Complete Interview with Scott Burns

J.D.
Can you give Get Rich Slowly readers a brief history of your background? I was wondering if you could talk a little about your career path.

Scott
I got very curious about money just in the course of my childhood. The first ten years of my life, I lived and shared a rented room, at one point in a house without plumbing, with my single mother. And by the time I graduated from high school, I was a millionaire’s stepson. My economic experience runs the gamut, but my intention when I went to college was to become the first engineering-trained test pilot, and that’s why I chose to go to MIT. My whole world view blew up just as I entered MIT in 1958.

When I was still a freshman at MIT, I got interested in writing. I was journaling, and started thinking about fiction, I actually started what may have been the first creative writing course at MIT: there were only two of us in it. MIT was wonderful, they let me cross-register at Harvard after Archibald MacLeish admitted me into his writing course.

I started writing about personal finance because one night my first wife and I were going to a dinner party, and she said, “Scott, I’ve heard you explain the economics of buying a house as many times as I want to. Could you just write it up so you can hand it out?” We were all in our twenties — it was a time of real mobility — there were a lot of kids who at that time came from relatively modest backgrounds who got out of MIT. Everybody was buying a house and doing all kinds of things that were brand new.

Anyway, I started writing about people and money then and it was just a wonderful, natural event. I thought, “Wow. I was meant to do this.”

J.D.
Were you writing for a publication or were you just writing for your friends?

Scott
Well, the first thing was writing for friends, and then I wrote essentially for free for a weekly Boston publication. I didn’t actually make a living writing until after I’d written two books, actually about ten years later, at age 30. The books they were the usual experience, but I think writers will have a very different experience going forward.

J.D.
Why’s that?

Scott
Well, the traditional publishing system is breaking down. It’s been operating as a winner takes all system for years, so the odds of making any money writing books have declined. And Jeff Bezos has changed the rules of the game with Kindle publishing.

J.D.
When you say winner takes all, you mean the “best-seller mentality”, and now it’s going to more of a long-tail thing where there are fewer large best sellers but more books, right?

Scott
Right. The focus is entirely on a literal handful of books that get extraordinary advances up front and if they don’t sell, it’s a gigantic embarrassment. Actually, the economics of publication haven’t changed — they’re virtually identical to the economics of new ventures. And they haven’t changed in two centuries.

J.D.
I’ve actually talked to a couple of agents — they’ve expressed an interest in working with me to try to develop a book proposal — and it’s not something that I’ve had time to do. I know that economically it doesn’t really make sense to do it, unless there’s a huge reception to the book, which is just a crap shoot.

Scott
Absolutely.

J.D.
On the other hand, I wonder if there aren’t some other reasons to do it. I mean, it seems to me that if you have a book behind you, you have additional credibility. Right now, I’m just a guy who writes a blog. It may be a huge blog, but…

Scott
That may change. All of us have this idea that books are wonderful and that they do something solid for you. There are lots of people who would write a book for free, simply because it will be good on their resume. Or, it may be necessary for them to retain their jobs. I’m thinking of academics.

Larry Kotlikoff is just an overpoweringly productive human being who’s written I have no idea how many books. But he wouldn’t be able to be a tenured professor at Boston University unless he accepted that as the basic operating rules. It’s publish or perish in the elite colleges.

J.D.
So you’ve been writing about personal finance for a long time now. I’m curious if you’ve noticed things that have changed since you’ve started. Is the advice that you were giving in the late 60s still relevant today? And what sorts of changes have you seen over the past 40 years?

Scott
Unfortunately, it hasn’t changed enough, because the basic issues don’t change. And because people approach the economic issues in the same — and repeatedly wrong — way. They were just using simple compounding and discounting for monetary figures and not really synthesizing and putting it all together, because computationally is so difficult to do.

So, things haven’t changed and you still have the same kind of spread of information conveyance. You have wonderful writers like Andy Tobias. Andy can’t make anything complicated. He’s just a wonderful writer. I’ve envied him from the get go.

J.D.
He has a great, personable approach. I like it.

Scott
Yes. He’s an easy read. He gets to the essentials very quickly, and he doesn’t try to complex it. Lots of people, they want to make things complicated, either because they want to make a living by making it complicated, or because they want to demonstrate how smart they are to others who don’t understand it.

J.D.
That’s one of the things I try to do at Get Rich Slowly. A lot of people just get intimidated by things like Roth IRAs. So one of the things I try to do is just interpret that into language that the everyday person can understand or relate to.

Scott
Well, you’ve got the basic, important formula here. This is one of the things that a lot of editors of publications don’t grasp. The issue is not dumbing the content down.

First, if you’re writing for a large audience, you have to assume that there’s a very broad range of intellectual capabilities and intellectual interests out there. There are people out there who have IQs of 160 and couldn’t balance a checking account. It has nothing to do with their intellectual ability at all! But that’s not where they focus their interest.

The task of a personal finance writer is to write things in an non-intimidating way so that you can reach the broadest number of people without degrading your content. If you insist on dumbing down — the usual route used to degrade the content — and, that doesn’t work. What we need is to be as lucid as humanly possible, have some amount of levity so that people won’t feel that they’re being punished, and get people to say, “Oh, money! This is another tool for adaptation! This is another way that I can improve my life. This is another way that I can escape having a life that consists of a long series of unpleasant surprises.”

If you really start to look at the big difference between people who have mastered their economic lives, it’s that they have fewer unpleasant surprises in their lives. A lot of us, probably most human beings — I don’t know that you can get through your life without some amount of unpleasant surprises — but if you can at least eliminate the money unpleasant surprises, that’ll make you better prepared to deal with divorce and the other traumas that life holds.

J.D.
You were talking about how the personal finance advice really hasn’t changed that much over the past 40 years, and I know that’s something you’ve addressed in Spend ’til the End. One thing that you didn’t talk much about in the book is the notion of behavioral economics, which I know has been around since the mid-70s at least. But it only seems to be gaining prominence over the past few years. I often say that managing money isn’t about understanding the numbers, because anyone can understand that if you spend more than you earn, you’re going to end up in debt. But managing money is more about managing yourself, manging your mind, because it’s your relationship with money…

Scott
Yes, it is, although I wouldn’t go as far as you just did, saying that everybody understands that you can’t spend more money than you earn.

As a matter of fact, I would say that that is one of the most favored American illusions, witnessing it right now with the housing crisis. For all of my professional life, and beyond that, buying a house has been a way to consume and grow your personal wealth at the same time.

Back in the 70s, I wrote a column for Vogue magazine, and one of the columns that I wrote about was just that. You could buy a home in a vacation area where real estate was appreciating rapidly, and you would take money out of your income pocket, and you would pay for the bills of the house, but the money would magically reappear in the increased value of the house. And that’s exactly what happened with the house I owned on Cape Cod. I took money out of one pocket, but when I eventually sold it, I got back way more than I’d ever spent on the house or its mortgage. And that was what was behind thinking like that, which works some of the time…

J.D.
Sure. Careful use of leverage.

Scott
Careful use of leverage and steadfast faith in the ability of our politicians to create ever increasing amounts of inflation. You just go with those articles of faith. You can do well, as long as you can make the payments. There are always people who think that they can get rich by borrowing. And you may happen to do better by borrowing, but you’re probably not going to get rich.

I had a life lesson in that. My stepfather was worth over a million dollars in the early 1960s. By the time he died, we were qualifying for Medicaid, because he believed that no dollar should go unborrowed. He was unfailingly generous with all of his boys, including me, but he was a high roller. He would buy whatever and then trust that it would work out. Well, it didn’t work out.

J.D.
Using leverage to do it. You see, to me this is a real philosophical difference that I encounter in my reading. On one end of the spectrum you have people like Dave Ramsey, who talk about how all debt is bad and you shouldn’t carry any debt. And on the other end of the spectrum you have people like Robert Kiyosaki who argues that debt lets you leverage and buy more than you would be able to otherwise, and that you should have as much leverage as you possible can afford.

I tend to side more with the “no debt” people, but I can understand the use of some leverage. Obviously buying a house is an excellent example — at least, if you’re not buying too much house.

Scott
There’s only one useful thing that Robert Kiyosaki has ever written. In one of his early books, he has a quadrant, and he divides assets up into consuming assets and earning assets.

What you and I are talking about is the illusion of wealth that people get and the satisfaction that they get thinking, “Well, I’ve invested in my home, and it’s going to make me rich.” It will make them feel rich, but it isn’t what all of us eventually need, which is a large portfolio of earning assets. The house is a consuming asset, and the only way you might benefit from its appreciation is by selling it. So, that’s a very useful thing. But then, he takes that to the furthest extreme by saying you borrow as much money as possible to buy earning assets. Well, it don’t always work!

J.D.
And often you have to be able to borrow far more than the average person can afford. I read and reviewed his most recent book, and his examples drove me crazy. He’s talking about borrowing money to purchase a $17 million dollar apartment complex. Well, that’s fine if you can afford to borrow $17 million dollars, but I’m an average guy. I can’t afford that. What can I borrow to…

Scott
Yeah, but you could afford it if you had $3.4 million of debt.

J.D.
Exactly! I feel like his advice is often lacking practical application for the average middle-class person. But I have to give him credit: he does get people thinking, even me. Even while I’m sitting there disagreeing with him and scrawling large rebuttals in the margins of his books, he’s got me thinking.

Scott
There’s an interesting aspect of a thing that we flew by very quickly, which is that you can’t borrow enough. One of the things that comes out in consumption smoothing is a thing called “liquidity constraints,” which is economic gobbledygook for saying that you can’t borrow enough money. But it has a wonderful side effect.

Because you and I can’t borrow enough money when you’re younger, it makes the mathematics of leveling your consumption throughout your life essentially impossible. If you were to take an average person’s life cycle profile, what you discover is that they can’t have a level standard throughout their lifetime. You’ll have an approximation, and so they’ll have one standard of living through their 20s, 30s, and early 40s, they’ll take a step up in their late 40s and into their 50s, and then there’s another big bump up later.

The important thing here is that this is against our will!

We want to borrow more money. We have been fine and doing our mightiest to borrow as much money as possible, and very few people can achieve it, even with all these nitwit bankers wanting to lend you everything. So, we have this built-in safety lever in liquidity constraints. The only problem with it is that it is contingent on the policy risk that’s involved in Social Security benefits for the very young. Because if the promises aren’t fulfilled, then those numbers won’t materialize.

J.D.
What do you think about the future of Social Security? Do you think the people just starting out in their careers will be able to rely on it for income when they reach 70 years old? I know that’s asking you to make a huge guess…

Scott
The answer is a qualified “yes”. Let me tell you why it’s qualified.

Talk to most people about social security, and you get a very binary response. It’s either great and a wonderful program, and they’re going to count on it. Or they say it doesn’t exist, it won’t exist, and I think flying saucers are more likely.

This binary approach — all or none — simply isn’t the way the world works. In between all and none, we have this ongoing horde of scheming politicians who are going to work very hard to nickel-and-dime every human being in the United States out of the promises that have been made. But that doesn’t mean that Social Security will disappear. The basic realities are that if Social Security went along, it would absolutely have a problem by 2042, I think it is.

(If you take a deeper look at the Social Security actualized tables where they don’t include the illusory interest that occurs in the Social Security trust fund, it’s more like 2015.)

At that point, Social Security, instead of running a cash surplus, will be needing to draw on the general fund, or Social Security will have to start redeeming its IOUs. But Social Security is a minor problem compared to the issue of Medicare. The unfunded liabilities of Medicare are like seven or eight times larger than the unfunded liabilities of Social Security.

J.D.
Really? I didn’t even know that!

Scott
The first book that Kotlikoff and I wrote together is called The Coming Generational Storm, and it goes into that in detail. The thing that’s wonderful about working with someone like Kotlikoff is that he has all the computational tools that are necessary and a very full grasp of what’s going on. He’s one of the prime movers and creators of an economic discipline called generational accounting, where you look at what exactly is going on with this program and who is paying for what and when? When you do that you discover, as many have suspected for decades, that the elderly are really hosing the kids.

The odds are that people who are in their 20s and 30s now, they’re going to face a much tougher situation, because the taxation for Social Security isn’t indexed. The taxation for the Social Security benefits is going to fall on lower and lower actual incomes year after year after year.

J.D.
Doesn’t the uncertainty regarding Social Security and Medicare and other things, doesn’t that make planning for consumption smoothing more difficult?

Scott
Yes, it does.

J.D.
This would be a good a time for you to explain what consumption smoothing is. This is actually a new concept to me; I’d never heard of it before.

Reading Spend ’til the End and learning about consumption smoothing really helped me realize I can use some of that money now. I don’t actually have to save it all for the future. And I have to figure out what the balance is.

Scott
And that’s the most difficult thing, because we’re always at war with ourselves. Part of us wants to, you know: “I want it all, I want it now.” The other part of us says retirement is more important. I find with reader letters that our population isn’t a smooth curve, isn’t a “mountain curve” of distribution. Instead, it’s bimodal.

You’ve got a group of people — admittedly small — who are over-saving and their standard of living should be higher. And they’ll wind up either dying with a fortune or possibly becoming big spenders late in life or retiring early. They’ll have those options. Then there’s the larger group that feels entitled in some way and feels that they must have everything now, and so they’re always over-estimating, over-optimistic, about their future.

Doctors are a great example of people who are over-optimistic about their future. It’s amazing. They treat human beings for major illnesses and many of them have yet to consider that at one point they will no longer be able to work. So they’re going along blithely spending all kinds of money without smoothing their consumption at all. The basic consumption smoothing idea is so simple, you wonder how someone got a Nobel Prize for it.

J.D.
A Nobel Prize, huh?

Scott
Franco Modigliani was a professor at MIT. His basic idea is that one way or another, people can try to smooth their consumption over their life. That’s why they save. The problem is, we don’t exactly know how to do it, and we’re not equipped to do it.

That goes back to the behavioral finance that you mentioned earlier. We’re just not geared to actually be able to to it very well, and worse, it’s not a simple problem, because there are a zillion different programs and things that affect our ability to smooth our consumption. Not to mention all kinds of unknowns, like the fact that your fifties is the most dangerous decade of your life, in finance.

There was one study done — I think it was the National Bureau of Economic Research that did it. They found an enormous amount of the distribution of wealth had to do with basically good fortune or bad fortune. And the most dangerous decade was the fifties.

• That’s when people have the expensive divorces.
• That’s when jobs get tenuous for some.
• That’s when people become ill or are not capable of working as hard as they did when they were in their forties.

As I look around at people I’ve worked with over the last fifteen years, that’s exactly what’s happened. I knew some wonderful people who just got on the wrong side, whether they made a bad decision or if they were in the wrong place at the wrong time. But their career paths have been unfortunate.

And then there are other people of equal ability &madsh and sometimes lesser ability — who have been startlingly more successful. A lot of it due to chance: marriage, your kids, things like that. It has nothing to do with return on investment, anything Ben Bernanke says, anything that anybody at Goldman Sachs says. It has everything to do with the human condition.

J.D.
Yeah. I think that a lot of times, when people make personal finance decisions, they don’t realize the human aspect of things. It’s going to play a large role, especially eventually.

That’s a common trade-off that people make There’s a book called Your Money or Your Life, where they talk about trading your life energy for dollars and stuff.

Scott
Wonderful book. An iconic book.

J.D.
And yet you, Scott Burns, you haven’t been able to make that leap yet from money and work to time and leisure. I’m curious if you could talk a little bit about this. I thought that was a fascinating passage that was just dumped in there and never really followed up on.

Scott
First, let’s bathe this conversation in a sense of good fortune. Not everyone has a choice about this, and they are forcefully separated from their jobs and then they have to make do. I feel very blessed that is a choice that I make, and I keep making it; I’ll opt for work because it feels good to be productive.

It seems a shame to walk away from all the knowledge I’ve accumulated and say, “Well, I want to do something else.” I really enjoy doing what I do. I’ve always wanted to write, and now I can. I no longer need an individual newspaper to be my employer. I don’t even need to make money writing. I do, but that’s like a habit. (It’s a good habit).

The part where the epiphanies start to arrive is when you realize that every day that you spend working is a day that you no longer have to do something else. And so there’s this increasing kind of torment: You’ve worked another day, and you ask, “Is this the choice I wanted?”

But with your concern… What would you do if you discovered that you were going to be dead in 90 days? Would you continue working? I’m not sure what I would do. I don’t think I’d go out and drink more margaritas. I probably wouldn’t undertake any major projects. I don’t know how. I’m still feeling my way to this. But I say that I’m now starting to take weekends off, and I’m getting much better at it.

J.D.
Did you used to work during the weekends too, then?

Scott
Yes. From full weeks in Maine, where my brother and I went sailing and I introduced my wife to sailing… And I was just keeping up the blog instead of writing columns while I was there. That was like being completely free.

J.D.
And that was the blog on Asset Builder?

Scott
Yes.

J.D.
Tell me a little bit about Asset Builder. I haven’t had a chance to look at it very much. I did take a little bit of a look at it, and it looks like the company is offering portfolios of low-cost index funds, which is what you advocate from what I’ve read.

Scott
Here are the basics. I started writing about couch potato investing after I had done a few for seminars. These seminars had a pretty high IQ filter, and people attending were doctors, lawyers, and accountants. They were professionals, and they weren’t dummies, but my asssistant and I would go over our impressions of the seminars afterwards and we both said, “Boy, these are really sharp people.” And then we’d say, “Do you think they’re going to follow the advice?” And then we’d both say, “No.” So it doesn’t matter how good an idea is if it doesn’t get executed, if there’s some barrier.

That’s why I started writing the couch potato approach. We may have to sacrifice something, but let’s see how good we can make things so that even if you’re virtually brain dead, you can manage your investments. The requirement for the couch potato investor is that you to have the capacity to fog the mirror and you need to be able to divide by the number two, with the aid of electronic calculator. So that doesn’t exclude a lot of people.

The whole idea was developed after that. The second couch potato portfolio was a margarita portfolio. That had three pieces and required that you divide by three, but it was named in honor of Jimmy Buffet — the other Buffet — so that other people would take it in that spirit. From there it went up to the full ten pieces to get a full distribution of academically defensible asset classes.

J.D.
So then, who should consider using Asset Builder? Why would I use it instead of just trying to construct a portfolio myself?

Scott
Well, we have to go another step yet. The couch potato building block portfolios basically are going to get you — in simple steps — to being fully indexed across a broad array of asset classes at very low cost. Using exchange-traded funds, you can do it very simply and very inexpensively, manage your money at nominal cost. The consequence is that you’ll probably outperform 70%, possibly 75%, of all the professional managers over the long term. There’s absolutely nothing to suggest otherwise, except a lot of garbage that comes from the people purporting to manage investments.

Then the next question comes: is there some way to improve on that? Everybody wants to tweak it, “Well, I want to do this, I want to do that.” There is a way to improve it, because these portfolios are not very efficient. They’re efficient cost-wise, not particularly efficient in terms of the relationship of the asset classes, so there’s a possibility of adding value by doing mean variant optimization. And that’s what Asset Builder does.

Asset Builder takes all the basic asset classes, and then we apply mean variant optimization, and then we have points along that frontier for different levels of risk.

J.D.
When you say “mean variant optimization,” you’re saying you’re looking for assets that aren’t correlated, then. Is that right?

Scott
Yes. We’re looking at all the regular asset classes and then we’re trying to find the best way to combine them. You’re looking for low correlation and, if you can, negative correlation assets. So, that’s what we do.

Anybody makes a claim that they have build portfolios along the efficient frontier, I think you should start heading to the door. All you can do is get a little closer and have a discipline that is likely to give you a better proportion portfolio so that you have a good shot at getting the maximum return for the minimum amount of risk. Nobody is going to be on the efficient frontier, because the efficient frontier is a concept, not a place.

J.D.
In Spend ’til the End, you have dozens of different hypothetical scenarios, and you analyze them each in different ways to maximize what you’re calling “the lifetime living standard.” I like this approach; it makes sense to me, and it addresses some of the questions that I’ve had in my own life lately. And for the purposes of book, you use ESPlanner to explore your options.

But ESPlanner is a product that costs $150 for individuals, which many people would probably balk at. Are other ways for the average person to make the same types of comparisons? To figure out, for example, what the effects of increasing your savings rate might have on your future standard of living, as opposed to your current standard of living? Are there ways for individuals to do this on their own, or do they really need a product like ESPlanner?

Scott
I think the book was written to kind of demonstrate the unusual findings that come out, so that you won’t be led astray by the errant conventional wisdom. If you can just grasp that idea, you’ll be a step ahead. The hard part comes in getting your very precise measures.

For example, deciding to delay taking Social Security benefits for a year will increase your lifetime consumption by — we’ll make up a number — 3.2%. I think there’s an intermediary step, and that’s getting the basic rules of thumb down.

If you’re young, debt is a relatively good thing, because you’re going to be paying back fewer real dollars, and you’re going to earning that money. So, the debt you acquire to buy a house is going to work well for you relative to, say, renting. In that sense, it confirms the conventional wisdom, except the conventional wisdom was given to you by its purveyors, they’ll say you’re going to benefit because you have all those tax deductions. Well, that’s BS.

I don’t know if it’s still on the Dallas Morning News website, but I had a calculator where I calculated the total tax benefits that one guy got from owning his house, and then calculated it for each, based on the median room price in major cities. And for all practical purposes, unless you’re in a major metropolitan area on the east or west coast, the whole tax deduction of home mortgages and real estate taxes is a sham, because the deductions most people get from home ownership will be less than the standard deduction.

J.D.
Huh. In that respect, they’re probably better off just paying down the mortgage. I think they’re better off doing that anyway.

Scott
No, no, now see that’s where the focus is wrong. The financial services will have you focused on the tax benefits, but the real benefit is the inflation benefit, which is much more certain than anything that’s going to come in our tax code. The change the tax code every year! Inflation has been with us all of my life. Which do you want to be on? Do you want to bet on inflation or the tax code? Do you think that’s much of a contest?

J.D.
No way. Inflation is around to stay. So, one last question here. As you connect with your audience through your website and through speaking engagements and book signings and so on, what are the biggest concerns they seem to have? Are there certain concerns that come up over and over again? And what kind of advice do you have for them?

Scott
First, there hasn’t been an awful lot of response to the book to date. Larry is in the east coast; he’s doing most of the interviews and TV spots, because the media is mostly east.

J.D.
I think it’s very much worth reading. I’m glad I read it; I think you guys have done a good job there.

Scott
Thank you, thank you. The recurrent themes are still present just in the reader communication. The column is very widely distributed and it’s got a lot of regular readers. But some things come up again and again:

• People want to believe that buying lots of house is good for them.
• They want to believe that buying a second house is good for them.
• They want to believe that borrowing is good for them.
• They want to believe that they should take Social Security benefits as soon as possible because they’re sure they’re going to die early.

[The Social Security] decision is the only instance I know of where people willfully assume they’re going to die young. Everywhere else, people are thinking that they’re going to live forever and hoping they’re going to live forever.

But they want to take that money and they don’t want to think about that decision as a financial decision. They get all tied up in the idea that they can take the money now. They don’t think about it actuarially. (That’s probably a good thing, because if we had 300 million actuaries in the country, it would be a really dull country.)

The reality is that the Social Security benefit delay is the best financial deal out there. Basically you give up a dollar of Social Security benefits and you have to spend a dollar fifty in investment money to get the same benefit as just delaying for a year. That’s a slam dunk.

That’s one of the other things in the book. You’re way ahead of the other people where you’re starting to think about all the alternatives. Most people don’t even stop to think about their spending agenda is way ahead of their income. So they’ve always got the next purchase planned, and they never get to what you might call the philosophical part, which is, “You know? Do I want to consume everything now or save some for later?

J.D.
Well, for me it’s actually been a struggle lately. I spent three years digging out of debt, and I was so focused on it, I had to curtail my spending. I didn’t curtail my luxury spending entirely (I don’t think that anyone could or should), but I focused on getting out of debt for so long there that once all of a sudden I had that free cash flow, it’s really been a challenge for me to say, “How much of this is going to go to savings and how much of it is going to go to improve my current lifestyle?”

That’s why reading Spend ’til the End came at just the right time. It seems to me the book is in many ways geared toward people in their fifties, but there’s still plenty to think about if you’re my age (39) or even younger. So the concept of consumption smoothing made me think, “Hey. It’s okay. I can spend a little bit of money on myself.

Scott
Yes, and it might be a good exercise to overcome some of the reluctance. You’re very likely one of the people who needs to go through an exercise because you’ve developed a new discipline. My wife and I will have conversations. We’re trying to search for things that appear to be natural events. I’m 67, she’s 65. The desire to consume is not permanent. My wife has been getting rid of things for close to a year now.

J.D.
Just purging them?

Scott
Yeah. She’s looking at objects differently. If we don’t use it, she really doesn’t want to have it around. She looks at objects she used to think, “Well, we’ll have those for the children.” But now, she asks the children, “Do you have any interest in this?” And if the kids say, “No,” it goes. And if the kids say, “Yes,” they’re in deep danger of having it arrive on their doorstep.

J.D.
So you’re anti-consuming!

Scott
Well, I don’t think anybody could look at us and say that. We live in a very nice house in Santa Fe, we drive two cars, we go where we want. I complain that I have too many clothes, but that’s because if I could find an acceptable religious order to join where I could have one costume, I would probably do it. But that’s eccentric.

J.D.
My wife complains that my uniform is the navy blue t-shirt, and every time I bring home another navy blue t-shirt, she’s like, “Man, get rid of another one!” I’ve got one on right now.

Scott
I look forward to summer because it’s the time of year when my wardrobe has four pieces: a pair of shorts, a pair of sandals, a shirt or a t-shirt, and the necessary underpants. That’s it!

J.D.
So, what do you plan to do now? Are you focusing on Asset Builder?

Scott
Asset Builder and the blog are kind of the same for me. My column is the kind of the lead feature of the Asset Builder website. Over some period of time we’ll probably change that and expand it. I’d like it not to be a cult of personality.

And Asset Builder is growing very rapidly. The assets under management doubled in four months between the end of January and end of May. So it’s clearly a business idea whose time has come. You can see our gamble with Asset Builder was basically, “If we build it, will they come?” Will people see the value proposition that we put out? Which is “we report regularly on the couch potato portfolios and if somebody wants to do that, they can.”

We like the idea that people will be do-it-yourself investors. But we also know that an enormous number of them really want to get the idea and then have somebody else do it.

J.D.
I was just thinking about that this morning for myself. I know what I want to do with the index funds and so on, but I’m just not ready to focus on them myself. I’m willing to pay something for somebody else to do it. As small as possible, of course.

Scott
As small as possible. But what we’ve found with people coming in is that they get the idea. They say, “All right, I’m going to manage assets as inexpensively as possible; I can’t do better than index funds, and if I basically just let George do it here — the George who has the low price and is making an effort to add value with mean variant optimization, being an efficient risk calculator measurer — then it’s kind of a done deal.”

We’re working on a piece that will be a visualization of the couch potato portfolios versus the Asset Builder portfolios. You can actually pick it up by sorting through the numbers on the website. You can see that for any given standard deviation, the Asset Builder portfolios provide a higher return than the couch potato portfolios. We can’t say, “That’s because the couch potato portfolios are so dumb.” It isn’t.

Couch potato portfolios beat most of the managers. What are we doing and how much do you pick up? Well, we think that our investors will pick up more return than they pay in fees. Our typical client has an account of about $400,000.

J.D.
And you accept clients as small as $5,000, right?

Scott
No, $50,000 is our smallest account and that starts them at 45 basis points. And at a million, it goes down to 30, if I remember. Yeah, I’m pretty sure that’s it.

We’re not going to have a lot of competition, because you have to get a lot of money and have managed it in order to make money doing it, which if we keep going at the current rate, we will have a lot of money under management. And yet, we already have $125 million, and that puts us roughly in the top 20 percent of registered investment advisers, within one year of starting.

J.D.
Nice!

Scott
Yeah. And that again tells me that people who get the idea and they know enough about the internet to feel safe dealing with the internet. In part because they’ve been trained by the company 401K plan. You know, they’ve been making changes to the company 401K plan, ones they choose because the company plan is on it, so we’ve got a whole generation now coming along, people who have been doing transactions on the web and maintenance. They’re accustomed to seeing their bank accounts on the web.

J.D.
Absolutely.

Scott
So, what would have been a lunatic fringe idea ten years ago, and what Kennon Grose at Asset Builder would call “missionary work” is now much closer to what’s normal, mainstream.

J.D.
I really appreciate you taking the time to talk to me; I know it’s been a long conversation, but I’ve learned a lot…

Scott
It’s been a pleasure. I’m delighted to listen to your explanation of how you’ve approached things. See, I’m the message here that we have a marvelous, new communication developing by way of the web and blogs. The column that I have coming out on Sunday is about reinvention and restoration, because while I was in Maine I saw a boat in the same town — in Belfast, Maine — the town that once owed its entire livelihood to chicken factories.

While I was there, two significant events occurred. The first three Buzzards Bay 30s were built and launched. These are beautiful restorations of Herreshoff design — million-dollar boats — and they launched while we were there. Just showing that we still have the capacity to appreciate the past, and there are people who put out the money to own what amounts to a craft work of art.

At the same time, an internet company called Village Soup bought five weekly newspapers in the mid coast area of Maine, one of which has been printing since 1819. So that’s a man bites dog story: the internet company is buying the print company. But shares of the company that owns the Dallas Morning News are down 50% in the last year. Ditto The New York Times.

J.D.
Even the New York Times!?!

Scott
The Washington Post, the best in the group, is down about 34%, and we’re talking circulation declines of 10-11%. From the journalistic point of view, if you’re an inkstained wretch, the world is ending. But how much communication are we losing? And the answer is, “What do you mean, losing?”

J.D.
In a way, we’re kind of gaining it.

Scott
Gaining it! We’re gaining it! We’re getting more unique voices with less invested interest. Less self-piety.

J.D.
I also think one advantage that the web has to offer over print media is the interactivity. I just put up a post saying, “Why don’t you share your personal finance success stories?” And that’s the lead story right now on my site. My readers can share with each other what they’ve done to be successful financially.

I feel like I’m a coach, sometimes, and my readers are a team. We’re working together trying to succeed. There are some definite drawbacks, obviously, to the web. I’m not a professional, I don’t claim to be a professional, but I’m also not a professional writer, either. I don’t have training in journalism, well, not much training anyway.

Scott
Neither do I. Do you enjoy writing?

J.D.
Oh, absolutely. This is what I want to do; it’s what I’ve always wanted to do.

Scott
And is this what you do for a living now?

J.D.
Yes. I was able to quit my job on March 6, I think was the date that I quit. And so now…

Scott
Hey, congratulations!

J.D.
Thanks. It’s exciting and kind of scary.

Scott
And the support is coming from Google-sponsored ads?

J.D.
I try to diversify, actually, as far as the income is concerned. So, yeah, a large part of it is from Google sponsored ads. There are other ad networks that I’m a member of. I try to keep the advertising relatively low-key on the site.

Scott
And that will also be a great advantage. I was on the Dallas Morning News website this morning, and they just hit you in the face with pop-up ads. I just don’t get it. And I’ve talked with several print reporters since the book came out, and the story is universal. The newspaper companies are trying things on the web, but they never put the resources into it that they require, because they’re fighting this battle with Stalingrad with the print edition.

J.D.
I think The New York Times is actually doing an excellent job. I don’t know the economics behind their paper or anything, but I know that their website makes them money. And I think that their website is excellent when compared to other newspaper websites. I love going to the New York Times website.

Scott
I was thinking of buying the Kindle so that I could read the New York Times more regularly.

J.D.
Yeah, everyone is talking about the Kindle lately. I haven’t actually ever held one. I think they’re ugly.

Scott
Neither have I. I wish they would kind of install them as totem objects… We could stare at them.

J.D.
Or maybe the libraries could start getting them and loaning them to clients. Yeah, I bet the libraries love that.

And she was like, “Man, you do not want to do that. We all want to be where you are. You don’t want to come where we are.” It fits in with what you’re saying.

Scott
I have a friend named Joe who is a very talented guy, now approaching his sixties. Joe has not quite been able to get onto the journalism train. He’s written for a bunch of papers but never gotten on the tenure track, so to speak. He’s owned a newspaper in Maine, takes wonderful photographs, and he’s at a magazine that is declining, that covers classic books.

And there is just going to be more and more people like that at the Morning News, when I go back. I just really feel like German officers at Stalingrad: they never get it. They’re just piling up the corpses and covering them with gasoline.

J.D.
I’m curious to see where it goes. I feel very fortunate. I’m able to help people. I’ve been able to parlay this into something that I love to do. I’ve always wanted to be a writer. I never thought I’d write about personal finance. I always thought I’d write poetry or science fiction or something. Personal finance, I never thought that that would be the topic. But it’s a great way to help myself and help other people at the same time.

Scott
Yes! All you have to do is be direct — and you clearly are — so I think you’ve got a great future.

[Name unclear], who is probably smarter than both of us put together — I talked with him early on, and encouraged him to write. He was wondering about it, and I gave him some advice. Little did I know that he would discover in himself a very fluid prose style so that he can approach very complicated topics and he’s like Kotlikoff. He’s got a good enough mind that a lot of things that would stress you and me, just are easily apparent to him, so it’s a lot easier for him to write about some topics than it would be for relatively normal human beings.

J.D.
Well, I’m going to try.

I find it interesting that you’ve been able to make the transition where you’ve got your blog, because there aren’t a lot of print writers, I think, that are doing that. You’ve got the people that are at MSN Money or Yahoo Finance, who they could be in more traditional print media, but for the most part it’s either they’re with the newspapers or they’re not. I like that you’re able to make that transition.

Scott
Well, newspapers are the only game in town. I mean, basically my goal when I started writing was I wanted to reach as large an audience as possible without degrading content. I applied the same principle to my aspirations as a fiction writer: I wanted to write about things and not get precious, but to reach as broad an audience as possible. Newspapers allow that; newspapers are great institutions. But the work is done.

J.D.
You keep talking about reaching as large an audience as possible, and that’s something that I’m really struggling with. When I was writing for a few hundred people, it wasn’t any big deal. I just wrote what came naturally. I find that the larger my audience grows, the more self-conscious I become. I feel like I’m on a stage.

The editing process takes much, much longer for me, and sometimes I feel like I’m bleeding my voice out of it. It’s becoming very mechanical and very forced — the final product — instead of being natural. It doesn’t help me that the articles that I write and do very little editing to tend to get the biggest responses. It drives me nuts.

Scott
You’ve noticed that, too!

J.D.
It happens to you, too?

Scott
Oh yeah. The things I sweat over, a lot of those just simply disappear without a response. But I’ll be under time pressure and I’ll write what I think is a quick and dirty column, and all of a sudden it hits a nerve.

Last year, I had noticed that whenever I mentioned Home Depot, the people they start to curse. So I write about the disappointment of Home Depot. Well, that turned out to have more page views than anything else that has appeared on Money Central. I can’t remember the numbers, but they were blown away at Money Central. The chairman of Home Depot wrote in an e-mail and apologized.

J.D.
Is this “Is Home Depot Shafting Shoppers?” Is that the piece?

Scott
That’s probably it, yeah. I don’t remember the MSN title, but that sounds like an MSN title. They generally are a little harsher in their titles than I am.

J.D.
Learning to craft titles. Whew — I just can’t do that. I feel like mine are always too mundane. I see other people who are able to write and they create these sensationalist titles. I know it draws an audience, but I feel like in some ways it’s disingenuous, too.

Scott
Well, I think you’ve got a really good gut sense. I worry about the headlines that are more suggestive than the content that follows, because there’s a point they become too divisive.

This all gets back to something that you mentioned earlier about feeling that you’re in a conversation. The benefit of the two-way street is that it allows the possibility that there isn’t a final calculus for everything. And that’s really the way things are: there isn’t a final calculus.

J.D.
Absolutely!

Scott
We’re just all kind of muddling though and we use the best tools that are available at this particular moment, and we make the best decisions that we can, given the information that we have. Sometimes, that’s a disaster, but a lot of people out there are thinking that there is some cathedral of truth, where there is a final calculus. I’ll get letters from people saying, “What exactly is the Couch Potato?” And it’s like they got upset when I switched from the Vanguard 500 index to the Vanguard Total Market index.

J.D.
Because they wanted for there to be one right answer.

Scott
There’s a simple reason for it! When I started the whole business, the 500 index was what was in the store. That was what you could use. Now, we have a lot more choices. And there are some other benefits, like it allows you to capture in the same holding, small caps as well. How could you change? They think change invalidates and change doesn’t invalidate, change just shows adaptation.

J.D.
Absolutely. I’m sitting here nodding my head, saying, “Yes!” I believe this, too. It seems especially in our political culture, we want absolutes. We want it to be this or that, we want things to be black or white. We’re very polarized.

For example, when you talk about paying down debt, the mathematical way to do it, of course, is to pay down the high interest rates first. But that never worked for me until I discovered Dave Ramsey, who says, “No, start with the small balances first.” And that really drives some people crazy because they think that doesn’t make sense mathematically.

Scott
It makes sense emotionally, because you get rid of all of it. You say, “I had eight debts, and now I’m down to three.” Eighty percent of the debt is still in the last three.

J.D.
Exactly. But on the other hand, it feels so much better. And you free up that cash flow, too. But for me I say, “Do what works for you.” Because there are multiple approaches.

I think the same goes for risk tolerance. There’s more than one way to invest, and your risk tolerance has to play a huge role in how you invest. There’s no one right way — you’ve got to take into account your risk tolerance.

Scott
Right. If you don’t take it into account, you’ll wind up abandoning the risk that provides the higher return at a very crucial time.

I’ve got a book that I want to suggest you read, and it will kind of expand this for you as well as add an interesting amount of chronology to it. Its title is Aging Well. It’s by George Vaillant. Vaillant is a professor of psychology at Harvard, and he is in charge of the only very long-term study of human beings. One of those human beings is a friend of mine who’s now 88 years old

I visited this friend on Cape Cod a couple days ago. This is a guy who decided on Normandy Beach that if he lived to get off the beach, he would go to Harvard Law School. And he did. He’s very direct.

I asked him on this trip, “Were you tempted to go on the anniversary trip recently?”

And he just looked at me and said, “Hell, no! I didn’t like it the first time.”

This study started when my friend was in his twenties, so there’s a group of Harvard undergraduates in it. There’s a group of very bright women in the Oakland school system, and that started in the thirties. And then there’s a group of inner city men.

They’ve been followed and Aging Well is the synthesis of what’s been learned, and no other theme comes out more powerfully to George Vaillant than the whole idea of adaptation. Nothing else predicted your success in life. It wasn’t the family you came from, it wasn’t your economic background, it wasn’t your education level. Basically, the only other thing he could say is, “Don’t smoke and don’t drink very much,” because those did have negative correlations.

J.D.
That reminds me a little bit of… Have you seen the movies Seven Up! and 21 Up and I think they’re at to 49 Up?

Scott
No.

J.D.
It’s a British documentary series that started in 1961 or 1963 [actually 1964], looking at British schoolchildren who were seven years old, from a variety of different backgrounds. And then every seven years, the director has gone back and looked at the same children (Well, they’re adults now — they’re 49.)

He just looks at their lives. Obviously it’s cursory, because he has 90 minutes to cover 20 people, or 15 people, or whatever he’s down to now. So you get 5-10 minutes with each person in each episode. It’s just fascinating to see how people change, what they go through.

Scott
Yes.

J.D.
I like the human condition. I like how people interact with life.

Scott
And money is a great language for participating in it, either as a writer or as an active human being. That’s where I concluded. When I left fiction, I thought, “Gee, am I selling out? This is a language with a lot of verbs in it; this is good.”

J.D.
To me, money just reveals a lot about people: how they relate to money and how they interact with it. And how they change how they relate to it. My relationship with money now is completely different — it’s almost a polar opposite — from what it was five years ago. So, I think it’s encouraging to see that people can grow and learn and develop.

Scott
Yes. But just don’t assume that everybody can. Hope that you can help some.

J.D.
So far, I’ve been able to help many. I just hope I can help many more.