Saturday, March 15, 2008
Run on Bank
This picture shows a Run on the Bank that occurred in New York City in February of 1912.
Did any of you follow the financial news yesterday? We had what looked like a full blown "Run on the Bank" at one of the countries largest brokerage houses. It was sort of scary, and you wondered if the institution was going to survive the day. The government did step in, and indicated that that they would step up and provide liquidity for the institution.
As this was going on, I called my dad up, to ask him for his thoughts. He was born in 1920, so he remembers the roaring 20's, and he vividly remembers living through the Great Depression. I asked him if he had any advise for me. He said, "Son, the thing you need to know about a Depression is that He Who Panics First, Panics Best. If there is going to be a run on the bank, you want to make sure you are first in line." You know, it is always hard for me to tell when my dad is joking, and when he is serious. This was one of those cases. So, I chuckled a little bit, and then asked him if he really had any advice for people when the country might be facing tough economic times. He said, "There are three things that are very important. None of them are easy, but all of them are necessary." Below I summarize what he told me.
1) Control Your Spending. Now he was a master at this. I'm talking real old school here. When I was growing up, I would get in trouble for pulling an entire paper towel off the roll. He would yell at me, "Don't tear it off at the perforation, that is what they want you to do. Just tear off only what you need for the job at hand." In the 18 years I lived in his home, there was never a job that he thought required more than 1/8 of a paper towel. He always had a nice car, but he always bought it used, and always paid cash. He says you should never borrow money to buy a car. If you were to tell him that you don't have enough cash to buy a car without borrowing, he would tell you that you are trying to buy too much car . . . buy an older and less fancy car. He also believed in taking a lunch rather than eating out, and he believed that if you had to eat out, then order water with the meal to save the price of a drink. It is funny, when I was growing up I thought of him as being cheap, now that I am older, I think of him as being wise.
2) Get Out of Debt. My dad viewed debt as a terrible thing. Almost a form of slavery, or at least indentured servitude. When a person goes in debt, they no longer control their finances, their finances control them. First step is to tear up the credit cards, and not dig the hole any deeper. Then you should first pay off your credit cards. After that, pay off your car loan, and then finally pay off your house. This is not an easy thing to do, but if you really do a good job on rule 1, rule 2 becomes manageable.
3) Save and Invest. My dad says that after you get out of debt, you should concentrate on saving and investing. He says most people do not have the temperament to play the stock market. Human nature motivates people to usually do exactly the wrong thing in the market. He says the only thing that always works is to: 1) Stay widely diversified between cash, property, stocks, bonds, and hard assets, and 2) time cost average into investments, putting a fixed amount each month into the market.
I should point out that my Dad did not go to college, and has no formal financial expertise. I will say though, that his family made it through the Great Depression, and never missed a meal. In fact, they were able to be generous throughout the depression with both friends and strangers. I can honestly say that I never saw my dad turn any one away empty handed. He was always generous with anyone in need.