Several years ago I was asked to speak at a dinner meeting for some customers of a large insurance company.  It so happens that another economist, Gene Stanaland, was the featured speaker in the afternoon session.  Gene turned out to be a professional speaker who bills himself as the “Will Rogers of Economics.”  He was pretty amusing.  For example, he said that he had thought he was doing quite well financially as an economics professor at Auburn University, until the day that he was adopted by a family from Somalia.

My tablemates at dinner asked the question:  “If Gene is the Will Rogers of Economics, what are you?”  I was stumped for a while, but after thinking about I realized that I am the “Forrest Gump of Finance.”  If you missed it, Forrest Gump was the leading character in a movie of the same name.  He was played by actor Tom Hanks.  Forrest was a simpleton who happened to have a ring-side seat for many momentous events in American cultural history over the past 50 years, including meeting a young Elvis Presley, playing football at Alabama for Coach Bear Bryant, winning the Medal of Honor in Vietnam, visiting the White House with Presidents Kennedy and Nixon, phoning in the Watergate burglaries, playing ping-pong with the Chinese, and making a fortune in the shrimp business (primarily by owning the last shrimp boat still afloat following a hurricane).

The rationale for my connection to Forrest is that I have had a ring-side seat for many momentous events in financial markets over the past 40 years (and, by some accounts, am pretty simple).  As a graduate student at Berkeley in the early 1970s, I witnessed the development of options theory and financial economics.  In 1981, I was a member of a small team that produced Ronald Reagan’s first economic forecast and Economic Report of the President.  The inflation forecast which was widely derided as the original “Rosy Scenario” (that inflation would fall from double digits to 3% in five years, a forecast which turned out to be extremely accurate) was produced by my desktop computer (an Apple II) using a proprietary econometric model (yes, there really was a model).  In my thirties, I saw the thrift crisis up close and personal as an investments executive at a Federal Savings Bank.  Then, in my forties and fifties, as an interest rate risk manager for a large mortgage banker, I had a ring-side seat for numerous derivatives debacles and the mother of all financial crises in 2007-2009.

Personal Finance

I have also had a ring-side seat for many of the typical mistakes that people make in their personal finances.  In most cases, I was the one making the mistake.  A few of these mistakes included delaying entry into the work force to my late twenties by stretching out graduate school as long as possible, over-investing in the stock of the company I worked for (I did this twice, with disastrous consequences each time), and many poor timing decisions (mostly failing to buy and selling too early).  Nevertheless, I have been bailed out largely through one fortuitous decision; namely, targeting a high savings rate.  In particular, I have always targeted saving 50% of after-tax income, even at my first job making $16,000 before tax as an assistant professor at the Claremont Graduate School (now University) in 1977.  I think I was led to this decision after running across timeless financial advice in a book called “The Richest Man in Babylon.”

The Richest Man in Babylon

One of the simplest and most powerful pieces of financial advice can be found in the short paperback book “The Richest Man in Babylon” first published in 1926.  In just a bit over 100 pages, author George Chasen provides several entertaining short stories, each with a common theme – the secret to creating wealth.  The secret is three-fold:  first, “A part of all you earn is yours to keep.  It should be not less than a tenth.”  Second, “Seek investment advice from those who are competent through their own experiences to give it.”  And third, “Learn to make your gold work for you.”  In short, save, invest and reinvest.  Following these simple rules anyone, even the book’s main protagonist the lowly scribe Arkady, can become quite wealthy.

Are these simple rules still valid today?  From one perspective, they are more valid.  In ancient times, actually any time prior to about 1800, nearly everyone lived at the edge of subsistence.  When you are living at the edge of subsistence it is very difficult to eke out any savings at all.  Today in the developed world, thanks to two hundred years of sustained real per capita economic growth, even the people on the so-called “poverty line” are substantially above subsistence level.  Achieving great improvement in your absolute standard of living can certainly be achieved by following the simple rules.

Yet a common refrain is that getting ahead is more difficult today than in the past. Perhaps the reason for that is that people tend to focus on their relative standing.  We are aware that the income and wealth of the top performers in nearly every field is skyrocketing higher.  So, by comparison, the rest of us feel poorer.  However, in most cases of enormous wealth, the benefits to the “masses” have been yet more enormous.  Think of Bill Gates and Microsoft, Steve Jobs and Apple, Sam Walton and Walmart, Jeff Bezos and Amazon.  We all benefit from product innovation, improving quality and lower prices.  These people have proven to be magnificent stewards of capital.  By deploying that capital in new ventures they make the rest of us richer, not poorer. If we were purely looking out for our individual self-interest, we should be cheering the success of these great entrepreneurs, and thousands of others like them.  At least, that is Forrest’s view.