Distinguishing the Important from the Unimportant

Via Principles by Ray Dalio:

199) Distinguish the important things from the unimportant things and deal with the important things first.

• 199a) Don’t be a perfectionist, because perfectionists often spend too much time on little differences at the margins at the expense of other big, important things. Be an effective imperfectionist. Solutions that broadly work well (e.g., how people should contact each other in the event of crises) are generally better than highly specialized solutions (e.g., how each person should contact each other in the event of every conceivable crisis), especially in the early stages of a plan. There generally isn’t much gained by lots of detail relative to a good broad solution. Complicated procedures are tough to remember, and it takes a lot of time to make such detailed plans (so they might not even be ready when needed).
• 199b) Since 80% of the juice can be gotten with the first 20% of the squeezing, there are relatively few (typically less than five) important things to consider in making a decision. For each of them, the marginal gains of studying them past a certain point are limited.
• 199c) Watch out for “detail anxiety,” i.e., worrying inappropriately about unimportant, small things. 
• 199d) Don’t mistake small things for unimportant things, because some small things can be very important (e.g., hugging a loved one).

- Joe

Planning for the Inconceivable

"Now you out here all by yourself

Ask Steve Jobs, wealth don't buy health."

- Pusha T

"Even in my will, keep it trill, to the day I peel
Even in my will, keep it trill, to the day I peel
Even in my will, keep it trill, to the day I peel
Even in my will, keep it trill, to the day I..."
-A$AP Rocky

(Above, rappers Pusha T and A$AP Rocky explain the importance of proper estate planning documents.)

When it comes to estate planning and insurance, many individuals fail to even consider unlikely, nevertheless possible, outcomes. For example, when asked what is the worst possible outcome of a car accident, most individuals erroneously answer death. While this is definitely the worst outcome in almost all areas, when it comes to finances there are more challenging situations, such as total paralysis. Without digressing into government assistance programs, total paralysis requires a full-time health care worker, numerous capital improvements such as handicapped entrances and possibly an elevator, as well as countless other expenses. Unfortunately, this situation does not even cross the mind of most, leaving them unprepared when disaster occurs.

There are numerous other problematic situations, including mental deterioration, divorce (no one expects it will happen to them, but divorce rates are extremely high), cancer, diseases, etc. Everyone acknowledges these events happen, just not to them. This is why estate planning and insurance are so critical, and it is a financial planner's job to help an individual or family prepare accordingly. Pertinent documents include a will, durable power of attorney for healthcare, and advanced medical directive (aka a living will) to name a few.

Investments and taxes often get most of the attention as it relates to finances. However, estate planning and insurance are just as critical. While it may be impossible to plan for every scenario, it is wise to take a few specific precautions in order to be better suited to handle certain outcomes.

- Joe

The Power of Argument

Arguing can be a powerful tool. I find that many people try to avoid arguments, or they start arguments for the wrong reason. However, arguments can be valuable. Part of the misconception may have to do with the word itself. Arguing has many negative connotations. Maybe a better word for what I am referring to is debating. Either way, it is important to understand the usefulness of such an act.

Nassim Taleb wrote in Additional Aphorisms, Rules, and Heuristics, "Business wars are typically lost by both parties, academic wars are won by both sides." Likewise, arguments of conflict are lost by both parties, but arguments of an academic nature are won by both sides. This is because, assuming each party is approaching it with good intent, each walks away more intelligent than before. It is an important capability to question one's own opinions and ideology and to expose oneself to people with different ideas.

The cognitive bias belief perseverance consists of two main parts: 1) a reluctance to seek out information that contradicts one's belief and 2) skepticism when finding contradictory information. Arguing, when done with integrity, can be a powerful way to combat against belief perseverance. It is an extremely serviceable and valuable skill to be able to change one's opinion.

This does not mean embrace a herd mentatiliy. Rather, it is about having an open mind, considering different information when appropriate. As Aristotle wrote, "It is the mark of an educated mind to be able to entertain a thought without accepting it." Be able to consider new information, different opinions, and argue with others in an honest way in order to avoid belief perseverance and benefit from the knowledge of others whom you may not initially agree with.

- Joe

Passive Versus Active Investing: An Introduction to Major Challenges

In my co-author's last post,  he introduced some characteristics of passive and active investing. Both have challenges.

For passive investing, cognitive biases that affect decision making are a major challenge. This is also true for active investing, but it might be particularly prevalent in passive investing. It is somewhat common to see a self-prolaimed passive investor changing to an active strategy due to cognitive biases, but it is much less frequent that cognitive biases result in an active investor investing with a passive strategy. Since there are several dozen cognitive biases, this is a real and significant challenge.

For active investing, fees and expenses are a major challenge. Active investing is more expensive than passive investing. Furthermore, passive investing is now being offered for free. This is a major challenge to active investing because fees are one of the most impactful factors in investing.

While the passive versus active debate will likely never be resolved in the minds of everyone, there are major challenges to be faced no mater what ideology one chooses.

- Joe

We Were Born to Win: Passive vs. Active

It's human nature; we were born to win at all costs. Not only are we survival machines, but our fierce competitiveness introduces many different emotional biases that can cloud our judgment in an advanced world when it comes to decision making.

Sports or investing, people have an urge to win.

Specific to investing, investors seek outperformance; we seek superior returns and in effect, more money. While the lottery could be described as a tax on people that are bad at math, one might describe the stock market as an ever changing fertile crescent for confirmation bias: confirmation bias being the tendency to search for or interpret information in a way that confirms one’s beliefs or hypotheses. Humans are very talented at coming up with facts to back hypothesizes, while it should be hypothesizes as a result of facts.

I would like to introduce two financial strategies to you: passive and active.

Passive management aims to replicate the performance of the “market” as a whole. When I say market I am referring to the aggregation of buyers and sellers, the average of what every other investor is doing. The passive investor does not attempt to “time” the market; this could be selling their positions right before the election or the passing of a bill in anticipation of some type of mass pessimism. The passive investor is the stoic of investors: one who can endure pain or hardship without showing their feelings or complaining.

Why is this done? The passive investor has an understanding that their lack of total comprehension of why the market goes up and down will prevent them from making educated investing decisions. However, they believe in “reversion to the mean.” The market will go up, the market will go down, but given a long time period the market will consistently rise. The passive investor controls their fear.

Active investors see themselves as the superior investors. Due to various methods and research techniques, the belief is that there is the possibility of outperforming a given index or market through individual stock selection and market timing. The essence of their approach is to capitalize (outperform) based on pricing inefficiencies in the marketplace.

Individuals utilize the active approach (hire an active manager) to increaser their perceived chances of outperforming the market. Through the relationship they gain researched and informed investment decisions. They also have the possibility of maximizing gains and minimizing losses. It is important to remember that an active investor is different than a financial planner, which covers not just investing, but all aspects of financial planning.

Now let us look at your situation. You are 24, you just landed a job, maybe your first, and you are thinking about investing. Do you need a financial planner? I would say no, but you do need a financial plan. And part of this plan involves deciding how you are going to invest your funds. Once you start saving it can be easy to be deterred, one bad mistake could set you back several years and your optimism about saving may be ruined. My advice to you is to step back from idiosyncratic risk, (risk associated with one company or a small group of them) and buy the market as a whole. Once a solid base is built up, a time or even a need may come for an active manager; however given the extreme value of time, especially in your 20s, the best thing in most situations is to step back from risk, choose a cheap fund, forget about your money and do not pay attention to the markets.

-Luke

Quotes to remember from Letters from a Stoic; by Seneca

“When one has lost a friend one’s eyes should be neither dry nor streaming. Tears, yes, there should be, but not lamentation.”

“You can only acquire it successfully if you cease to feel any sense of shame.”

“You cannot, I repeat, successfully acquire it and preserve your modesty at the same time.”

”You have to persevere and fortify your pertinacity until the will to good becomes a disposition to good.”

“You want to live-but do you know how to live? You are scared of dying-and, tell me, is the kind of life you lead really any different from being dead?”

“Success is going from failure to failure without loss of enthusiasm.”

”Every journey has an end.”

“Everything hangs on one’s thinking.”

“For men in a state of freedom had thatch for their shelter, while slavery dwells beneath marble and gold.”

“How can a thing possibly govern others when it cannot be governed itself?”

“How much better to pursue a straight course and eventually reach that destination where the things that are pleasant are the things that are honorable finally become, for you, the same”

“I am telling you to be a slow-speaking person.”

 

-Luke

How to have more money than you will know what to do with

It is rare I see young adults that have a heightened sense of urgency to prepare for the next level. I will not lie, as a 21 year old I often have the mindset that I have all the time in the world. I have more than enough time to “figure it out” and “get what I want”. What I find important to keep in the front of my mind is that young adults have something even Warren Buffett cannot buy: time. Time is the only treasure most of us start out with in abundance, and let me tell you, they are not making any more of it. Let’s make the most of the opportunities we have today, because there will soon come a day when time is not quite as ubiquitous.

Want to be wealthy by the end of your life?

Learn early in life how to defer gratification. The ability to resist temptation for an immediate reward, such as blowing an entire paycheck on one night out, is a challenge. Self-control is like a muscle, the more one uses it, the stronger it gets. However, if one never practices self-control, it becomes weaker and weaker.

The “Marshmallow Theory,” based on a widely publicized Stanford University experiment, has been a landmark in the ability to demonstrate the power of self-control in individual’s financial and personal lives. The experiment followed the actions of children who were left alone with a marshmallow and told that if they did not eat it they would get another one in 15 minutes. Some children waited the full 15 minutes, some ate the marshmallow immediately, and others ate it somewhere in-between. Years later, researchers tracked down the same children and found that those with the willpower to wait the full 15 minutes (one in three), grew up to be more successful adults than those who ate the marshmallow immediately, including higher SAT scores and higher-paying professions. Do not eat the marshmallow.

We need to learn to take as much pride in not owning something as owning something. What is even more of a challenge is seeing the aforementioned funds having any ability to make you wealthy; it will. A one-time investment of only $5,000 when you are 25 will grow (@8%) to well over $75,000 by the time you are 60. To put that in contrast, to have the same amount when you are 60 you would have to invest over $24,000 at the age of 45. We have the advantage; (Pre-tax basis, assuming 3% inflation).

We cannot wait for luck to make us rich. Wealth does not come to us, it does not look for us, we need to go get it. How? By living below our means. Be proud of a simple lifestyle, wear it on your shoulder; pay yourself first and build up your wealth. The first step to fully embracing a frugal lifestyle is to ascertain what areas of your life you need to cut back on. The easiest way to do this is to keep a budget. Break it up on a weekly, monthly and annual basis; that $2.50 a day on coffee may not seem like a lot, but $2.50 a day invested on a pre-tax annual basis would return over $180,000 35 years later (assuming 8% rate of return). It is also important to keep in mind that the best things to spend time and money on at a young age are experiences; you’ll sure remember that camping trip you took with your best friends a heck of a lot longer than that night you blew $200 at a bar.

Those who plan for retirement will succeed in prospering in it. Writing down your goals or your plans has no magic in its own, but those who document what is important to them at an early age are more likely to identify where they are, where they want to go, and how to get there. This will help hold you accountable.

The happiest people out there are not those who are sitting back on a beach doing nothing productive with their lives. They are those who have determined for certain, at a young age what is important to them, and have done those things throughout their lives. Those who succeed know that all the “tomorrow” may not be guaranteed, and for that reason excitement cannot be completely pushed off. Let’s do everything we can to identify our passions, dreams, and goals, and then find ways to make those dreams a reality today.

-Luke

The Difference Between Complicated and Complex

The book I am currently reading, The Checklist Manifesto: How to Get Things Right by Atul Gawande, references a white paper discussing the difference between complicated and complex. The white paper, entitled The Simple, the Complicated, and the Complex: Educational Reform Through the Lens of Complexity Theory, is written by Sean Snyder and is published through The Organization for Economic Cooperation and Development (OECD). It can be found here. Both sources, the book and the white paper, adapted information from the original study by Professors Brenda Zimmerman of New York University and Sholom Glouberman of the University of Toronto where they analyzed Medicare reform in their landmark paper Complicated and Complex Systems: What Would Successful Reform of Medicare Look Like?, which can be viewed here. All three sources discuss the difference between complicated and complex problems.

The following is an excerpt from the book explaining the difference between complicated and complex with an example:

Complicated problems are ones like sending a rocket to the moon. They can be sometimes broken down into a series of simple problems. But there is not a straightforward recipe. Success frequently requires multiple people, often multiple teams, and specialized expertise. Unanticipated difficulties are frequent. Timing and coordination become series concerns.

Complex problems are ones like raising a child. Once you learn how to send a rocket to the moon, you can repeat the process with other rockets and perfect it. One rocket is like another rocket. But not so with raising a child, the professors point out. Every child is unique. Although raising one child may provide experience, it does not guarantee success with the next child. Expertise is valuable but most certainly not sufficient. Indeed, the next child may require an entirely different approach from the previous one. And this brings up another feature of complex problems: their outcomes remain highly uncertain. 

Mr. Snyder elaborates on the difference between the two:

Complicated contexts are the realm of expertise and data analysis – the known unknowns. Cause and effect are not self-evident but can be teased out through analysis. The policy maker’s role here is to assemble the requisite minds and encourage differing opinions while avoiding paralysis of analysis. Once cause and effect are understood, interventions can be undertaken to tackle the problem, and, if the required expertise were present during the discussion phase, as in the case of the rocket launch above, the solution should work and be replicable.

The complex is the realm of the unknown unknowns. It is a space of constant flux and unpredictability. There are no right answers, only emergent behaviours... The policy maker’s role in this space is to create safe spaces for patterns to emerge, which is best done by increasing levels of interaction and communication within the system to its largest manageable level. Expertise is useful but not sufficient to solve complex problems – great patience and a sharp eye for new behavioural patterns are the only way forward.

Once an understanding of the difference between complicated and complex is developed, what are the practical implications when problem solving?

The key is recognition. Is the issue is complicated or complex? This will then prompt answers to other questions: Is there a pattern to be followed? Can something be replicated to achieve success? Is one dealing with dynamic characteristics? Can a formula be applied? Will outside expertise solve the problem or only increases the chances of solving the problem? Will a heuristic help?

Despite often being used as synonyms, complicated and complex are very different. It is important to understand the differences between the two and to be able to apply it to problems and decisions in order to take the steps towards resolutions more effectively.

- Joe

Benjamin Franklin

I just finished reading Benjamin Franklin's autobiography. While the autobiography was very interesting overall, one takeaway in particular stood out to me:

Benjamin Franklin read a lot.

A few excerpts from the text:

From a child I was fond of reading, and all the little money that came into my hands was ever laid out in books.

He credits reading for some of his other skills:

My mind having been much more improv'd by reading than Keimer's, I suppose it was for that reason my conversation seem'd to be more valu'd.

He was friends with others who read a lot:

My chief acquaintances at this time were Charles Osborne, Joseph Watson, and James Ralph, all lovers of reading.

He even created a library system, one of the first of its kind in the Colonies:

The libraries were augmented by donations; reading became fashionable; and our people, having no publick amusements to divert their attention from study, became better acquainted with books, and in a few years were observ'd by strangers to be better instructed and more intelligent than people of the same rank generally are in other countries.

Reading was a priority, both to learn and for fun:

This library afforded me the means of improvement by constant study, for which I set apart an hour or two each day.

Reading was the only amusement I allow'd myself.

Benjamin Franklin's reading habits remind me of a quote by Charlie Munger:

In my whole life, I have known no wise people who didn't read all the time -- none, zero. You'd be amazed at how much Warren (Buffett) reads -- at how much I read. My children laugh at me. They think I'm a book with a couple of legs sticking out.


- Joe

Arithmetic Versus Geometric Mean

An important concept of investing which can be somewhat challenging to grasp is the difference between arithmetic mean and geometric mean.

Arithmetic mean is also known as the simple average. It is the sum of all numbers divided by the number of observations. For example, the arithmetic mean of 4,5,6, and 7 is 5.5, calculated the following way:

(4+5+6+7)/4 = 5.5

The geometric mean is notably different. As it relates to investing, the geometric mean can be used to calculate a time-weighted compounded rate of return. The formula to calculate geometric mean is the following:

The difference between the two as it applies to investing is best illustrated through an example:

From year 1 to year 2 a stock increases in value by 100%. 
From year 2 to year 3 the stock decreases in value by 50%.

The arithmetic return is 25%, calculated as (100%+-50%)/2 
The geometric return is 0%, calculated using the formula.

This is a significant difference. If we use some specific stock prices and apply the returns, we can more clearly understand:

From year 1 to year 2 a stock at $20 increases in value by 100% to $40. 
From year 2 to year 3 the stock at $40 decreases in value by 50% to $20.

Even though the arithmetic return is 25%, the stock which was worth $20 at the beginning of year 1 is still worth $20 at the end of year 2.

Another example from a different perspective:

You have $100. You lose 10% and then gain 10%. How much do you now have?
The answer is $99 because 10% of 100 is 10 but 10% of 90 is 9.

Even though the arithmetic return is 0%, the geometric return is actually negative.

This is one of the reasons why minimizing losses can be more important than maximizing gains - losses hurt more than gains help, both literally and psychologically through loss aversion.  

-Joe

Correlations and Investing

One of my favorite bloggers is Ben Carlson. He is a CFA (Chartered Financial Analyst) and author of the blog A Wealth of Common Sense. I would strongly recommend you check out his blog by clicking on the link here.

Mr. Carlson has had some great posts recently on correlations as it relates to investing. To preface, investors often look for lowly correlated, negatively correlated, or uncorrelated assets because this is a basic principle behind diversification, famously referred to as the only free lunch in investing. However, just because an asset has a low correlation or is uncorrelated with another does not make it a good investment. As Mr. Carlson writes, this is because correlations are dynamic, not static, meaning they change over time. Additionally, the risk-return tradeoff still must be considered when deciding between investment assets. For example, Mr. Carlson notes how "cash has little correlation with the S&P 500, just as commodities do, but that doesn’t mean it makes sense to hold cash over the long run." Furthermore, investing solely for the sake of negative correlation can be inappropriate as well:

The problem with a focus exclusively on correlation is that stocks are up on average three out of every four years. So there isn’t an investment that perfectly offsets the risk and returns from stocks with similar performance. Correlations also tend to change when high returning strategies are discovered by the wider investing community.

In other words, since stocks are up on average three out of every four years, assets negatively correlated with stocks must be down on average three out of every four years.

Another issue is that when everything goes extremely poorly (i.e. a depression or recession), the correlation concept fails. Mr. Carlson writes:

The other problem with diversification is that it can fail you at the worst possible times. We saw this in the 2008 crash when everything got killed, save for cash and U.S. Treasury bonds. When markets go terribly wrong, correlations tend to go to 1 (everything falls together). 

Overall, investing in assets solely because they provide negative correlation, low correlation, or are uncorrelated can be a dangerous strategy. That being said, diversification is an essential aspect of investing and correlation is a significant part of diversification. However, each assets must be considered from a risk-return standpoint both from a individual standpoint as well as from a comprehensive and holistic point of view.

- Joe

sources:
A Lesson in Portfolio Correlations via A Wealth of Common Sense
William Bernstein on Diversification via A Wealth of Common Sense
There’s No Such Thing As Precision When Investing via A Wealth of Common Sense

Value vs. Growth Investing

Often, specifically in the genesis of an investing career, we come across two common investing terms that can be very confusing: value investing, and growth investing. Both strategies seek to produce the best returns; both claim to be the best investment decision. Why the difference in name? Like most goals there are several different approaches to get where you’re going.

Growth investing, as the name suggests, is the approach that attempts to seek out companies that will experience faster than average growth. Growth can be measured by revenues, earnings, or cash flow. The way the business is managed is also very important. For example, many growth-styled companies are more likely than value-styled companies to utilize profits for capital expenditures; this can be the purchasing of additional factories, company acquisitions, or other projects.  This is seen as more beneficial than simply using profits to buy back stock or pay out dividends to shareholders.

The goal may be to outperform the market by identifying these growth-type companies, but it is important to understand that there is no free lunch; it is impossible to get something for nothing. Growth companies tend to represent a greater risk than value companies. That is why if one plans on investing in growth companies, mutual funds, whatever; it should be clear that often a higher risk tolerance is required.  

Value investing on the other hand attempts to find the “diamonds in the rough”; this meaning companies that are trading at levels below their fundamental worth; there are many reasons this could be the case. Often entire industries fall on hard times, companies have awful earnings reports, or there is just a horrible perception about the company; these are just a few reasons that a company could be trading at a discount.

In general, value companies tend to be perceived as less risky than growth, often value companies are mature names that are paying consistent dividends to their shareholders.  

This is of course the tip of the iceberg; analysts use complex models and forecasting techniques to best ascertain the future performance of both growth and value names. That is probably not your job as an investor; but it is your job to understand to the best of your ability what you’re investing in.

 

-Luke

Wisdom From Nassim Taleb

Nassim Taleb recently created a document titled Additional Aphorisms, Rules, and Heuristics which I find contains many pieces of insightful wisdom. Here are a few parts that stood out to me:

Never read a book review written by an author whose books you wouldn't read.

If someone is making an effort to ignore you, he is not ignoring you.

Never hire an A student unless it is to take exams.

Business wars are typically lost by both parties, academic wars are won by both sides.

The only way you can ascertain that you are really rich is if you prefer to drive a slightly beaten nondescript car, without feeling compelled to let others know that you are doing it "by choice."

People tend to whisper when they say the truth and raise their voice when they lie.

A good book gets better at the second reading. A great book at the third. Any book not worth rereading isn't worth reading.

A heuristic on whether you have control of your life: can you take naps?

The longest book I've ever read was 205 pages. 
One of the shortest books I've ever read had 745 pages.

If the professor is not capable of giving of class without preparation, don't attend. People should only teach what they have learned organically, through experience and curiosity... or get another job.

If you don't feel that you haven't read enough, you haven't read enough.

To understand how something works, figure out how to break it.

It is a sign of weakness to avoid showing signs of weakness.

An enemy who becomes a friend will always be a friend; a friend turned enemy will remain so forever.

If you are not familiar with Nassim Taleb, I would recommend looking into some of his books and ideas.

-Joe

Premortem

I recently finished reading Thinking, Fast and Slow by Daniel Kahneman. In the book Kahneman touches on a managerial strategy called premortem, during which he references the thought-leader of the subject, Gary Klein. Essentially, premortem is the opposite of postmortem. Gary Klein describes "Performing a Project Premortem" in the Harvard Business Review and goes into detail on the concept, which can be read here. However, this excerpt from Thinking, Fast and Slow paints a vivid picture of the idea as well:

The procedure is simple: when the organization has almost come to an important decision but has not formally committed itself, Klein proposes gathering for a brief session a group of individuals who are knowledgeable about the decision. The premise of the session is a short speech: "Imagine that we are a year into the future. We implemented the plan as it now exists. The outcome was a disaster. Please take 5 to 10 minutes to write a brief history of that disaster."

I can immediately envision many useful applications of this exercise. Mainly, it can help both proponents and opponents of a decision brainstorm using prospective hindsight, which can improve accuracy in identifying reasons for future outcomes.

While Thinking, Fast and Slow contained many excellent thoughts and ideas, this concept of premortem stood out to me because of the hindsight aspect which offers benefits that other risk analysis methods do not.

- Joe

The Most Efficient Predator You Don't Know

Via the National Wildlife Federation August/September 2014 Edition by Natalie Angier:

African lions roar and strut and act the apex carnivore, but they're lucky to catch 25 percent of the prey they pursue. Great white sharks have 300 slashing teeth and that ominous movie sound track, and still nearly half their hunts fail. Dragonflies, by contrast, look dainty, glittery and fun, like a bubble bath or costume jewelry, and they're often grouped with butterflies and ladybugs on the very short list of "Insects People Like." Yet they are also voracious aerial predators,  and new research suggests they may well be the most brutally effective hunters in the animal kingdom.

Compared to the aforementioned predators, dragonflies statistically hunt much more productively.

Dragonflies manage to snatch their targets in midair more than 95 percent of the time.

There are three key factors that enable dragonflies to hunt so successfully: their nervous system, eyes, and wings.

Nervous system:
One research team has determined that the nervous system of a dragonfly displays an almost human capacity for selective attention, able to focus on a single prey as it flies amid a cloud of similarly fluttering insects, just as a guest at a party can attend to a friend's words while ignoring the background chatter.

Eyes:
Dragonflies also are true visionaries. Their eyes are the largest and possibly the keenest in the insect world, a pair of giant spheres each built of some 30,000 pixel-like facets that together take up pretty much the entire head.

Dragonflies... have a full 360-degree of vision.

Wings:
Dragonflies are magnificent aerialists, able to hover, dive, fly backward and upside down, pivot 360 degrees with three tiny wing beats, and reach speeds of 30 miles per hour - lightening fast for an arthropod. 

In the dragonfly, the four transparent, ultra-flexible wings are attached to the thorax by separate muscles and can each be maneuvered independently, lending the insect an extraordinary range of flight options. "A dragonfly can be missing an entire wing and still capture prey," Stacey Combes, who studies the biomechanics of dragonfly flight at Harvard University, says.

While the dragonfly is a well-liked insect that people tend to enjoy seeing, it is also one of the most fascinating and efficient predators in nature, catching prey unlike any other.

-Joe

The Power of Simplicity and Subtraction As It Relates to a Winner's Game Versus a Loser's Game

“It is not a daily increase, but a daily decrease. Hack away at the inessentials.” 

- Bruce Lee

Simple is greater than complex. Similarly, subtraction can be as useful as addition. Often we seek improvement by addition. However, subtraction is a viable option that often gets overlooked as it promotes simplicity.

When Steve Jobs created the line of Apple products, such as the iPhone, iPad, and iPod, he did not choose to make the most developed and complicated technology. Rather, one of the appeals of these gadgets is their simplicity; they all have one main button.

"The difference between successful people and very successful people is that very successful people say 'no' to almost everything."

- Warren Buffet

Shane Parrish recently had an interesting blog post discussing Jim Collins and a few of his books. The title of the blog post is "Forget The 'To-Do' List, You Need A ‘Stop Doing’ List," which I think is a very interesting concept. As Shane Parrish eludes to in the post, while writing his books Jim Collins noted the following:

(This) lesson came back to me a number of years later while puzzling over the research data on 11 companies that turned themselves from mediocrity to excellence, from good to great. In cataloguing the key steps that ignited the transformations, my research team and I were struck by how many of the big decisions were not what to do, but what to stop doing.

Steve Jobs said something similar on focus, mentioned in another Shane Parrish blog post:

"People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the 100 other good ideas that there are. You have to pick carefully. I’m actually as proud of the many things we haven’t done as the things we have done.

One of my favorite heuristics, (techniques for problem solving, learning, and discovery that give a solution which is not guaranteed to be optimal), is referred to as occam's razor. Basically, occam's razor states that when deciding between two theories that make the same prediction, the simpler one is superior. Again, keep things simple.

While simplicity and subtraction are not entirely the same thing, they do go hand in hand. Eliminate the urge to add more and instead look to subtract in order to simplify.

In order to truly understand the power of simplicity and subtraction, it is crucial to understand the difference between a "winner's game" and a "loser's game."

In The Loser's Game by Charles D. Ellis he distinguishes the difference between the two. Essentially, in a winner’s game the final outcome is determined by the activities of the winner. In a loser’s game the final outcome is determined by the activities of the loser.

According to Ellis, "Dr. Simon Ramo identified the crucial difference between a winner's game and a loser's game in his excellent book on playing strategy, Extraordinary Tennis for the Ordinary Tennis Player." Ellis writes:

After extensive scientific and statistical analysis, Dr. Ramo summed it up this way: Professionals win points, amateurs lose points. Professional tennis players stroke the ball with strong, well aimed shots, through long and often exciting rallies, until one player is able to drive the ball just beyond the reach of his opponent. Errors are seldom made by these splendid players.

Amateur tennis, Ramo found, is almost entirely different. Brilliant shots, long and exciting rallies and seemingly miraculous recoveries are few and far between. On the other hand, the ball is fairly often hit into the net or out of bounds, and double faults at service are not uncommon. The amateur duffer seldom beats his opponent, but he beats himself all the time. The victor in this game of tennis gets a higher score than the opponent, but he gets that higher score because his opponent is losing even more points.

As a scientist and statistician, Dr. Ramo gathered data to test his hypothesis. And he did it in a very clever way. Instead of keeping conventional game scores – "Love," "Fifteen All." "Thirty- Fifteen." etc. – Ramo simply counted points won versus points lost. And here is what he found. In expert tennis, about 80 percent of the points are won; in amateur tennis, about 80 percent of the points are lost. In other words, professional tennis is a Winner’s Game – the final outcome is determined by the activities of the winner – and amateur tennis is a Loser’s Game – the final outcome is determined by the activities of the loser. The two games are, in their fundamental characteristic, not at all the same. They are opposites.

So if you are an amateur tennis player, the best strategy for winning a loser's game is by minimizing mistakes and letting the opponent beat themselves. Ellis writes the following about Dr. Ramo's book:

Dr. Ramo explains that if you choose to win at tennis – as opposed to having a good time – the strategy for winning is to avoid mistakes. The way to avoid mistakes is to be conservative and keep the ball in play, letting the other fellow have plenty of room in which to blunder his way to defeat, because he, being an amateur (and probably not having read Ramo's book) will play a losing game and not know it.

He will make errors. He will make too many errors. Once in a while he may hit a serve you cannot possibly handle, but much more frequently he will double fault. Occasionally, he may volley balls past you at the net, but more often than not they will sail far out of bounds. He will slam balls into the net from the front court and from the back court. His game will be a routine catalogue of gaffes, goofs and grief.

He will try to beat you by winning, but he is not good enough to overcome the many inherent adversities of the game itself. The situation does not allow him to win with an activist strategy and he will instead lose. His efforts to win more points will, unfortunately for him, only increase his error rate. As Ramo instructs us in his book, the strategy for winning in a loser's game is to lose less. Avoid trying too hard. By keeping the ball in play, give the opponent as many opportunities as possible to make mistakes and blunder his, way to defeat. In brief, by losing less become the victor. 

Many others have spoken and written on this same concept.

Admiral Morrison writes in Strategy and Compromise, “Other things being equal, the side that makes the fewest strategic errors wins the war."

Likewise, Charlie Munger notes "It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."

Furthermore, Shane Parrish says in his blog post of the same title, "avoiding stupidity is easier than seeking brilliance"

This concept of a winner's game versus a loser's game and avoiding errors ties back to the simplicity and subtraction discussion. A majority of activities (unless you are a professional or expert) are loser's games, including not only war, golf, tennis, etc but also intellectual pursuits, judgements, and decision making. As a result, keeping things simple through subtraction in order to minimize mistakes is an essential part of winning the loser's game.

-Joe

Why People Do Not Read

My friend, Max, recently posed the question on Facebook, "What do you think is the main reason/s that kids don't like to read?" I found it to be a very interesting and thought provoking question. I have grappled with a similar question for some time now.

However, before I attempt to give my opinion on the answer, it is important to make some key distinctions. One, there is a difference between "What do you think is the main reason/s that kids don't like to read?" and "What do you think is the main reason/s that kids don't read?" I will not attempt to answer why kids don't like to read because that would be speculation on my part; rather, I will attempt to answer the latter. Second, I will replace the word "kids" with "people." Kids do not always have the same freedom of choices compared to adults. Therefore, I believe it to be more exploratory to answer the question as it applies to "people." So to clarify, the question I will attempt to answer is as follows:

"What do I think is the main reason/s that people don't read?"

My answer to this question is surprisingly simple. It is not important to them. Everyone has the same hours in the day. We make time for things that are important to us and we do not make time for the things that are unimportant. This is true for everything, not just reading. It is as simple as that. Rather than reading we choose to text, play video games, browse the internet, watch SportsCenter, etc.  I am not insinuating that these are bad things. If we choose to do these things rather than read, we are deciding that they are more important to us. Again, if it is important, we will make time. My co-author of this blog wakes up early each day to read before going to work. When I was reading 15+ books a month, I would read at least an hour every day. No matter what my day consisted off, I would read for one hour. I could continue to cite numerous examples regarding prioritizing but hopefully the point is understood. We make time for what is important to us and we do not make time for what is unimportant. If people do not read, it is because it is not important to them.

-Joe

Optimizing Synergies With Strength Versus Weakness Distribution

This is not checkers; this is motherfuckin' chess.

           - Ben Horowitz, The Hard Thing About Hard Things

Generally speaking, a greater emphasis is placed on fixing weaknesses rather than improving strengths. However, this may be the wrong criteria for analytics in a variety of scenarios. In the book The Hard Thing About Hard Things by Ben Horowitz, Mr. Horowitz talks about the hiring process, specifically the strength versus weakness tradeoff. He notes a common mistake is "valuing lack of weakness rather than strength." A person who has little or no visible weaknesses is consistently viewed as superior to someone who has obvious weaknesses, and the strengths are then subsequently dismissed. However, this may not be the best way of comparing individuals, businesses, etc.

For example, person A has no apparent disadvantages but is decidedly average across the board. On the other hand, person B is terrible at X (and is quickly dismissed), although she happens to be excellent and Y and Z. Too often person A is favored over person B based on the "feel test" when it should be the other way around.

This problem is very situational. Ultimately, the decision maker must decide which weaknesses are acceptable and can be dealt with and/or improved on in order to determine what is the best course of action. While predominantly we tend to avoid weaknesses, we may be better off looking at the strength-weakness tradeoff from a different perspective. Specifically, is it worth improving strengths instead of trying to cover up weaknesses? Many times the answer is yes.

I often see this problem among team athletics. For example, in the spirit of the World Cup lets say there is a soccer team with the following talent distribution amongst starters:

• 4 excellent players
• 4 average players
• 3 poor players

Keep in mind soccer has 11 starters. The above talent distribution is rather common as soccer tends to have parity amongst teams. That is, each team has a fairly similar mix of talent. No team has 11 all-stars and no team has 11 terrible players.

So what does the coach do? For the sake of this example, lets say all 10 field players can play offense, defense, and midfield at a level equal to their overall talent level. How does the coach arrange the lineup in order to give the team the best chance to win?

Similar to the aforementioned discussion, too often a coach tries to cover up weaknesses by putting one excellent player at offense, two excellent players at midfield, and one excellent player at defense, thereby having an average offense, average midfield, and average defense in an attempt to cover up any and all weaknesses.

But perhaps the coach should consider a different strategy. Perhaps the coach should put all the excellent players on offense and accept having a poor defense, or perhaps the coach should put all the excellent players on defense and accept having a poor offense. Or maybe the coach should put all the excellent players at midfield. Why might these strategies of grouping the talent together and accepting certain weaknesses be superior to being average across the board? The answer has to do with synergy.

Synergy is the interaction or cooperation of two or more organizations, substances, or other agents to produce a combined effect greater than the sum of their separate effects. In simpler terms, two people working together can produce a greater effect than each can individually. One plus one can equal three with synergy. On the soccer field, the four excellent players are better off working together than being spread apart, unable to utilize each other. While this may come with one or two weaknesses, focusing on having strengths as opposed to hiding weaknesses often produces superior results.

This is also true for organizations in business. Being great at one aspect of your business is likely better than be average at everything. And even if you have a few weaknesses (which is likely no matter what), you can distinguish yourself by standing out in certain areas.

- Joe

The First Thing You Should Do Every Day

May of each year I look forward to listening to a few of the commencement speeches given to college graduates around the country. Usually there are two or three excellent speeches that contain timeless advice. My favorite this year was the University of Texas at Austin 2014 Commencement Address given by Admiral William H. McRaven. I would highly encourage you to view it here.

One of the points that Admiral McRaven makes is that you should start each day by making your bed, a practice regularly found in the military. He notes two important reasons why you should do this:

1. To start the day off with an accomplished task which will compound into "another and another" productive task.
2. To have a nice bed to come home to if you happened to have a miserable day, signify the opportunity for a new start tomorrow.

He says "The little things matter... If you can't do the little things right, you will never be able to do the big things right." I think it is important to start the day off with a productive task. Rather than dragging yourself in front of the TV and watching SportsCenter on repeat for two hours, by beginning each day accomplishing the simple yet significant task of making your bed, you are setting yourself up for a productive day.

Admittedly, I never use to make my bed. After watching this commencement address about a month ago, I have made my bed first thing every morning with positive results. Like Admiral McRaven points out, one would be surprised how meaningful a positive task can be to start one's day. Additionally, it always is better going to bed at night in a bed that is made compared to one that is messy.

I would highly encourage everyone to watch the entirety of Admiral McRaven's 2014 University of Texas at Austin 2014 Commencement Address and begin each day by making your bed.

-Joe

Fiction vs. Non-fiction

I recently finished reading Mr. Mercedes by Stephen King. I have read the last 4 or 5 Stephen King books and have been entertained by them all. I think there might be a misconception about Stephen King's genre of books - many of them are not the horror type stories that everyone associates with him. For example, Mr. Mercedes is a mystery and suspense type book. Either way, I would encourage anyone to read some of Stephen King's books as he is an exceptional writer. In my opinion, one of this greatest strengths is the ability to cover multiple perspectives in the same novel which I enjoy.

I read Stephen King and fiction books in general for entertainment purposes. However, often I learn just as much from fiction books as I do non-fiction books. I think it is important for any reader to vary the type of books he or she reads. While my balance between fiction and non-fiction is probably in the 20% fiction to 80% nonfiction range, I believe that having some variety is good. And I find both types of books fulfill the overall purpose of my reading - to learn.

For example, a few one-liners from Mr. Mercedes that are think are particularly interesting regardless of context:

"Don't complicate what's simple."
"It's hard to change your life when you're old."

Despite my desire for some fiction and nonfiction balance, I am still very selective about what fiction books I decide to read. Specifically, I have two key factors I follow:

1. Read exceptional authors. (i.e. Stephen King)
2. Read books that are culturally significant.

While number one is straightforward, number two is best explained with examples. Factor number two has resulted in my reading of books such as Great Expectations by Charles Dickens, Atlas Shrugged by Ayn Rand, The Count of Monte Cristo by Alexandre Dumas, and The Picture of Dorian Gray by Oscar Wilde, all of which I have greatly enjoyed and learned a lot from.

Overall, even with the goal of learning, I believe it is important to read a mix of fiction and non-fiction books, and I find that fiction sometimes is just as thought-provoking as non-fiction.

-Joe

How To Score High Grades In College While Studying Less

I just finished reading How to Become a Straight-A Student: The Unconventional Strategies Real College Students Use to Score High While Studying Less by Cal NewPort. Normally I do not read these kinds of books for two reasons: One, I do not believe they are effective. Two, I believe what works for one person may or may not work for another. There is no one-size-fits-all strategy for academic success. Despite these hesitations, I decided to give this book a chance. (Somewhat ironic considering I just graduated from college last month and I am likely done with all schooling.) I was pleasantly suprised. In my opinion, this book was one of the better academic self-help type books I have read. (admittedly, I have read very few for my standards). Part of the reason I think I enjoyed it is because it acknowledged the importance of leading a well-balanced academic life, something I think is important. For example, consider the following excerpts:

"Above all, remember that college is a multifaceted experience, of which grades are just one of many important pieces. It's my hope that this book will help you painlessly conquer this one piece so you can have more time and energy to explore all of the others - the friends, the unburdened idealism, the heroic beer consumption - that make these four years so rich."

"All the people I ever admired and respected led balanced lives - studying hard, partying hard, as well as being involved in activities and getting a decent amount of sleep each night. I really think this is the only logical defensible way of doing things."

While high grades are certainly important, they are not the only thing.

There are two other reasons I liked this book. One, the author wrote it by compiling survey answers from various straight-A college students. The advice was from students, not some random author. Two, the author stressed systems for being productive, something I have written about in the past. 

Overall, is this book worth a read? Probably not. But is it possibly worth a quick skim? Depending on your circumstances, I would say yes.

-Joe

Goals Are For Losers

On of my colleagues, Andrew Stewart, recently had a post on Medium discussing the problems with New Years Resolutions. Here is a noteworthy excerpt from his post:

One of the biggest perpetrators of our “insanity” is partaking in New Years resolutions. The idea behind resolutions is great. The New Year is symbolic with the chance to start fresh. We can take all our failures from the past year, tear them up, and throw them in the garbage. Great idea, love it! Unfortunately for most of us that’s not how our new years resolutions turn out. The trips to the gym last about two weeks and about a month for us “hardcore resolutionists.” The three books we bought begin to collect dust on the shelves alongside the books we bought last year. The first page of our journal is covered with fantastic ideas and resolutions for the upcoming year, but the second page remains untouched. February arrives and we realize that once again we spend too much time on social media, watching our favorite TV shows a bit too much, and other seemingly small destructive habits that we wanted to break. At least we get to look forward to next year’s resolutions right, because this year’s resolutions didn’t quite work out. Does this sound a little like insanity to you? It does to me.

Andrew goes on to identify two main reasons for New Years Resolution failures: 1) Lack of conviction and 2) Complacency. He then proceeds to propose a few possible solutions for turning resolutions around. I encourage you to read the article, and it can be found here.

Permit me to propose my own solution. First, it helps to set "S.M.A.R.T." goals. These are goals that are Specific, Measurable, Attainable/Achievable, Realistic, and Timely. A more detailed explanation of these types of goals can be found here. However, even "S.M.A.R.T." goals often go unachieved.

Rather, I think the only true solution is to establish systems instead of setting goals. Scott Adams, the creator of the comic "Dilbert," explains this well:

To put it bluntly, goals are for losers. That's literally true most of the time. For example, if your goal is to lose 10 pounds, you will spend every moment until you reach the goal—if you reach it at all—feeling as if you were short of your goal. In other words, goal-oriented people exist in a state of nearly continuous failure that they hope will be temporary.

Instead of setting a goal, one should work on establishing a system. This is because the goal itself actually does nothing to contribute to the completion of the goal. Rather, a system designed with a purpose in mind will allow one to succeed daily, thereby increasingly getting closer to completion.

So lets revisit the lose 10 pounds goal but with the intention to create a system. As part of this system, one would eliminate soda drinking and run a mile each day. Every day that goes by without drinking soda is a success. Every day that goes by during which one ran a mile is a success. Fairly soon these small changes compound, just like the idea of financial compounding interest, to result in successful completion of the initial purpose (in this case lose 10 pounds) the system was designed around. The book The Compound Effect by Darren Hardy talks about this concept.

Here is an outline of the "lose 10 pounds" example. Hopefully it is clear why one is better off with a system rather than a goal.

Goal based
Day One - did you lose 10 pounds? no = failure
Day Two - did you lose 10 pounds? no = failure
Day Three - did you lose 10 pounds? no = failure
Day Four - did you lose 10 pounds? no = failure
Day Five - did you lose 10 pounds? no = failure
Day Six - did you lose 10 pounds? no = failure
Day Seven - did you lose 10 pounds? no = failure
Day Eight - did you lose 10 pounds? no = failure
Day Nine - did you lose 10 pounds? no = failure
Day Ten - did you lose 10 pounds? no = failure

System based
Day One - did you avoid soda and run a mile? yes = success
Day Two - did you avoid soda and run a mile? yes = success
Day Three - did you avoid soda and run a mile? yes = success
Day Four - did you avoid soda and run a mile? yes = success
Day Five - did you avoid soda and run a mile? yes = success
Day Six - did you avoid soda and run a mile? yes = success
Day Seven - did you avoid soda and run a mile? yes = success
Day Eight - did you avoid soda and run a mile? yes = success
Day Nine - did you avoid soda and run a mile? yes = success
Day Ten - did you avoid soda and run a mile? yes = success

Fairly soon you are seeing the results (lose 10 pounds) with the system, all the while succeeding each day. However, with the goal you step on the scale each night having failed until you become impatient, frustrated, etc.

The system is all about putting ones self in a position to succeed. And the system will help one to keep a positive mindset.

So lets say your New Years Resolution is to get that promotion at work you have always wanted. Rather than setting that goal and failing every day you do not get the promotion, create a system. Maybe you decide to go in to work 15 minutes earlier each day and then let the rest take care of itself. This does not mean be passive as opposed to proactive about accomplishing your desires. Instead, it is about creating a well-thoughtout system that will put you in a position to succeed, not just for the big reason, but on a daily basis.

Accomplishing goals is not about making herculean efforts in order to make huge changes. Rather, it is about doing the little things correct day after day. In the words of James Watkins, "A river cuts through rock, not because of its power, but because of its persistence."

-Joe

A Guaranteed Investment

You’re much more likely to become wealthy investing in your own ability to generate future production than you are by buying an asset that was actually someone else’s investment.
- Cullen Roche


Luke, being a securities analyst for the past three years, and I, having my Series 65 License (Uniform Investment Advisor Law Exam), frequently deal with a dizzying array of investment options and choices. There are literarily thousands of different investment options, all with varying risk-reward tradeoffs. While our roles are slightly different, Luke and I often sort through this barrage of choices to discern what is most appropriate given one's investment goals and financial objectives. However, there is only one investment that we recommend for everyone in every scenario - investing in themselves.

When people first hear of our profession, they often ask "What should I invest in?" Usually the answer is "It depends." Despite this, there is one piece of investment advice that we will give to everyone regardless of time horizon, risk tolerance, cash available, liquidity needs, etc. That is, "Invest in yourself."Whether that is spending money to attend an industry conference, buying a review package to study, or simply ordering Malcolm Gladwell's new book, investing in oneself involves making efforts, both monetary and non-monetary, to expand one's mind.

Now this is not meant to be a rainbows and butterflies and unicorns and 'everyone can succeed!' type post. Rather, it is meant to be general advice on a specific observation regarding the wealth accumulation process. There are two main parts to increasing the bottom line on your brokerage account - 1) your investment return and 2) how much you actually invest i.e. the amount of funds you save towards your account, whether that be through dollar-cost averaging or some other technique. Saving 2 percent of your gross income and earning a 15% annual return is not the same as saving 20 percent of your gross income and earning a 10% annual return. So how can one have more funds to invest and still live the lifestyle they want? The simple answer is make more money. Easier said than done, but through the aforementioned strategy of investing in oneself, one can greatly increase their earning potential. 

Do not hesitate to spend money on things that will improve your knowledge. Just as the definition of investment implies, one gives up something in order to achieve something else - in this case a broadened horizon, expanded circle of competence, or wider professional network is the potential return. This does not mean it is ok to waste money on any passing desire of material gain; rather, investing in oneself involves the same due diligence that is required for a financial investment. However, even though it still requires choosing certain things over others, what is different about investing in oneself is the fact that you will get out of it what you put in to it. Investing in yourself is in your control. The stock market is not. As a result, with dedication investing in oneself can have a guaranteed return.

Allow me to connect the dots to clarify what this post is getting at. There are two components to your investment account bottom line: the amount you save to invest and the return you get on your investments. The amount you save to invest is in your control which is correlated with how much money you make. This can usually be increased by improving oneself which involves investing in oneself. The return you get on your investments is not in your control. Therefore, it may be wiser to concentrate on improving earning capacity in order to save more rather than trying to identify the next hot stock.

-Joe

Prioritizing Tasks to Optimize Effectiveness

A great strategy to use to optimize one's effectiveness and productivity is to prioritize tasks by identifying them as belonging to a Urgency-Importance quadrant. Then, one can recognize what needs to be addressed in order to enhance their work effectiveness. The quadrant goes as follows:
Once categorized, individuals can then decide what really requires their attention. However, this is easier said than done.

Tasks that are "High Urgency, High Importance" will get done. These are the things that are due immediately and are obviously crucial to address. Typically, one does not need much self-control to do this category of tasks - their significance is obvious.

Tasks that are "High Urgency, Low Importance" are ones that demand your attention but really do not matter. Typically, these are time wasters. However, these are easily misunderstood. Due to the perception of high urgency, one may feel accomplished when completing these tasks, but in reality they do not do much in terms of progression. An example would be going through one's email inbox each morning. One feels pressure to respond in a timely manner but rarely are emails crucial. If the message were, it would more likely be dealt with by phone or face-to-face. And worse yet, sorting through one's email gives a false sense of accomplishment once completed.

As the name indicates, tasks that are "Low Urgency, Low Importance" matter very little and do not require immediate attention. One does not need much guidance when it comes to these tasks.

Lastly, tasks that are "Low Urgency, High Importance" are ones that may not need to be addressed for months or even years but have large consequences. These are the most misunderstood yet vital type of tasks. They are easy to put off; however, doing so can be detrimental to success. As mentioned before, these tasks require lots of self-control so they are best addressed in the morning.

It is important to identify two of the four quadrants in particular in order to optimize one's effectiveness. These two are "High Urgency, Low Importance" and "Low Urgency, High Importance." The other two are more obvious so they tend to be dealt with appropriately. One needs to be sure not to waste time with the "High Urgency, Low Importance" activities and not put off the "Low Urgency, High Importance" activities. Identifying and properly handling tasks in this way can  greatly improve one's effectiveness and productivity through time-management optimization.

-Joe

No New Friends

How many deep and devout connections do you have? I am not talking about soft connections or Facebook friends – I am talking about people you would not feel uncomfortable picking up from the airport: maintained and cultivated relationships. If you are as connected as I am through social media/technology, you would probably gander that the number is relatively high; it is not - it actually cognitively can’t be.

GORE-TEX: you may recognize it as the company that makes hiking boots, wet suits, ponchos and other weather resistant products. Oddly enough, this company is the subject of a popular narrative in the world of sociology. The company had humble beginnings like most start-ups. The founder, Bill Gore, literally set the company up in his basement. GORE-TEX was operated this way for many years until the Denver Water Company ordered seven and a half miles of their specialized waterproof, breathable material; this forced the founder to expand manufacturing capacity. The company continued to expand until one day Gore walked into his factory and “simply didn’t know who everybody was.” The founder recognized that the bigger the company was the less concerned the employees were with helping out each other, and helping out the company. Salesmen did not know the manufacturing team which created a lapse in product repairs and all around customer service.

Gore decided to cap his factories at 150 employees. This was guaranteed by the number of parking spaces he built outside new factories; when there were not enough parking spaces anymore, it was time to build a new factory.

“Dunbar’s Number” is the suggested cognitive limit to the number of people with whom we can maintain social relationships. This number was first postulated by the British anthropologist Robin Dunbar, who found a correlation between primate brain size and average social group size. His theory was that “this limit is a direct function of relative neocortex size, and that this in turn limits group size. The limit imposed by neocortical processing capacity is simply on the number of individuals with whom a stable inter-personal relationship can be maintained.”

What is Dunbar’s hypothesized limit? It has been proposed to lie between 100 and 250, with a commonly used value of 150.

*Pictured above: Robin Dunbar, the British anthropologist pioneering research on human social behavior

 

 

*Pictured above: Drake, a man who clearly understands the cognitive restraints surrounding social relationships as elucidated by his verse in the song No New Friends.

Social media certainly enables relationships; this can be said with absolute certainty. But does it: A) replace existing relationships B) prevent additional relationships from forming or C) actually not build relationships at all?

We devote approximately 40% of our limited social time each week to just five individuals, often the most important people we know. Historically this number has been limited to five due to proximity issues and time restraints. Social media claims to have the answer. There is virtually no cap on how many internet “friends” you can have. If the world felt so inclined literally every person on the planet could read the words I am typing right now as the connectivity potential is innumerable.

Your great-grandparents knew the same people their entire lives. People did not move around like we do today, collecting pockets of friends everywhere we go; often we enter regionally fragmented friend groups without even leaving our couch via technology.

Having more technology does not make your neocortex bigger.

When asked if tools such as Facebook and Twitter have changed our capacity to handle social connections Dunbar stated:

“Apparently not at all; it is important to remember that the 150 is just one layer in a series of layers of acquaintanceship within which we sit. Beyond the 150 are at least two further layers (one at 500 and one at 1,500), which correspond to acquaintances (people we have a nodding acquaintance with) and faces we recognize.

All that seems to be happening when people add more than 150 friends on Facebook is that they simply dip into these normal higher layers. If you like, Facebook has muddied the waters by calling them all friends, but really they are not.

This isn’t to say that social-networking services don’t serve a useful function in facilitating our interactions with our “friends,” but what they don’t seem to do is allow us to increase the number of true friends.”

It is very easy to be overwhelmed by the potential for connections via social media/technology platforms, and it is true that much can be gained by leveraging these connections. However, it may be advantageous to keep the old saying “quality over quantity” in mind because unfortunately, our ability to maintain relationships is cognitively limited.

-Luke