by experts.

Nietzsche was right. That’s exactly what happened during the course of the 20th century. And now that we are squarely into the 21st century, the idea of making important life decisions based on erfahrung, your own experience, seems – at least to nice, perfectly smart and well educated people like ML – naive … even foolish.

Needless to say, I don’t feel that way. I think we are all better off directing our lives based on what we know from experience to be true, rather than on what we’ve been told (by the government, by big business, by vested interests, etc.) to be true.

In my humble opinion, some of the most commonly held, “common-sense” ideas about making money and accumulating wealth are downright falsehoods. But I’ll get back to that in a moment. Let’s take another look at what ML has to say about “Automatic Wealth.”

“He [me] is very specific in recommending those things that have done well for him. He offers many strategies for making more money doing specific types of [high paying] jobs, investing in real estate, and starting or financing small businesses. There is good advice in there, and I think it is worth reading for that, since Mr. Masterson is very successful.

“But the book’s pitfalls center around specific investing advice.

“For instance, he recommends not investing much in the stock market because of its volatility, and talks about how much he likes investing in bonds, since if you hold them to completion you know what you are getting. This is true, but does not consider the effects of inflation, which makes that steady income worth less (whereas stock valuations and dividends tend to keep up with inflation). This is a perfect example where you have to realize he is telling you what has worked for him, but may not be the best advice for many (although I agree with him that the stock market is currently overvalued).”

I disagree on the small point ML makes – about bonds and inflation. The truth is that the return you get on bonds does indeed take into account the effects of inflation. When computing yields, bond dealers include projection inflation rates into their calculations. If they didn’t, the bond market would have collapsed long ago.

But on the larger point, ML’s implied criticism that I am negative toward stocks, I must plead guilty. I don’t mean to be. But I’ve spent almost 30 years in the investment advisory business. During that time, I’ve seen lots of people get rich. But those who got rich and stayed rich were the brokers, promoters, and gurus of stocks. Seldom were they the investors.

Even the greatest stock picker of all time, Warren Buffett, didn’t get rich by trading stocks. He got rich by being a businessman and then parlaying his wealth into Berkshire Hathaway, the company that he’s kept in good shape through a combination of smart stock selection and great business promotion.

Let’s get back to ML:

“He [me] also seems to contradict himself when he uses the stock market’s historical average of 10% returns to claim you need a net worth of 10 times your living expense to retire. In one breath, he is poo-pooing the stock market, then using its average returns in his retirement calculations.”

Again, I can’t accept this as a criticism. My point about the stock market – a point I’ve been making over and over again in ETR and that I make in “Automatic Wealth” as well – is that it is nearly impossible to beat the stock market. There is a ton of wissen-type information out there that validates the truth of this. Most professional stock traders can’t beat the market, and individual, non-professional investors usually take a serious beating.

The data tells us that. But so does my experience – my own experience of trading stocks as well as what I’ve personally witnessed.

But this is all beside the point. I am not against stocks. I’m against the idea that the average guy can expect to earn, on the average, 25% a year (or more) on his stock portfolio. My advice about stocks – “Automatic Wealth” and elsewhere – is to put a reasonable amount of money at play (for me, a guy who thinks the market is highly overvalued, a small amount feels comfortable) and to invest it in either a no-load index fund (in which case you should hope to get no more than 10% over the long haul) or with an individual manager or advisor who has a proven, long-term track record of 12% or 15%.

I have recommended several such advisors in the past. For example:

And for the past several months, I’ve been working with Andrew Gordon, ETR’s financial editor, on developing a new trading program that we’re calling “The Skeptical Advisor.”

“The Skeptical Advisor” combines what I know about evaluating a business with what both Andrew and I have discovered about successfully investing in stocks. What Andrew has come up with is a sensible, business-oriented, time-tested system. I have read his writings, discussed ideas with him, sought him out for advice on my own portfolio – and I can vouch for his intelligence and integrity.

In short, if you are a conservative investor looking for above-market returns in the stock market, I trust him to serve you well. And “The Skeptical Advisor” should be right up your alley.

[Ed. Note.  Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]