Quora Answer: Is David Lawrence Ramsey III a Good Financial Role Model?

The following is my answer to a Quora question: “Is David Lawrence Ramsey III a Good Financial Role Model?” 

No. He is an entertainment personality more than he is a financial guru.  He makes his money selling financial advice through syndicated radio shows, more than he does from actual investing.  How does that make him someone credible? 

Consider this: he filed for bankruptcy in 1988 because he was overleveraged on his real estate portfolio.  This means he was more a speculator than an actual investor, and the bank refused to continue credit.  If his portfolio was viable, a bank would not call back the loans.  This is not a bankruptcy filing due to adverse changes in the market beyond his control.  This was reckless borrowing.  He advises people to invest exclusively in equities and disparages bonds, showing that he does not understand how debt instruments work in a balanced portfolio.  This means the personal holdings of the retirees who listen to him are unnecessarily over-exposed and volatile. 

He claims an average annual rate of 10 to 12% return, which is unrealistic unless you are investing a very large sum in a hedge fund, and have that level of risk tolerance.  Also, this does not give a true picture of how the funds are doing.  Annual growth rate is a useful tool to identify trends in investments, nothing more.  It uses the previous year’s earnings as a base to measure growth.  Compound annual growth rate is a better metric for average growth rates.  For example, if a company grew 20% in year one, and growth slowed to year two to 0%, with the compound annual growth metric, we note that change and can use that opportunity to rebalance the portfolio.  The average annual return, it would be seen as 10% growth year on year for both years.  Over an extended horizon, the portfolio is destined to seriously underperform. 

A good financial role model would be someone like Warren Edward Buffet.  He advocates never investing in anything you do not fully understand, and that is just common sense.  This precludes you falling for trends.  Warren Buffet also practices doing a thorough homework of the company, its management, its market position and growth potential relative to its stock price, and then buys and holds.  That is a lot of reading, it is not glamorous, but it makes money.