From: Sanjay Bakshi
Sent: Sat 26/11/2005 18:18
To: BFBV
Cc:
Subject: Dr Zen and his System
Dr. Brian F. Zen, who runs the ZenWay program, claims that as a Zen student he is “used to simple life-style” and that he has “no desire for material luxury.” And yet, when asked about his passion for the ZenWay program, he says “It's what I love to do, and you know, the money doesn't suck.”
Dr. Zen wrote to me recently and made me an offer.
It is, to put it mildly, a very generous offer.
He wants me to recommend to you, as my student, his online investment course which has helped “people with limited means to become millionaires and multi-millionaires.”
Dr. Zen will charge you $800 to sign up. He promises to pay me $400, if you do.
You will, I hope, recall the connection between Dr. Zen’s offer and Mr. Charlie Munger’s example of “bribing the purchasing agent”. I had used this wonderful example as an illustration of the power of incentives and the need for multi-disciplinary thinking in one of my earlier lectures. I was quoting Mr. Munger, who in this speech, said:
“I have posed at two different business schools the following problem. I say, “You have studied supply and demand curves. You have learned that when you raise the price, ordinarily the volume you can sell goes down, and when you reduce the price, the volume you can sell goes up. Is that right? That’s what you’ve learned?” They all nod yes. And I say, “Now tell me several instances when, if you want the physical volume to go up, the correct answer is to increase the price?” And there’s this long and ghastly pause. And finally, in each of the two business schools in which I’ve tried this, maybe one person in fifty could name one instance. They come up with the idea that occasionally a higher price acts as a rough indicator of quality and thereby increases sales volumes. . .
. . . But only one in fifty can come up with this sole instance in a modern business school – one of the business schools being Stanford, which is hard to get into. And nobody has yet come up with the main answer that I like. Suppose you raise that price, and use the extra money to bribe the other guy’s purchasing agent? (Laughter). Is that going to work? And are there functional equivalents in economics – microeconomics – of raising the price and using the extra sales proceeds to drive sales higher? And of course there are zillion, once you’ve made that mental jump. It’s so simple. One of the most extreme examples is in the investment management field. Suppose you’re the manager of a mutual fund, and you want to sell more. People commonly come to the following answer: You raise the commissions, which of course reduces the number of units of real investments delivered to the ultimate buyer, so you’re increasing the price per unit of real investment that you’re selling the ultimate customer. And you’re using that extra commission to bribe the customer’s purchasing agent. You’re bribing the broker to betray his client and put the client’s money into the high-commission product. This has worked to produce at least a trillion dollars of mutual fund sales. This tactic is not an attractive part of human nature, and I want to tell you that I pretty completely avoided it in my life. I don’t think it’s necessary to spend your life selling what you would never buy. Even though it’s legal, I don’t think it’s a good idea.” [Emphasis mine]
Dr. Zen claims to teach Graham-Buffett system of value investing. Here’s what he claims at his site:
“At Zenway.com, we only deploy proven methods developed and tested by proven superinvestors. And in terms of proven investment methods, nothing is more so than the analytical methods introduced in the 1934 classic, Security Analysis, widely recognized as the Bible of Wall Street. Benjamin Graham, the father of security analysis, introduced the idea that stocks should be viewed as small parts of a business that's for sale. He developed a system for identifying the real value of a business based on measurable data. This system was later modified and further developed by Warren Buffett, the greatest investor in the world. Our Zenway investment system is based on the Old Testament written by Benjamin Graham and the New Testament written by Warren Buffett.”
I checked the price of the “old testament” from here. It costs $31.50. And I checked the price of the “new testament” from here. It’s free. Yes, the single most valuable source of knowledge about investing – the Warren Buffett letters – are available for free to anyone who has access to the internet, which I believe, all potential customers of Dr. Zen, do.
So, all it costs is $31.50 to get access to the collective wisdom of two of the greatest minds on Wall Street that ever existed.
How, then, does one go about selling a high-priced product derived out of something so cheap? That’s simple. One uses, the reward super-response tendency and the associated incentive-caused bias (whose bread I eat, his song I sing) which it produces– Mr. Munger’s terms - by pricing the product high and offering a very significant part of the sales proceeds to people like me having access to “captive audience” like you.
There is nothing illegal about Dr. Zen designing his business model in this manner. After all, seeking profits is the essence of capitalism, isn’t it? But I doubt it very much – if the fathers of value investing – Mr. Graham and Mr. Buffett - would approve of the marketing strategies used by Dr. Zen, for promoting products created out of their knowledge, which they generously shared with the world, without any profit motive involved.
When Wal-Mart pushes its suppliers to lower their prices, and then passes on these low prices to its customers, and yet is able to earn a respectable return on capital, it’s an example of a positive-sum game which benefits civilization as a whole. Wal-Mart does not make money off its customers – it makes money with them. But when someone pushes a high-priced product using as ammunition, mouth-watering commissions offered to people who are in a position to influence others, it largely becomes, at least in my view, a zero-sum game. You’re not making money with your clients anymore- you’re making money off them. And, this aspect of capitalism is not very good for civilization.
There is another aspect of Dr. Zen’s philosophy of life which I find rather interesting. He claims to know how to make money in the stock market using the principles of investing he says he learnt from Mr. Graham, Mr. Buffett, and others. And yet, he chooses to run a for-profit venture which sells this very knowledge.
If he is so sure about his system, why is he selling it to others, at any price? After all, the money he can make from his system, if it really works, will be far more, than money he is likely to make by selling that system. By selling the very system which, he believes, works, is he not killing the goose that lays the golden eggs?
Moreover, if he is selling it to others for $800, using 50% commissions to increase volumes, what does that imply about his own rational assessment about the value of his product to its buyers? Would he agree to put his own money in something like this, knowing that 50% of what he pays will go, not to the seller, but to the person who recommended it to him?
These are controversial questions, but logical ones, in my view. In the investment business, we should address these questions in the following manner: If we really know how to do it, we should not sell the “how to do it” for any price. But, if we still want to share our knowledge, then we should give it away – for free.
Prof. Graham knew this. So do Mr. Buffett and Mr. Munger.
I hope you do too…
Regards
Sanjay Bakshi
Dear Prof: Bakshi: I respect your work and your suspicion about any online courses charging a fee for teaching and coaching. I apologize that I did not explain our program too well that made you think that the up-to-50% commission is a "bribe" to you. It is not. By taking a 50% payout, you will have to personally coach whoever you referred into our online coaching and mentoring program. We are actually paying for you coaching work for a one year period. That's why we believe we are providing a extremely valuable service for a very low fee. I happen to believe that personalized coaching is the missing link towards success for all the college kids who went to good schools. I respect your noble idea of teaching for free. But I have one question: If we follow your advice, how could our tutors and teachers make a living and bring food to their family table? Also, how could we set up our classroom and the computers to facilitate our coaching? Would you, our noble professor, consider donating a few million dollars so we can provide value investing university courses for free? Without any pay, how can we recruit talented teachers. By the way, I happen to believe that a commercial coaching business could benefit people more than a non-profit organization because we have an opportunity to create wealth for our trainees and tutors. Further more, could you please do what you preach and come to New York to coach all our students for free? Also, would you take in students into your classes for free? How much your students would have to pay to take your courses? How much do you get paid by giving your lectures? The last time I checked, it seems your students pay a much higher tuition to learn from you. Our guys pay a lot less and get much more personal guidance from us. You and I belong to the same church of Graham-Buffett Value Investing. I am somewhat disappointed and hurt that a fellow believer would attach a brother for offering personalized coaching and mentoring for a meager fee. If we don't offer the guidance ourselves, would you rather hope that we push all the naive investors into those $2,000 per day online trading courses or expensive conferences? I also want to make another point. I fully understand that smart guys like you can just hit the books, synthesize all the conflicting information, and figure out the map and the puzzle all by yourself. But less talented people may need some coaching. Coaching can also dramatically speed up the learning curve. Even Warren Buffett paid a lot more than $800 to attend Ben Graham's lectures. I firmly believe there is value in what you do and what I do. We all have noble motives while pursuing commercial interests by designing different compensation systems. I don't see any reason to belittle other's work. Yes, Buffett and Graham taught a lot. But I believe their teachings can be better structured and better organized. Besides, all the math and language books are already on sale in bookstores, should we just banish all the schools and universities and ask all the kids to read the books themselves? There is also some flaw in the notion that those who know don't teach, those who teach don't know. Do you know that one of world's best swimming coach did not know how to swim himself? Yet he coached many Olympic gold medalists. The coaches are not necessarily the fastest athletes. But they know how to provide guidance. So there is value in what I do even if I am not as good as Buffett. I also believe there is a lot of value in what you teach and you did not choose to keep all the secrets for yourself. Again, I respect your work. I think your misunderstanding of our program is mainly due to the 50% commission. I am sorry that I did not explain the work involved upfront. Had you showed an interest, you would have to sign an agreement with us where you would take up the obligation to coach whoever you refer into our online training program. I hope you could remove your comments from your blog due to the misunderstanding of the work involved behind the 50% commission and tutoring fee. Otherwise, please kindly post my response right on top of your posting to prevent mischaracterization of our coaching program. Respectfully yours, Brian Zen -- BRIAN F. ZEN, CFA http://www.zenway.com - from wisdom to wealth wealth management • estate tax planning Midtown: 330 W. 38 St. Ste 238, New York, NY 10018 Downtown: 211 N End Ave, New York, NY 10282 phone: 212.786.3018 fax: 212.786.1859 cell: 646.388.0887
mistakes or misunderstandings in your blog comments. Please post this
as a formal response from me:
Dear Prof. Bakshi:
There seems to some huge philosophical misunderstandings between two teachers of value investings.
1) Had you decided to be part our Zenway tutoring and mentoring network,you would have to tutor, teach and mentor your team members and students inorder to EARN your 38% fee. The 12% deferred compensation would be based on your performance as a mentor and researcher in our network of enlightened investors. We think the work of teaching and mentoring is noble. It's really a lot of good work for a low fee. We prefer not to label it as a "bribe".
2) The $800 tuition to get one-year's worth of trainings, tutorings, mentorings and research stock picks is really cheap compared to someother not-for-profit investment courses at many universities. Would you care to share with us how much your students pay to enroll in your classes. Further more, would you be willing to return all your teaching compensation to your school?
3) Great investors like Benjamin Graham have come out to teach for a small sweat fee. To say that "if someone is willing to teach and therefore his system must be worthless" is perhaps not reasonable. I bet Warren Buffett paid more than $800 to take Benjamin Graham courses.
4) If we use your logic, we would perhaps close all the schools and universities in the world. You can buy all the cheap math books and physics books, why pay the huge tuition to get tutors, mentors, and instructors from all the not-for-profit universities? It seems a for-profit organization of zenway.com is charging less than some not-for-profit universities.
5) You can always read Newton and Einstein. Then why all the high-priced textbooks, high-tuitioned university courses, why all the reorganization, repackaging, and representation of all the materials from Newton and Einstein. Our simplification and reorganization work at zenway.com is aimed to make value investing so intuitive that even a kid would understand. To say our work is worthless is perhaps an attack on your own teaching work.
6) If we follow your noble advice to make our courses free to all,would Prof. Bakshi be willing to donate $2 million so we can pay the rent of our classroom?
Respectfully,
Brian Zen
http://www.zenway.com/
