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