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I wrote the “Forest Fire” blog post late last night…

Late tonight I quote a buried paragraph in a front page story from today’s Financial Times (second to last to paragraph in “Shocked Lehman staff ‘told to move on’”):

“Some of Lehman’s senior bankers are expected to set up independent advisory boutiques in the near future”

The forest fire is going to be painful for all us, and unfortunately EXTREMELY painful for some. But, let it be known that it IS burning and the best thing we can do is let it clear the dead forest and burn itself out. Your children’s generation will appreciate the opportunities with the sapling firms.

I live in the West and have seen many forest fires. In the case of natural forest fire, what happens is that as the forest grows old, the trees grow so large that the forest floor sees little sunlight and the thick, lush vegetation turns to sparse and dry materials. Additionally, old trees that die of diseases or similar fall to the ground and dry out. The result is vast kindling, great fuel for a fast and hot fire. An event, such as a bolt of lightning occurs, and the forest is ablaze. It is an unfortunate situation as the devestation left behind is horrifying. However within just a few years, where there was once just a couple of very large, old trees there are hundres of small saplings and new vegetation.

A bolt of lightning has struck Wall Street this year, the media likes to refer to that bolt of lightning as the credit crisis. This weekend we saw two more big trees begin to burn, Lehman Brothers and Merrill Lynch. Last week Fannie Mae and Freddie Mac were burning like crazy, but our noble Secretary of the Treasury (the acting firefighter) swooped in and (in theory) put out the blaze. Now he is again trying to determine how to bring in the choppers and contain the new burn.

The whole situation reminds me of the Colorado fires of the late 90’s as compared to the big Yellowstone fire of 1988. The long and short of this is that it has proven quite healthy and natural for the forest to burn out every so often so that new blood can bloom from the forest floor. Despite the controversy about letting the fires burn in Yellowstone in 1988, it proved to be very healthy for the park and policies were enacted in 2004 that make it so all natural fires in the park are left to burn.

The economy is on fire, but just like the forest this is a necessary requirerment for our national economic ecosystem to function properly and regeneratively. When the overgrowth becomes to high and powerful, another powerful force must ravage the big trees in order to make way for the new trees to build new and better forests.

My point is that yes it sucks the stock market was down 5% today. But if we want a long term solution, we need to call off the firefighters and let the credit crisis fire burn itself out. This is how free markets are supposed to work by their very nature and definition. So… Hank Paulson, George Bush, Barack Obama, and John McCain… give up the mismanaged attempts at containment and let the fire burn out. We will be much better off in the long run without the big trees that caused it. The collateral damage is very sad but you are exactly the ones who have told us about the necessity of sacrifice oh so many times over the last few years.

And besides the last two American industries that were really on fire and the government helped put out were the auto industry and the airline industry. Do you really want to see our entire banking and financial services sectors looking like those do five years from now?

There are about 10 million interesting ways to finish this sentence but today I am troubled over a statistic I heard on one of my favorite internet radio shows… Only half of Americans think it is possible to save for retirement. Not “only half of Americans have properly saved for retirement” but that in fact, only half even think it is possible!

Talk about an alarming… especially if you are 26 and in position to be one of those responsible ten years from now for footing the bill for a sinking Social Security program. More importantly, it seems like a lack of will on the part of the American people.  Where is the tanacity? The drive to go out and kick ass so you can have a great time living out those golden years?

In my view, there are two problems leading to this terrifying statistic: 1) gross consumerism and 2) the American financial services industry.

Gross Consumerism

People complain a lot about their debt. The media is even beginning to observe that the majority of us are prisoner to our debt. But what are doing about it? I mean really doing about it? It seems to me what we are doing is bitching about gas prices going up and home prices coming down. Yet I don’t see the connection between those things and some $14,000 in average household credit card debt (not counting the second mortgages taken out on homes to pay off mounting credit card debt). I think a more pertinent question might be some thing to the effect of can you live through this football season without the High-Def Sunday Kick-Off cable package? Or will life come to a screeching halt without the $100/month “see and be seen” gym membership? Everyone wants to blame someone for why they can’t support their gross consumerism. It is way past time to suck up, get seriously intense (Dave Ramsey would say “beans and rice, rice and beans”) and kick the debt out of the house!! My prediction… if you, right now today, are carrying a balance on your card whether it is growing or not, are squarely on track to be eating those beans and rice at 75.

The American Financial Services Industry

To quote one of my foremost heros in the area of business… “Wall Street is the only place I know of that people drive to in a Rolls Royce to take advice from someone who rode the Subway”. The proverbial “Millionaires Next Door” are plowing money into accounts with their financial advisers, only to watch their hard-earned net-worth (usually the result of self employment) be slammed by transaction fees, management fees, and unnecessary taxes. The worst part is they are all very bright people and recognize this happening but keep doing it under the idea that “my guy is different here in my small town. He really is a good guy.” Worse are the people who aren’t the millionaire next door. Often these are the same people that have the consumerism problem mentioned above but managed to amass a couple hundred thousand in their retirement account over 25 years at their corporate job. These guys wake up at 50 or 60 and realize that isn’t enough money to sustain themselves for more than a couple years, if that. So they turn to our subway-riding big-talking financial adviser to turn their 200K into a million. Guess what, bad move.

The simple fact (and big secret) is this… investment advisors are terrible. Yours is not different, sorry to tell you. Over an investment horizon of 5 years 97% of all financial advisers and fund managers fail to be the returns of the stock market at large. Over longer period this number shrinks to effectively zero. This means you are paying them a fee (much larger than you suspect most likely when all different fee types are accounted for) to get you much lower investment returns than a simple index fund you can purchase anywhere with a virtually nominal fee. The underlying secret is this…

Market returns are not average returns, they are superior returns. The reason they are superior is because less than 10% of people actually earn market returns after taxes and fees in their retirement account. Thank you big-shot advisers. So stop trying to find someone who can help you beat the market and figure out how to match the market (i.e. buy and hold a diversified index fund, like ticker symbol VTI).

Where to Go From Here

Good question. I suppose it comes down to your generation.

If you are a baby boomer and are currently doubting your ability to save for retirement, all I have to say good luck (sorry for that). You are too close for passive investments like stock market investing to do you any good by 60-65. Best thing I can say is consider either 1) starting a really good actively managed business you control and know you can win at, 2) continue to aggressively pursue your career and build your income which is your most powerful wealth building tool, 3) hope your kids do well and help you to live your expected lifestyle (quite the sad thought), or 4) hope the government bails you out (this probably means an upgrade from beans and rice to Ramen Noodles).

If you are a Gen X’er and are currently doubting your ability to save for retirement, now (and I mean right this very minute) is the time to get INTENSE. Cut up the credit card, get on a budget, get the debt paid off, start kicking serious ass at work, and get rid of your buddy the investment adviser. Buy and hold index funds and mange your income carefully and you can get there.

If you are a Gen Y’er and are currently doubting your ability to save for retirement, you give up way to easy. Start by forgetting most of what the Baby Boomers and Gen X told you about retirement saving and remember what your grandparents told you. Take risks NOW and everytime you do and win a little, put some of it away for later. You are totally set, as long as you don’t let the banks and financial advisers suck you into their system.

Recent events (MANY recent events) have led me to wonder something… why do we set our sights low? Let me break this down a little bit.

THE BACKGROUND:

For years now I have been hearing about how sad ‘my generation’ is. “They have a poor work ethic”, “they are not loyal”, “they think they are entitled to everything”, “they have no respect for private information”, and I could go on. Yet everyone is my ‘MySpace’ generation seems frustrated too. My parents’ generation was going change things right (at least that was what they tried to tell everyone in the 60s)… no more wars, stick it to the man, etc. but they did nothing really (no offense). We still have wars, we still have preventable disease, our environment has gotten worse, we still have corporate greed, and on, and on, and on.

THE FOREGROUND:

I feel like I fight this in Corporate America now every day. Worse, I feel like I am going to have to get really aggressive before I get anywhere. In the last few years I sat and watched as Ernst & Young played “zero-sum games” with our competitors (we offered a crappy, low-value suite of services and made up for it through larger “growth” pushes and cutting prices) leading me to swear I would not engage in zero-sum games with competitors ever again. Yet, where I find myself right now in our new business trying to “make our name in the market” is doing exactly the same thing… undercutting price, really “selling”, etc.

THE POINT:

Why the hell does all of this continue to progress in this manner? Let me explain why I think it does… all the generations ahead of mine (and when I say ahead of mine, I literally mean anyone older than 25… which is funny because I am 26) aren’t ready to accelerate into the future, no offense. My generation isn’t lazy or disrespecting of company privacy or any of the rest…. We are all just ready to work TOGETHER to accelerate business and economies into the future. Instead of me at E&Y hiding things from “my competitor” at PWC; my college buddy who works at PWC and I are connected on LinkedIn and Facebook and are sharing experiences to lead to smarter conclusions and decisions thus making BOTH of our organizations better.

BUT THE OLD GUYS DON’T GET IT! Everyone older than me is just sure we have to “compete” and treat other firms like they are from some other planet. Here is the deal. I can’t help but wonder why Generation X and The Baby Boomers are often so anti-innovation. When certain kinds of services and products are becoming commoditized and starting to look like a zero-sum game, instead of increasing sales efforts and cutting prices… why don’t we innovate, grab the business/industry by the balls, and turn it on its head? And if we can’t, realize that business changed, what we do is not viable, and learn to do something else.

So, I am currently wondering why our team is fighting this crazy trend of getting a piece of commoditized work.

QUESTION: Why do we care about it? ANSWER: Not sure, guess because we have to start somewhere.

QUESTION: Are big companies actually better or more important clients than very small ones? ANSWER: Not sure again, yet we FIGHT for work at Denver’s big, public companies to really make no more money on an hourly basis than we do when we provide really great services to very small “Loveland-type” (for those that don’t know me - small, home-owned type) businesses. The reason is because we deliver a borderline commodity service to very big companies, yet we offer a borderline transformational service to very small companies.

QUESTION: When we cut prices and increase sales are we really putting the customer at the center of our business? ANSWER: I don’t think so. If a customer is really pushing to reduce prices, shouldn’t we help them get what they want? It seems like the thing to do is totally change approach and build the service specifically around cutting price… don’t just cut margin, automate, innovate, and get ahead of the market.

WHAT NEXT:

I’m going to work. Time to put the customer at the center of what we do and rethink our strategy on a few things. Time to abandon this idea of playing defense with pricing and play some serious offense. I think it is so easy to fall into thinking you can’t do certain things but you can. That’s what being an entrepreneur is all about. Instead of selling a service that used to cost $125,000 for $100,000 with a smaller margin (say $10,000) in order to meet the customer in the middle on their desire to reduce costs, why not think about how to do it smarter with software and automation, build the product to do it, and sell it for $50,000 with a $25,000 margin? The zero-sum game ends, customer and provider win, and the economy benefits from innovative thinking. BUT… you have to set your sights higher to accomplish that. Hat is the quote that comes to mind… “Shoot for the moon. Even if you miss you will land among the stars”. So come on old guys, lets set our sights higher and change business forever.

This video nearly took my breathe away. EXACTLY my “real world” take on what Web 2.0 means to the world after strip off the crap that is venture capitalism, talk of “Bubble 2.0″, etc.

Web 2.0 to isn’t about new businesses… it is about changing how old businesses, people, etc. are perceived. You have to understand who Gary is and what he is done to understand his perspective fully but it is spot on. And for those who have no idea what I am talking about… you (and your business) may get left behind soon.

Excellent, succinct explanation Gary.