Today we’re looking at PT Barnum and his book Humbugs of the World. After all, there’s no one who knows a sham better than a professional sham salesman. “Humbug” as you probably know, is an old world for “bullshit” or “flim-flam” but PT Barnum generously defines humbug as mere…. exaggerations of the truth. And as long as people were getting their money’s worth, humbug here and there isn’t a problem. Whatever you say, PT.

Humbugs came out in 1865, following the huge success of Barnum’s autobiography. Humbugs did pretty well too, and you can probably find really beautiful copies of both books in your local used book store – but it’s public domain and free on Kindle. If you want to see a really beautiful copy, CFI Amherst has a lovely leather copy in their library with gold lettering on the cover and gold on the edge of the pages.

At times, Humbugs reads like PT Barnum is simply defending his own humbuggery by pointing at people who are bigger liars than he is. And hey, the guy has a reputation to keep. But that all fades away when he talks about spiritualists and mediums. Barnum never hired a single one and he has nine chapters full of venom and scorn for the lot of them. If you’re into the history of spiritualists, this is worth picking up just for those chapters alone.

Otherwise, the book gives us a nice overview of the scams and psudoscience of the day, like the “Golden Pigeons of California”, the weird and wonderful moon hoax (the one with the demons having a party on the moon), witch hunts, Monsignore Cristoforo Rischio (a “model for our quack doctors”), blood purification pills, and the list goes on and on. The chapters on financial scams are tailor made for Skeptic money readers, with lottery humbugs, Tuipomania, the largely fictional (but very profitable) New-York and Rangoon Petroleum Company , and page after page of money swindles. The book is mostly anecdotes and feels like a friendly conversation with Barnum. It’s also pretty sarcastic and light-hearted, so it’s very readable, despite the 150+ years of language difference.

There is some serious historical culture shock. He has two chapters devoted to avoiding food and alcohol-related scams; for example, watering down alcohol to “homeopathic” doses. Barnums words, not mine. It took me a minute to remember that these were the days before FDA and basic food regulations. I’ve never felt so grateful for modern food regulations in all my life. I’ll let you read them for yourself, but it’s all very scary. It’s for the germaphobe. The chapters on quack medicines are even scarier with magic sand, rampant placebo use at doctor’s offices, and hashish candy. It’s a wonder anyone was able to survive a doctors visit at all.

Other chapters left me really disliking Barnum. The 1800′s were a bit racist. Ok, they were really racist. And boy-howdy is Barnum right in step with his era. The chapter on the Miscegenation pamphlet is flat-out unpleasant. I get that he had to sell copies of the book to all parts of the US (I’m looking at you, post-civil-war-south) but I took very long breaks from that chapter. It ended up being worth reading for the history of the word “Miscegenation”, but I feel like that information could also be learned from Wikipedia without reading about Barnums disgust with racial mixing. His chapters on religious humbug is where he can really loose me. He’ll start waxing on and on about pagan cultures on distant lands or ancient heathens and my eyes glaze over. On the upside, he does move onto “ordeals”; traditional christian “trials” that would determine your innocence if you survived drowning, poisoning, burning, etc. Apparently these were still practiced during his time.

Overall, it’s a fun read and many of the lesser scams in the book aren’t available to research on the internet. If you’re into history in general or if you feel like you’ve simply run out of new ways to be shocked by scam artists, well,  you’re only gunna find this stuff here and Barnum is awesome. Go check it out.

Humbugs of the World is public domain and is available on Project Gutenberg for free, and currently is free in the Kindle bookstore.

The audio recording is free at the Internet Archive, and was recorded by volunteers at Librivox.org

Post by Phil Ferguson
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From Jon Stewart
Feb 15th, 2012

Part 2….

Post by Phil Ferguson

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NOTE:  This post is part of an ongoing education series.  This information is for educational purposes only.  This information does not constitute investment advice.  No rational person would make investment decisions based on a blog post.  Please consult with your financial advisor before taking any action.  If you wish to have specific advice for your situation please contact Polaris Financial Planning.

Every quarter I take a look at how different segments of the investing world are doing.  Below is the historical performance 6 US market segments.  I divide the US market this evaluate performance and future opportunities.

Over long periods of time (10+ years) all segments tend to perform about the same so, unlike most advisors, I generally think of a hot sector as a contrarian indicator.  That is to say, the better one of the segments has done and the longer it has exceeded the long term mean of the other sectors, the less desirous it is.

Data as of 12/31/11

2011 was a rough year for the market as a whole but, the last 3 years have been great.  3-year average returns range from 12.49% to 18.65% per year.  Keep in mind, these numbers compound year after year.  The Small value has an average of 18.65% per year but a total return is 67.05% for the 3 years and not just 3 x 18.65% (55.95%) as one might expect.

Over the 10 year time frame the differences between large cap and small / mid cap has grown.  Very roughly, the 10 year average for large caps is just over 3% and the small / mid caps are around 5.5% per year.  The difference is only 1.5% per year but when compounding is taken into account the 10 year total returns are around 35% for the large caps and 71% for the small / mid caps.

Now is the time for a subtle change in the allocation matrix for the portion of your funds invested in the US stock market.  Over the past several years I have given a positive bias to the small and mid cap indexes and this allocation has proved to be very rewarding.  I am now moving toward a more neutral market cap balance.

If you don’t know how your assets are allocated, I would be happy to help you find the right balance.  If you would like more information or specific advice on your portfolio please contact me.

NOTE:  This post is part of an ongoing education series.  This information is for educational purposes only.  This information does not constitute investment advice.  No rational person would make investment decisions based on a blog post.  Please consult with your financial advisor before taking any action.  If you wish to have specific advice for your situation please contact Polaris Financial Planning.

via CNN.

A few days ago, I told you that I may speak at TAM9.  I have been working on the PowerPoint presentation and the paper that goes with it.  The paper will be published on the JREF (James Randi Educational Foundation) blog.  Several people have already helped me and I think the paper is much better.  I am putting the current draft of the paper below.  Please take a minute and let me know what you think.  Is there anything that needs to be improved?  It could be a better expatiation of a term, a spelling error, or even the placement of a comma.  Put your suggestions below in the comments.  I need to submit this on June 4th, so  make suggestions soon.

Thanks!

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Skepticism and Investing – Guaranteed Mutual Funds

Psychics use cold reading and tell you what you want to hear.  Did you know that some of the same tricks that promote woo are employed by your investment advisor?  These people may not even know that they are hurting your long-term financial success.  Most investors know that the stock market tends to return about 10% per year (over long periods of time) but what if you don’t want the risk.  In this case a sales person can use that fear and try to make you feel safe and secure.  They want to take away the fear you have about investment risk and, most of all, they want you to invest with them.  The sales person tells you about a product that may pay a little less but it is Guaranteed.

Just to let you know I am not one of those people, let me give you a full disclosure.  Here are a few things that the fine people at the Illinois SEC strongly suggest I make clear.  I am an Investment Advisor Representative (IAR) with 15 years of experience and I am the president of Polaris Financial Planning LLC (Polaris).  Polaris is a “fee-only” Registered Investment Advisor (RIA) in the state of Illinois.  Registration with the state of Illinois does not reflect an endorsement by the state or Illinois. Finally, the material contained here is for educational purposes only and does not constitute investment advice or a solicitation.  Please consult with your financial advisor before taking any action.

Because they wish to avoid risk, some financial advisors and their customers find products like Guaranteed Mutual Funds very attractive.  These types of products may also be called “equity-indexed annuities”, “fixed-indexed insurance products” and “indexed annuities”.  These products make a lot of promises and by the time the sales person is done telling you about one, it may be hard to say no.  The description below is based on a real product that you can buy from an advisor or broker.  Let’s go over some of the good things that your friendly sales person may tell you:

- This is a new product that combines the best of bonds and stocks.

- Your principle investment is guaranteed; you can’t lose.

- Part of the money is invested in an index fund .

- The balance of the money is invested in Zero-coupon bonds (Zeros).

- Zeros are issued by the US Government  and they are AAA rated.

- You will make at least 40% in the next 10 years.

- The 40% return is guaranteed.

- You make about 4% each and every year.

- You have the potential to make more in the stock index funds.

We will now cover some of the details that the sales person “forgot” to tell you.  The odd thing with the investment world is that they don’t need to tell you these things verbally, because all of the details are in the prospectus.  Often the prospectus is 72 pages of 6 point font written in the best legalese.  You sign the last page of the prospectus that you never read, and now they can do almost anything with your money.

Now we need to get specific and do some math.  I know – MATH!  This is your life savings we are talking about so… be strong.  Let’s start with a $100 investment which you cannot lose; its guaranteed.  You will earn 40% in 10 years which is also guaranteed.  After ten years you should have $140.  We can be sure you will stay in for ten years because there is a 10% penalty for early withdrawal and the idea of losing 10% of your money scares you. That is why you bought this type of investment in the first place.  Another small technicality is that you don’t make 4% per year.  4% per year compounded over 10 years would make your investment worth around $148.  Your result is closer to 3.4% per year compounded; but hey, it’s only your long term retirement plan, right?

Here is how we will do the math; we will start with the $140 you expect to have at the end of 10 years and take out a few small expenses.  Did the salesperson tell you about the 8% load?  A load is a sales fee that is collected from you and paid to the company and/or sales person.  Eight percent is on the high side for mutual funds, but this is a really good investment, so it is a small fee to pay.  You invested $100 and the $8 fee comes off the top, so you actually start with an investment of $92. Subtract $8 from your expected total of $140.

Your 40% return adds $37 to your investment not the $40 you expected.  Remember, you only invested $92 ($100 – $8).  Subtract $3 from your expected total of $140.  As you were told in the prospectus, your money is invested in mutual funds and all mutual funds charge an annual fee.  This fee covers the cost to manage your funds – and they deserve it for getting you such a great product.  This fee is 1.8% per year.  It is above the industry average but, you’re worth it.  Total cost over ten years is just $18.  Subtract another $18 from your expected return.

Since your money and the 40% return is guaranteed, it’s like insurance.  You pay for auto, life and home insurance – of course you have to pay a little something for this insurance.  This cost is just 1.5% per year.  Total over 10 years is about $15.  Subtract $15 from your $140.  Isn’t this a wonderful investment?

We need to talk about taxes.  The IRS does not want to wait and tax you on all the money you are going to make with the Zero Coupon Bonds.   So they created a thing called imputed interest. They collect tax on the money you are going to make.  This costs about $.80 year or $8 over the 10 years.  Don’t forget to subtract the $8 in taxes from your fabulous investment!

You started with $100 and expected to end up with $140!  After we took out a few “small” expenses and end up with $88 ($140 – $8 – $3 – $18 – $15 – $8).  Your principle and the 40% return were guaranteed but, so were the all of the fees you agreed to when you signed the last page of the prospectus.

I can’t tell you what you should do with your money but, I can give you 5 simple ideas that can help you with your future investments.

- KISS = Keep It Simple Silly.

- Only invest in what you understand.

- Use ultra low cost index funds.

- Use your critical thinking skills and learn what you are doing.

- If it sounds too good to be true; it probably is.

If you wish you can read more about this type of product at this FINRA (Financial Industry Regulatory Authority) investor alert page.  More information about investing can be found at http://polarisfinancialplanning.com/