Relationship with Money
A blog that knows money is more than numbers
53 | Thinking Like a 10-Year-Old
Investing seems like it should be so much easier to understand.
As a kid, I felt like I understood it pretty well.
When you have money, you can choose to buy shares of stock of a company and over time you hope that money will grow to an amount that is bigger than what it was when you started.
I can still say I think I understood it as a kid, but man, did the world try to convince me that I didn't for a bunch of years.
No single thing can be blamed, but there are a bunch of things that can shoulder some of the responsibility for abstracting my 10-year-old self's definition.
The marketing of financial services firms. The fear-mongering of the media. The endless "fine print". The by-the-minute price quotes. The infinite number of options. The complicated terminology. The tax rules. The statements. The account types. The fake investments.
Every single one of those things slowly obscured that simple, accurate definition of "investing".
The reality is that even with a good baseline understanding of what it means to invest, the circus that is modern-day "investing" is mighty adept at leaving us dazed and confused.
It leads some to think investing is...
Riding the roller coaster of a single stock.
Sitting in the safety of a money market fund.
Making money without the risk of losing any money.
Doubling or tripling your money in a couple of years.
Borrowing to invest only to see it all slowly go to zero.
Trying to time the bottoms and tops of the market cycle to "buy low and sell high".
Hunting for the next hot investment or meme stock.
Buying and holding an index fund for the rest of time.
No wonder investing seems so hard - the way each of us define it is as if we're trying to say that badminton, soccer, basketball, and swimming are more similar than they are different because they are all "sports".
If we can get back to understanding and promoting the definition of "investing" that we all had when we were 10-years-old, I think it'll make us all better investors.
52 | Toilet Paper and Gold
In March 2020, during the peak moments of uncertainty and fear surrounding the COVID-19 pandemic, there were shortages of every imaginable consumer item.
Many things impacted small groups of people, but one shortage impacted every single human on the planet.
Toilet paper.
I can recall neighbors dropping individual rolls of toilet paper on other neighbors front steps to help share the available supply.
Sadly, there were some bad apples that saw the shortage as a business opportunity. Newsweek tells the story of one of them here.
It didn't take a genius or an expert economist to realize that hoarding toilet paper during a pandemic was pretty messed up.
There are some folks that had a medical reason to get more toilet paper than the average person at the time - I am not dogging on them.
I am dogging on the few folks who were hoarding a scarce resource in anticipation of everyone else having to beg or pay them for their abundance.
When toilet paper was the resource and a pandemic was the challenge, it was easy to see the lunacy and self-centered nature of the hoarding.
In spirit, the theoretical "holy grail" moment for gold isn't any different than hoarding toilet paper in March 2020, it's just become a little more socially acceptable through the generations.
Historically, I have found the economic arguments against owning gold compelling enough to pass on it.
Gold doesn't generate income like a business does year after year after year.
Gold has no practical role in improving our daily lives as a society.
If it doesn't do either of these things, then why own it?
But the part that really moves the needle for me is the fact that its value is primarily derived by society's aggregate fear of the future.
When you buy gold, you're hoping to profit off the fact that someone else will eventually be more scared than you are - it's the ultimate opportunity to round trip the fear-greed spectrum in a single decision.
That's not exactly a characteristic of a fulfilling life in my mind, so no, I don't own or plan to own gold and I don't plan to own stacks of toilet paper during the next pandemic either.
36 | Investments are a Distraction
Wait a second…what?!?
We just did a deep dive on how to invest and now it's a "distraction"...are you kidding me?
Nope.
Once we've cared for the basics and are prepared to behave, there isn't much else we can do when it comes to investing.
Whether it's the fact that there are infinite investment options that all converge into a similar outcome over long periods of time or...
The fact that our lived experience with money has so much more to do with how we generate income, how we spend it, and how we set it aside, or...
The fact that most details of investing are like your doctor reading you the footnotes of the research papers that led them to arrive at their proposed treatment plan.
Investments are an enormous distraction.
They are a distraction behind-the-scenes if we waste time with their administration.
They are a distraction in conversation the moment they have gone over the head of the least knowledgeable (or interested!) person in the room.
They are a distraction when we pretend that any tactical tweak is going to change our relationship with money.
The reality is that the numbers side of financial well being is mostly covered by three core themes...
At all times, do/will I have sufficient cash (blue) on hand?
On average, does/will my income (purple) exceed my spending (red)?
Over time, am I aware of how my spending (red) expectations compare to what I am setting aside (blue/gray/yellow)?
Beyond these basics, investments (and any other tactical details for that matter!) run the risk of completely distracting us from the story that we're writing with our use of money.
Additional Reading
Retirement Success Financial Independence: A Surprising Look into the Factors that Drive Positive Outcomes from the ASPPA Journal
Yes, I crossed out "Retirement Success" - the principle is the same regardless of the goal - see the first paragraph of Page 5 and the related visual
Market High Soup For The Soul by Jared Korver
Your Complete Financial Life by Carl Richards
Not a solicitation - just a powerful visual
35 | Patient Investing, Part 7 of 7: The Secret Ingredient
Investing in a manner that you believe in and in which you have a baseline understanding knowing that, regardless of strategy or plan, the only guarantees are that someone will always outperform you and that how you behave during the inevitable unsettling times will be the biggest determining factor in your lifetime returns. Owning businesses tends to increase potential returns, diversification tends to make the ride smoother, long horizons tend to increase the probability of positive returns, and above-average patience is a superpower.
Forecasts rarely match reality.
Outcomes do not always align with effort.
The story in our head doesn't always align with the story that unfolds.
Patience is the only way that I know to bridge these gaps.
Patience is to successful investing what the heart is to the human body.
When you see something that challenges the fundamentals of your own way of thinking - patience to lean in, listen to the facts, discuss them with a friend or colleague, and evaluate whether your beliefs still hold true.
When you see someone else experience investment performance that appears to outpace what you are experiencing - patience to acknowledge the discomfort it may cause without abandoning your own plan.
When the world seems to be falling apart at the seams and the value of your investments seems to be free-falling - patience to make an adjustment to the things you can control without getting overwhelmed by the things you can't control.
When a new idea is promoted as the "next big thing", but in reality it doesn't seem to create real value that will ever enhance our collective life experience - patience to wait for its day of reckoning to arrive without getting caught up in the hullabaloo.
When a part of your portfolio feels like dead-weight that needs to be pruned because of recent under-performance - patience to know that each investment will have its ups and its downs, and that recent disappointment does not necessarily call for permanent abandonment.
When a decision feels so urgent and important that you are becoming paralyzed by the moment and the stakes - patience to know that buying a little more time will likely bring more clarity, more information, and more ability to make a sound decision.
Patience isn't a cute virtue.
Patience isn't convenient to have in case of emergency.
Patience is the backbone of success.
Patience is a superpower.
Additional Reading
How long is forever? by Seth Godin
Stop worrying about investments, become a better investor by Carl Richards
Staying Put by Morgan Housel
34 | Patient Investing, Part 6 of 7: How Long is "Long"?
Investing in a manner that you believe in and in which you have a baseline understanding knowing that, regardless of strategy or plan, the only guarantees are that someone will always outperform you and that how you behave during the inevitable unsettling times will be the biggest determining factor in your lifetime returns. Owning businesses tends to increase potential returns, diversification tends to make the ride smoother, long horizons tend to increase the probability of positive returns, and above-average patience is a superpower.
What do you think the market is going to do this year?
What a question...
It's hard for folks not to ask and it's impossible to answer.
I literally have no idea what the market is going to do this year.
The same will be true if I'm asked again next year, or in 5 years, or in 10 years, or in 20 years.
I'll go as far as to say that someone constructing an answer to the question, "What do you think the market is going to do this year?" is taking the easy way out and only further ingraining our unhealthy desire to grasp for certainty.
If I'm forced to give an answer, I'd probably point to the left hand side of the JP Morgan chart below and say if we're 100% invested in stocks then I'd bet this year will be somewhere between -39% and +47%.
Obviously, that's not super helpful.
I think we're asking the wrong question though.
The question should never be, "What do we think the market is going to do this year?"
The question should be, "Why do we have dollars invested if we think we'll need them next year?"
Investing is not a slot machine, but the shorter the horizon, the more it's going to feel like a slot machine.
Ask me how I think the market (i.e. the collection of companies that make up the market) are going to perform over the next 10 or 20 years and now we're talking about something worthwhile.
If our outlook for investing is a single year, at some point there are going to be some pretty disappointing results - hopefully (cross your fingers!) those results don’t correspond with a significant life event.
If our outlook for investing is a couple of decades, I don't think we'll ever be disappointed by the results regardless of whether they are the historical best or historical worst for a 20 year period.
The tricky part is that for more than a couple of decades, we've been building habits of daily life and engaging with technology in ways that have made the next moment seem like the only moment that matters...
Additional Reading
Keep It Going by Morgan Housel
The delay by Seth Godin
Days or decades: What’s it going to be? by Carl Richards
Stocks For the Long Run by Ben Carlson
33 | Patient Investing, Part 5 of 7: Be Careful What You Ask For
Investing in a manner that you believe in and in which you have a baseline understanding knowing that, regardless of strategy or plan, the only guarantees are that someone will always outperform you and that how you behave during the inevitable unsettling times will be the biggest determining factor in your lifetime returns. Owning businesses tends to increase potential returns, diversification tends to make the ride smoother, long horizons tend to increase the probability of positive returns, and above-average patience is a superpower.
A friend of a friend rode the GameStop wave from the bottom to the top and back to the bottom in January and February of 2021.
An initial investment of something close to $10,000 grew to something close to $1,000,000 within a few days with the biggest moves happening within hours and even minutes.
What a psychological Petri dish.
So much personal financial wealth tied up in a single stock, that for a couple of days a financial future was reduced to a slot machine with pay outs surging and plummeting by life-changing amounts every few minutes.
I think it's easy to say, "How did you not sell it when it was $1,000,000?!?", but the problem is it's impossible to put ourselves in the vacuum.
If you've made $1,000,000 in the last 10 minutes from holding something, what do you think you're going to do for the next 10 minutes?
Please don't pretend that you have so much control over your rational brain to cash out your winnings.
If you cash out and it continues to surge, you're kicking yourself for a pretty long time.
If you don't cash out and it plummets, you're kicking yourself for a pretty long time.
If you happen to cash out and it plummets, odds are pretty good that you'll have an imaginary friend named "Overconfidence" live the rest of your investing life with you helping you hunt for the next big opportunity.
The Gamestop saga certainly compressed the time and increased the dollar amount, but it's a textbook example of what's happening when we concentrate our financial net worth into a single company or investment.
If you Google "diversification", you'll get some analysis about holding 25 or 30 individual stocks.
It's not actually about the numbers though.
Diversification is about matching up your expected investment gains and losses with what your stomach can handle, knowing that we are not trying to keep from vomiting, but we're actually trying avoid chronic mild nausea.
Diversification is about knowing that in theory the upside is wonderful, but in reality the downside is completely unacceptable.
Diversification is about trusting that scar tissue is a real thing instead of believing it's something that won't impact you.
Diversification is about putting your eggs in different baskets, so that when one basket breaks, gets stolen, or spoils, you have others that allow you to keep playing the game for as long as possible...
Additional Reading
Portfolio thinking by Seth Godin
Easy Money is Money Easily Lost by Ben Carlson
Diversification Means Always Having To Say You're Sorry by Brian Portnoy
32 | Patient Investing, Part 4 of 7: The Ceiling is the Roof
Investing in a manner that you believe in and in which you have a baseline understanding knowing that, regardless of strategy or plan, the only guarantees are that someone will always outperform you and that how you behave during the inevitable unsettling times will be the biggest determining factor in your lifetime returns. Owning businesses tends to increase potential returns, diversification tends to make the ride smoother, long horizons tend to increase the probability of positive returns, and above-average patience is a superpower.
The "Aura" of the Owner
Maybe there aren't that many dots to connect here. I think we all inherently know that owning something carries a different aura.
When someone says, "I work for this company", it's only so interesting and inspiring. Even someone in a key role will eventually be limited in the impact they can have and the reward they can reap.
When someone says, "I own this company", we're immediately taken to a different level. You feel it in your gut. An owner gets a different level of respect and share of the pie because they take on a different level of accountability and responsibility.
The Rewards of Ownership
When you own a business (as the sole owner or as one of many shareholders!), you get at least two things - income generated by the business and participation in the growth of the business itself.
When it comes to traditional investing, I think technology has abstracted each of these realities in distinct, unhelpful ways.
The income generated from a business used to arrive as a paper check that made it easy to see, feel, and appreciate. Now income gets commingled in an account and likely automatically reinvested making the income side of the equation feel a bit more mystical than it actually is.
The growth portion has turned into a convoluted, real-time metric that is updated every second on your smart phone, CNBC, or your Robinhood app. Instead of trusting that creation of value eventually leads to capturing of value, we've trained ourselves to believe that daily and even hourly moves of investments matter.
Even with these abstractions, the nature and rewards of owning a business have not changed one iota since the first business was incorporated - the income and growth potential that comes with ownership builds financial wealth in a way that is unmatched by being a lender or even speculating on the value of a scarce item.
As MJ would say, "The ceiling is the roof!" when it comes to the upside of owning a business.
The way that "owning-the-business-upside" plays out over time doesn't require an advanced degree to understand. In Morningstar's visual below, two lines are not like the others. That's the "different aura" showing up in the numbers.
The Hidden Side of Ownership
The sexy part of ownership is easy to sense and see.
The hard parts of ownership aren't quite as obvious.
Businesses get paid for fixing things that are broken or improving something that is sub-optimal.
This means that when a lot of things are broken or sub-optimal there is the greatest opportunity for growth.
The only way to participate in that growth is to be an owner before, during, and after the "fixing" or "optimizing" has happened.
The top lines above look great on paper, particularly relative to the lines beneath them, but the chart ignores the uncertainty and discomfort faced every step of the way.
Every bit of growth happens before, during, and after wildly unsettling things are happening all over the world.
Morgan Housel illustrates it well in this chart below. This is the "different aura" showing up in the lived experience.
A key word in all of this is "owning businesses tends to increase potential returns". Because it's not a guarantee, that's all the more reason we own a bundle of companies instead of just one...
Additional Reading
Asset allocation: Key to your investment climate by Vanguard
Stock, Bond & Cash Returns Over the Past 95 Years by Ben Carlson
Keep in Mind, Stocks Rose 1,100-fold During This Period by Morgan Housel
31 | Patient Investing, Part 3 of 7: The Pilot Has Turned On The "Fasten Seatbelt" Sign
Investing in a manner that you believe in and in which you have a baseline understanding knowing that, regardless of strategy or plan, the only guarantees are that someone will always outperform you and that how you behave during the inevitable unsettling times will be the biggest determining factor in your lifetime returns. Owning businesses tends to increase potential returns, diversification tends to make the ride smoother, long horizons tend to increase the probability of positive returns, and above-average patience is a superpower.
No matter your level of belief, depth of understanding, or specific strategy, the unsettling times are guaranteed to happen.
Nobody, literally not a single person, experiences investment growth, or any kind of growth, without taking some steps backwards along the way.
Your ability to stay the course and remain invested during the periods where you are below your most recent personal high-water mark are the second most important skill you'll have to hone to be a successful investor.
One part is numbers - the best days actually come in the worst times. The depths of the Great Depression, Black Monday, the Financial Crisis, and the COVID-19 Pandemic are where the best days are found. See here.
If you miss out on those days, the implications are brutal. See for yourself...
No change in strategy or hack is making up for that gap. That is only one 20-year period, but all the other 20-year periods look the same. It doesn't matter what you did in practice, what type of equipment you're using, or what tricks your coach told you, if you can't stay in the game when it is the hardest to play, you will lose.
The numbers are easy to see. The trickier part is the psychological side - trusting simplicity instead of increasing complexity.
Doing nothing or "gritting it out", seems too easy to be right. I think this confuses "simple" and "easy".
You know what's easy...
"I think I'll wait until everything seems like it's under control and then I'll invest."
"I think I'll invest in CDs or I-Bonds to get a guaranteed interest rate."
"I think I'll switch my investments to something else because that will make me feel like I've done something productive amidst the chaos."
You know what's simple, but hard to actually do...
Have the discipline to keep enough cash in the bank to provide some cushion to navigate the unsettling times.
Have the wherewithal to acknowledge that the unsettling times are going to happen, but it's impossible to know exactly when they will happen.
Have the self control to not look at CNBC, social media, or your investment statement if that is what is necessary to keep you from making a reckless decision during unsettling times.
Have the courage to have a conversation with someone else before those unsettling times push you to the brink.
As I often like to say, if it seems hard to do, then that's probably a sign that it's the secret to success.
Additional Reading
Fees vs. Fines by Morgan Housel
Is market timing worth it during periods of intense volatility? by Jack Manley
Time the Market Game by Personal Finance Club (don't fall for Jeremy's context-less bio)
30 | Patient Investing, Part 2 of 7: The "Other People"
Investing in a manner that you believe in and in which you have a baseline understanding knowing that, regardless of strategy or plan, the only guarantees are that someone will always outperform you and that how you behave during the inevitable unsettling times will be the biggest determining factor in your lifetime returns. Owning businesses tends to increase potential returns, diversification tends to make the ride smoother, long horizons tend to increase the probability of positive returns, and above-average patience is a superpower.
Whether it's a day, a year, a decade, or a lifetime - someone, somewhere will always beat your investment returns.
If we can't establish this as gospel, then we'll be second-guessing ourselves to the grave.
Some people will actually outperform, while others will only claim it.
But it's a guarantee that you’ll never know who’s for real and who’s faking it.
Either way, your ability to ignore both groups is how you'll become a good investor yourself.
Once you're cared for some basics, intentional ignorance leads to extraordinary returns.
Whether we're talking about one day, one year, one decade or one lifetime - someone, somewhere will always have an investment strategy that performs better than yours.
As Elon would say and do, "let that sink in!"
If we can't establish this as an investing gospel, then it's going to be a long lifetime of second-guessing, social comparison, and useless woulda-shoulda-couldas.
Some people will legitimately outperform and others will claim to have outperformed when they actually haven't. It's close to a guarantee that you'll never know who's for real and who's faking it.
Either way, your ability to ignore and completely block out the "other people", especially when they have allegedly outperformed you, is likely the most important skill you'll have to hone to be a successful investor.
We used to live in a world where access to information and knowledge was limited, so it made sense to go searching for better options. Some people legitimately had access to things that others didn't, so the hunt might have made sense.
The world has changed and you have access to all the information and knowledge that you could possibly need. The problem now is that it's impossible to know which information and knowledge is actually useful. Speculating about the "success" that others are experiencing is only gas on the information-overload fire.
The hunt was worthwhile when scarcity of information was the issue. The hunt is pointless, even destructive, now that abundance of information is the issue.
In a world of abundance, the competitive advantage is some combination of a mental filter that can keep the useless information from ever hitting the radar and the ability to throw on blinders so you don't get spooked when something inevitably makes it through.
Additional Reading
Hope is not an investment strategy by Carl Richards
FOMO: The Worst Financial Trait by Morgan Housel
“The market has spoken” by Seth Godin
29 | Patient Investing, Part 1 of 7: Believe
Investing in a manner that you believe in and in which you have a baseline understanding knowing that, regardless of strategy or plan, the only guarantees are that someone will always outperform you and that how you behave during the inevitable unsettling times will be the biggest determining factor in your lifetime returns. Owning businesses tends to increase potential returns, diversification tends to make the ride smoother, long horizons tend to increase the probability of positive returns, and above-average patience is a superpower.
There is no "right" way to invest.
If you don't believe me, go read this book, or at least it's summary, and then come back.
There are infinite options and choices when it comes to investing and not a single one of them will work for the long haul without some level of personal conviction and belief.
There is a spectrum of belief - some people will personally know the ins and outs of their beliefs and may even have experienced something tangible that led them to believe. Others will have heard testimonies from trusted family, friends, or colleagues that have led them to believe.
In The Psychology of Money, Morgan Housel says, "Manage your money in a way that helps you sleep at night. Some people won't sleep well unless they're earning the highest returns; others will only get a good rest if they're conservatively invested."
I'd add that some people will sleep better owning index funds, some will sleep better owning actively-managed funds, some will sleep better owning individual stocks, some will sleep better owning real estate, some people will sleep better owning their own business, and some will sleep better in a mixture of many things.
Regardless of what you believe, I think the deepest form of belief is being agnostic to benchmarks and "other people" - 100% belief that the way you are invested will allow you to live the life you most desire to lead.
This doesn't happen overnight, but it can happen over time and it is worth pursuing over time because the freedom that comes from the next dollar of financial wealth pales in comparison to the freedom that comes from the ability to say "no" to the next shiny investment or to ignore what all the "other people" are doing.
The "baseline understanding" is a touch trickier because there is a risk of getting buried in the weeds.
With that said, part of belief is a high level understanding of what you are trying to believe in - even if it is only the broad strokes.
The knowledge that investment returns are only possible if you are willing to stomach investment losses is part of understanding.
The ability to acknowledge when a specific type of investment or strategy is too complex for you to trust is part of understanding.
The ability to see investing as being an owner and participating in the progress of humanity instead of viewing it as a slot machine that randomly creates winners and losers is critical to understanding.
Belief and baseline understanding ensure that we are prepared for the two guarantees of investing...
Additional Reading
Forget beating some index, instead focus on your financial goals by Carl Richards
Internal vs. External Benchmarks by Morgan Housel
My 'Too Hard' Pile Is Pretty Big by Christine Benz
19 | Are You Saying It's Going to Keep Growing?
In a past conversation, I was helping someone get their feet back under them after a significant life crisis.
We spent a few months building a relationship and slowly organizing all the pieces of their personal financial situation.
Eventually, we got to the point that we needed to talk about investments.
Sadly, our team's canned investment conversation had a lot of financial jargon - equity allocation, cost basis, unrealized gains and losses, emerging market exposure, credit risk, fund manager, etc.
Even more sadly, the conversation included a PDF document that had more numbers than you would hope to see in a lifetime much less in a single hour.
After chatting through the detailed investment plan, we opened it up to questions to be sure we were all on the same page.
Question #1...
"I don't want to ask a stupid question, but are you saying it [the investment account] is going to keep growing?"
Not a joke - that really was the first question.
Chuckle all you want, but I have found there are no stupid questions when it comes to money.
Everyone, I mean EVERYONE, has the same questions whether they are willing to ask them or not and those questions are almost always of the "what-does-this-mean-for-my-life" variety and not the "can-you-clarify-what-you-mean-by-downside-capture" variety.
Shame on me for being part of a presentation that was so complex that someone had to clarify whether we hoped the investments would continue to grow!
Frankly, I think this specific conversation was just one exceptionally good example of what happens a million times a month in a typical annual investment review.
I think some people feel obligated to nod along and "track with the conversation" because it's their responsibility to "keep up with the finances" and make their family's biggest financial decisions. The nitty-gritty investment details must be part of this job description...right?!?
I think others are checked out within a couple of minutes or before the conversation even starts because it doesn't make any sense and certainly has nothing to do with their day-to-day experience with money. The nitty-gritty investment details are way too complex...I guess we'll never be "good with money"?!?
Either way, I don't think the investment review does much to address the uneasy and overwhelmed feeling that comes when most people think about money - that feeling might even be more acute than it was before the meeting started.
For too long, investments have served as a gatekeeper to real financial advice. Investments are important, but they are a fraction of our relationship with money.
When it comes to investments, I think it's OK if all you really want to know is that we're hoping they'll continue to grow.
17 | UNC vs. Duke and The Agony of Defeat
The losses drain the emotional tank more than the wins fill it up. Professional psychologists call it "loss aversion".
What a twisted psychological reality. That's not how it's supposed to work...right!?!
Enter the 2022 Final Four.
In my years at UNC-Chapel Hill and even after, I can remember speculating with friends on the possibility of one day meeting Duke in the NCAA Tournament...
Can you imagine the stakes and the environment? Can you imagine the bragging rights if we won? Can you imagine having the upper hand in the rivalry forever?
Sure enough in March of 2022, Duke beat Arkansas on Saturday and the Tar Heels beat St. Peter's on Sunday and CBS flashed the bracket onto the screen - UNC vs. Duke in the National Semifinals on April 2, 2022.
Within minutes of the final buzzer that Sunday night, the feelings of theoretical excitement and possibility pivoted almost instantly to...
What if we lose? Have the stakes grown too large? Will any game after this one ever mean anything?
If you think my feelings were unique, think again. Here is the Wall Street Journal's take on it.
Remember what we said at the start - the losses drain the emotional tank more than the wins fill it up.
We're not saying the losses count differently than the wins, they just have an out-sized emotional impact.
The emotions as a Tar Heel fan aren't very different from those as an investor.
The gains feel good when they happen, but the emotional high pales in comparison to the pit in your stomach when the losses start to add up.
The losses are part of the game. Unavoidable, painful, and hard to predict exactly how they will feel when they happen.
Recognizing that the feelings are inherent to the experience is the only way you can have enough courage, patience, and perseverance to play and eventually win the game.
Yes, the Tar Heels won the game, 81-77. To this day, it is probably the best game I have ever watched. You can watch the final three and a half minutes here if you'd like.
With that said, the Tar Heels have lost plenty of other games that have stung. Following those losses, there's been some amount of sulking, but there have also been conversations with fellow Tar Heels to acknowledge the feelings, highlight the silver linings, dream about where we go from here, and strategize about how we’ll win the next one.
I think that’s a pretty good blueprint for how to handle investment losses too.
12 | A Shortcut to Financial Literacy
Here's an idea for a way to improve financial literacy quickly.
Make it easier to be literate with a mandatory cover page for all bank and investment statements.
Disclose, polish, detail, and market the heck out of every additional page, but give me one sheet that allows for apples-to-apples comparisons across firm, account type, and product type.
Here it is...
Date Range
Beginning Balance
Contributions
Withdrawals
Dividends
Interest
Fees (broken out by investment fees, advice fees, and added features fees)
Gain or loss
Ending Balance
Portion that is cash
Portion that is accessible today
Portion that is accessible in 1 year
Portion that is accessible in 5 years
Portion that is accessible in 10 years
That's it.
Many will argue that more detail is necessary - it's not.
I don't want a percentage return calculation - you spend dollars, not percentages.
I don't want asset allocation, cost basis, realized or unrealized gains on the cover sheet.
Leave the overwhelming and disorienting details for Page 2+.
I just want dollar amounts assigning responsibility where it belongs.
Simplicity that someone with a high school diploma could understand and use to compare to the next statement.
Instead of continuing to make rules that increase complexity and overhead, give us a single sheet that will weed out bad players fast.
No nonsense, no deflecting, just clarity and a buck that stops on Page 1.
The capability is there at every financial services firm. People to audit it every so often are there too.
Let's get started. Then let's apply the same idea to debt.
8 | Confusing Compounding
Compounding is tricky.
It seems like some folks intuitively understand how compounding works and others learn once it is too late to matter.
Because the near side of the curve is so flat, it’s hard to have the patience to get to the far side. It seems like it’s always out of reach.
Because the far side of the curve is so steep, it’s hard to get oriented if you happen to make it there. It seems like the goalposts keep moving because the next “score” is so financially valuable.
To further complicate our relationship with compound interest, we get quotes like, “The first rule of compounding: Never interrupt it unnecessarily.”
Very useful if your goal is to make as much money as possible.
Somewhat less useful if your goal is to use money to fill a life as full as possible.
Not useful if life happens and you are forced to “interrupt” compounding at a less than ideal time.
I can’t argue with the power of compounding and the importance of letting it happen over time. The results on a spreadsheet or account statement are profound.
The tricky part is the squishiness of a word like “unnecessarily”. At some point, you’re going to have to “interrupt” compounding if you plan on using money to live your life instead of living your life to make money.
Once you understand how compounding works, I think the biggest growth opportunity is to get clear on what it means to “necessarily interrupt it”.
5 | Grow a Tree, Don't Fill a Bucket
With a bucket of water, there’s only one way to fill it up - more water. With a tree, we know the basics that help it grow, but the exact blend of those basics is never the same.
A bucket of water can be sheltered from the elements. A tree gets a front row seat to every storm for its entire life - water, wind, and even fire can contribute to its growth.
With a bucket of water what you spill is lost forever. When a tree loses a limb, it recovers with time.
It’s always easy to track progress to a full bucket of water. With a tree, it's impossible to know how it will grow each month, season, and year.
A bucket of water will never grow on its own, but a tree will.
It's easy to fall into the trap of believing that building financial wealth is like filling a bucket of water.
If you don't believe me, wait until the next time you hear someone say...
"I want to wait until things are more certain and then I’ll invest." They're filling a bucket.
"I want to invest, but I don’t want to lose any money.” They're filling a bucket.
"Once I get to a certain amount, then I will feel secure." They're filling a bucket.
A tree can't be protected from the storm, it will probably lose a limb or two at some point, and it never reaches a final size or shape. But none of these things keep us from growing trees.
Grow a tree, don't fill a bucket!
For those that can't get past the fact that a tree can die, read more here.
Pep Talk for the Hard Times
In case you needed to be reminded what it felt like to see your account balance go down, now you likely have recent, first-hand experience.
These are times when a motivational speech is likely more appropriate than a technical lecture.
When, if necessary, not logging into your account is more impactful than any tweak you could make.
When reflecting on what we’re aiming for is more appropriate than adding up the current score.
When a hug is more appropriate than a slap on the back.
When patience is more necessary than sophistication.
Alas these types of drawdowns are not only inevitable, but necessary for long term growth. Failure sowing the seeds of progress.
As Morgan Housel puts it, “Returns are never free. They demand you pay a price, like any other product. And since market returns can be not just great but sensational over time, the fee is high. Declines, crashes, panics, manias, recessions, depressions.”
The sneaky part about investment returns is that the “price” they demand isn’t showing up on a label – it shows up in the form of sleepless nights, impulsive slashing of spending, second-guessing your own investments when you hear a friend describe theirs, higher blood pressure when you follow the news, fear that your investments won’t stop dropping until they hit $0, etc.
These are times when it is easy to forget that the “markets” are not a slot machine but instead are a group of real businesses run by real people showing up every day to add value to this uncertain world that we live in – figuring out how to operate in a post-COVID world, dealing with supply chains upended by a war in Ukraine, trying to add value to the world despite experiencing higher costs, worldwide leadership that is turning over to a subsequent generation, and on and on.
Like exercise or dieting or relationships, timing and magnitude of effort do not always match up with immediate results.
I have found that it is helpful for me to remember that building resilience will always beat grasping for certainty.
When it comes to investing, resilience looks like…
Investing in a manner that you believe in and in which you have a baseline understanding knowing that, regardless of strategy or plan, the only guarantees are that someone will always outperform you and that how you behave during the inevitable unsettling times will be the biggest determining factor in your lifetime returns. Owning companies tends to increase potential returns, diversification tends to make the ride smoother, long horizons tend to increase the probability of positive returns, and above-average patience is a superpower.
Have hope. Stay the course. Don’t process this alone. Find someone and talk to them about how you’re feeling right now. That will be more powerful than anything else you can do.
Additional Reading
Behavior versus everything else by Carl Richards
Reminder that “how you behave matters more than what you know”.
Days or decades: What’s it going to be? by Carl Richards
Halftime speech because maybe that is what you need right now.
A Market Update for Real Investors by Morgan Housel
Timeless, humorous, and a helpful reminder that effort and results are not perfectly correlated.
Selloffs Through History by Ross Mayfield
Historical context because this has happened before and will happen again.