Relationship with Money
A blog that knows “enough” isn’t a number
77 | The Elegance of the One Pager
As with most pieces of art, there is more than what meets the eye.
The one pager is designed to change the way we all think about money and the way we interact with money.
It's timeless.
It's grounded in reality.
It doesn't lie.
It filters out the noise.
It compartmentalizes.
It's comparable.
It meets us where we are.
Just because we've made finances hard for hundreds of years doesn't mean they have to be hard forever.
James Clear says, "The highest level of mastery is simplicity. Most information is irrelevant and most effort is wasted, but only the expert knows what to ignore."
That is target and the one pager hits it on the bullseye.
It's timeless.
With a shout out to Luca Pacioli, the father of modern-day accounting, the one pager is built with his unbridled genius in mind.
It harnesses the power of basic accounting in a manner that is accessible to the accounting nerd, the creative artist, and everyone in between.
It paints a complete picture of one's entire financial picture without an overlooked gap or an unnecessary addition.
Not only can it travel over time, but it holds up across time and leans heavily on the truth that financial well-being depends on a few simple, but difficult to master concepts.
It's grounded in reality.
There are no projections or predictions about the future.
There are no assumptions or placeholders.
There are no calculations because detailed calculations aren't necessary.
No, that's not a typo. And yes, I know it probably contradicts every other financial conversation you've ever had. That's the goal.
The one pager is a concise, efficient summary of what has happened so that we can establish a shared understanding of reality and then spend the rest of our time looking and moving forward.
Because what we have experienced is so much more compelling than what we have been told, it would be a waste to do it any other way.
Additional Reading
Reality as reassurance by Seth Godin
It doesn't lie.
With a shout out to Rasheed Wallace, the one pager doesn't lie.
If something needs tweaking in your finances, we'll all be able to see it.
There will be no lectures or lessons.
Only simultaneous realizations of what needs to happen next.
Your habit of saving (or not saving) will be in plain sight.
Your level of cash on hand will be as apparent as ever.
Either way, those two things alone tell us almost everything we need to know regarding our technical skills for managing money.
Sometimes the truth feels right and sometimes it hurts, but the truth always sets you free - eventually.
Additional Reading
Productive assets and useful flows by Seth Godin
It filters out the noise.
At first, the one pager will probably feel a little disorienting.
It will feel too simple.
You might even wonder if it ignores the layers of depth that exist in managing finances.
This is only a symptom of how we've been trained to hunt for complexity.
The beauty of the design is that it sheds a bright light on 95% of what moves the needle with our finances and allows the remaining 5% to fade into the background or, better yet, never even hit the radar.
If you get the majority of the 95% correct, then you will like the outcome.
If you get the majority of the 5% correct, you'll keep the hamster wheel spinning.
When you filter out the noise it's OK if it takes some time to get used to the quiet.
It compartmentalizes.
Oftentimes, it's easy for a surprise in one area of our finances to impact all the other areas.
If we're not careful, we'll even make some impulse decisions that don’t change the circumstances in any way.
If we feel like we're "behind", we start contributing to investment accounts at a unsustainable level, which in turn drains cash on hand and increases the stress felt in the day-to-day.
If we feel like income is going to be a little tight, we toy with the idea of making a lump sum payment to a mortgage only to realize that it will only reduce our accessible resources even more.
If our investments decrease in value, we begin pinching pennies in every spending category only to realize that we're allowing money to make our decisions for us instead of making decisions about our money.
The one pager allows us to attribute financial progress and setbacks to the correct things so we don't try to fix things that aren't broken or allow the things that are broken to hijack the mic.
It's comparable.
I double-dog-dare you to sit down with someone else and have an open, honest conversation comparing and contrasting your one pagers.
Most finance conversations get lost in rabbit holes and stuck on insignificant details leaving everyone more disoriented than they were at the start.
Conversations centered around the one pager cut to the heart of our biggest financial decisions and feelings right away.
The chaos of the numbers is replaced by the essence of the story.
From Buffett to Bezos to you and to me, everyone's finances fit in the one pager and the underlying emotions and themes are eerily more similar than they are different.
It meets us where we are.
Whether we love finances or hate them, our brains weren't designed to handle that much information at one time.
Almost 70 years ago, the psychologist George A. Miller asserted that the span of immediate memory and absolute judgment were both limited to around 7 pieces of information.
The financial services industry treats this law like Americans treat speed limit signs - nearly total disregard.
As soon as you've said S&P 500, diversification, ETF, tax efficient, emerging markets, asset allocation, and bull market, you've used up a normal person's allotment of digestible information and haven't actually addressed anything that will improve their relationship with money.
Was the one-pager designed with complete intellectual awareness of Miller's Law? Sadly, no.
But it was designed with the knowledge that when it comes to finances, you can't make it simple enough.
And let's be honest, even if we didn't connect the two from the start, it's pretty cool (and validating!) that the one pager has 7 colored bars.
Additional Reading
The complex middle between “simplicity” and “elegant simplicity” by Carl Richards
76 | She Said, He Said
In a conversation with a couple, I started with a simple question to kick things off, "What's your favorite way to spend money?"
The wife shared that going on a date or out to dinner with friends was her favorite way to spend money. The experience of getting ready, anticipating the evening, and connecting with people was second to none in this season of life.
The husband shared that he had grown accustomed to saving extra by eating on the cheap with friends in a way that had led to endless stories and deep relationships with minimal financial investment required. He acknowledged that excess spending to acquire the "experience" even seemed a bit irresponsible.
One totally legitimate perspective that will likely find saving and investing to be empty, meaningless, and detached without some spending on Priority #1.
Another totally legitimate perspective that will likely feel like they are wasting dollars and maybe even "falling behind when saving for the future" if they splurge on date nights.
I couldn't have cut to the heart of our relationship with money better had I written the script.
I think it's easy to think this question should take a backseat to more "sophisticated" topics like investments, odds of retiring on time, or the best credit card rewards.
This is a mistake.
No hack, planning tactic, or investment idea can compensate for these differences in perspective.
It's too easy to think more money is the solution, but more money doesn't change either of these perspectives - at best it allows them to be brushed under the rug still co-existing in an awkward, unspoken kind of way.
More times than not, it's not the amount of money that matters, but our relationship to it.
75 | A Deadly Combination
A common experience with our money is that our cash on hand (blue), real estate (yellow), and investments (gray) at some point can get to a level that feels like "a lot".
Of course, "a lot" is about as subjective as anything can be in finances.
Compared to $200, some people feel like $2,000 counts as "a lot". For others, $20,000 feels like "a lot" and for others it might take $200,000 or $2,000,000 to hit "a lot".
Your bank account grows to a size that surpasses the largest expense you've ever had and it feels like "a lot".
A home appreciates over a decade or two and it feels like "a lot".
Investment return in a single year is comparable to a few months worth of paychecks and it feels like "a lot".
No matter your definition, it's easy for "a lot" to feel like a good finish line and an opportunity to treat yourself, but this is where it starts to get tricky.
Without the context of our expectations, "a lot" isn’t always what it seems, and modest growth can disguise and even fuel unsustainable expectations.
Our expectations are no better represented than by our spending (red) and they have a way of growing without us even realizing it.
There is always something else that we could get or do.
Once we have something, it's never quite as satisfying as we expected it to be.
Things tend to get more expensive over time.
And the reality is that expectation’s natural state of being tends to be one of growth rather than decay.
The challenge here is that our expectations continue to grow, while our ability to support those growing expectations levels out at "a lot" - a deadly combination.
Truth be told, “a lot” is only a feeling unless it’s tethered to expectations.
74 | Cash Gets a Bad Rap
If there was a contest for biggest buzz-kill in finances - talking about "cash on hand" might take the cake.
Usually, it gets paid a measly interest rate.
Usually, it just sits there and "doesn’t do anything".
Sometimes there is a temptation to spend it all or invest it all - neither of which is a very good idea.
To top it off, cash in the bank is often called an "emergency fund". Talk about negative self talk!
It's tough because the measurable things aren't that impressive.
All the cool parts about cash are the things you can't measure - the ways it allows you to organize your life without thinking about the dollars needed.
Cash allows you to say "yes" to the opportunity of a lifetime or the year or the month without "crunching the numbers".
Cash allows you to change jobs or careers.
Cash allows you to take time off between jobs.
Cash allows you to ignore the due date on your paycheck because you're not waiting for those dollars.
Cash allows you to ignore the due date on your credit card bill because it's on auto-pay and you know the funds will be there.
Cash allows you to leave investments alone when they're down 20% in a 12-month period.
Most people I know want opportunities, options, and flexibility, which is exactly what cash offers, but we just don't think of it that way.
Google says three to six months of expenses is an appropriate amount of cash to have on hand, but if collectively we all feel limited or constrained by our money, doesn’t that make you think the standard rules of thumb might need a little work?
If you want more opportunities, options, and flexibility, try holding a little extra cash and see what happens.
Additional Reading
How I Think About Cash by Morgan Housel
How Your Bank Balance Buys Happiness: The Importance of “Cash on Hand” to Life Satisfaction by Peter M. Ruberton, Joe Gladstone, and Sonja Lyubomirsky
73 | Bad Words
A "bull market" is when stock prices rise by 20% after two declines of 20% each.
It's only identified after the fact.
Let me repeat - it's only identified after the fact.
On June 8, 2023, the Wall Street Journal informed us of the following, "S&P 500 Enters New Bull Market".
The market is up 20% since October 2022 and in June 2023 the Wall Street Journal says we're "entering a bull market".
What a joke.
If you've been waiting for the "start-of-the-bull-market" headline you've already missed out on a 20% rebound.
What's brutal is that the headlines of the past six months have been all doom and gloom - inflation, interest rates, debt ceiling, layoffs, etc. and yet a "bull market" has happened right in front of our eyes. The same way it always happens.
My guess is that a lot of people feel more comfortable investing after reading a headline like that, but they've missed out on a good chunk of the return that's already been made.
A beautiful example of financial terminology only adding to the confusion of personal finance.
This is bad enough, but here is where it's going to get tricky.
A "recession" is a period of temporary economic decline during which GDP falls in two consecutive quarters.
It's only identified after the fact.
There's a decent chance that the past 6 months will be declared a "recession" once the bean counters get around to closing the books.
It's not a signal of bad news. It's just confirmation that all the doom and gloom that you just lived and felt is in fact what the numbers say too.
It's a little like playing a basketball game without a scoreboard. If the other team full court pressed you into turnovers, got all the offensive rebounds, and made half of their 3s, the scoreboard isn't really necessary and can only confirm what you have already felt and experienced.
The existence of the scoreboard doesn't change what happened on the court and it certainly doesn't tell us anything about the outcome of the next game.
Just like the scoreboard, declaring a "recession" doesn't change the experience of the past 6 months and it doesn't tell us anything about the next 6 months either.
Be careful of finance words - they're rarely as helpful or informative as they seem.
72 | In Defense of Values-Based Investing: Right and Smart
This is not a sales pitch for Eventide Investments, but their investment process and commentaries illustrate the mysterious third factor better than anyone else I have ever read or seen.
Shaun Morgan says, "The true measure of success for a business lies in its ability to generate a profit by creating value. But profits generated by extracting value often have a limited lifespan. Profits generated by creating value, on the other hand, have the propensity to rejuvenate and sustain themselves."
An ability to identify and own companies that have been, are, and will continue creating the truest form of value for the world will lead to out-performance over long periods of time.
Eventide goes further by describing how a company that creates value interacts with each of its stakeholders in their Business 360 process...
When a business delights its customers, they become loyal patrons and go on to promote it to their friends and family, but when it disregards its customers, they walk away and tell others to steer clear.
When a business supports its employees, they give their best to their work, but when it neglects its employees, they in turn neglect their work or quit.
When a business cultivates a sustainable, humane supply chain, suppliers deliver quality goods and services, but when it mismanages its supply chain, suppliers and their workers suffer and deliver lower quality goods and services.
When a business respects and invests in local communities, they see the business as a blessing and go on to support it, but when it ignores local communities, they see the business as a curse and may actively oppose it.
When a business preserves and cares for the environment, it nourishes and sustains productive yield as the business grows, but when it damages the environment, the company may run out of resources or even face litigation or environmental disaster.
When a business satisfies an important need for society, people delight in its products and services, growing the market, but when it harms society with its products and services, society suffers and condemns the business.
Anyone can appreciate that delighting, supporting, cultivating, respecting, preserving, and satisfying is going to lead to better outcomes for all stakeholders in the long run.
This kind of investing not only begins to define the mysterious third factor, but also is the best way to achieve greater returns and lower volatility over the long haul - making it both a worthy and a profitable pursuit, because "doing what is right is also doing what is smart".
Additional Reading
A paradox of status and power by Seth Godin
The Fourth Source of Alpha by Shaun Morgan
Introduction to the Business 360® Framework by Eventide Asset Management
71 | In Defense of Values-Based Investing: Cost Isn't Only Measured in Dollars
If defining the "mysterious" third factor is challenging, then actually executing a strategy that accounts for it is as nuanced, complex, and filled with constraints as anything in personal finance.
One set of nuance and complexity has to do with the level of due diligence and research dedicated to evaluating possible investments.
Whether you are doing the research yourself or hiring someone to do it for you, the process of evaluating companies through a personal set of values or beliefs is a tall task.
Time becomes the limiting factor if you're picking individual stocks and trying to evaluate each of them based on non-financial merits.
Trust and alignment of values become the limiting factors if you're trying to find a fund that will actively evaluate each company for you.
Accessibility and awareness become the limiting factors if you're looking for a private investment that might address the mysterious third factor.
Underneath all three approaches, the level of judgment intensity is a spectrum unto itself - it's one thing to avoid companies that fail to check certain boxes, but it's another thing entirely to only select companies that check all the boxes.
Then there are the technical and behavioral factors to consider too.
The more we limit the field of investment candidates, the harder it is to be diversified, which can lead to greater return, but also greater volatility.
The more we tighten up our criteria, the less correlated our returns will be to the greater market, which can challenge our level of conviction during the inevitable periods of under performance.
Each of these nuances is a hidden "cost" that can be worth paying, but like any hidden costs, the less you know about them before you start the more likely you are to be disappointed when they show up.
We can continue to talk theoretically about all the nuances, but like any other investment approach, outcomes are driven by the same themes of being diversified, deciding your blend between stocks and bonds, expecting to buy and hold for a long time, and being patient through the ups and downs.
As fun and rewarding as it can be to talk about "impact" and "flourishing" and "value creation", if we forget the fundamental themes then we aren't going to make it very far. And if we haven't cared for our own relationship with money, then most of the effort will be for naught.
But if we've acknowledged the nuances, cared for the basics, and tended to our own relationship with money, then the upside on all three factors - return, volatility, and that mysterious third - is quite a worthy pursuit...
70 | In Defense of Values-Based Investing: The Mysterious Third
Traditionally, the performance of investments has been measured using two primary factors.
The first and sexiest is investment return - how much did the investment grow over time? This is what you'll overhear people bragging about at a party or on social media.
The second is investment volatility - how smooth was the ride to achieve the return? You won't hear as much about this one, but I think it's what allows the most seasoned investors to sleep well at night and pat themselves on the back for a job well done.
Understandably, these two criteria are relatively easy to measure and compare across investments, so they've become factor 1A and 1B for analyzing performance over time.
From the start, there has always been a mysterious third factor that anyone could feel in their gut, but struggled to put into words.
Recently, as access to information has become more ubiquitous and timely, it has felt like defining this third factor is more within reach even though at times it's still as mysterious as ever.
Is the company actually creating value for people or is it extracting value from people?
Does the company contribute to the flourishing, in the most holistic sense of the word, of all people in the world?
Or does the company contribute to the continued deterioration, in the sneakiest sense of the word, of all people in the world?
The trouble is that distinguishing between value creation and extraction is hard.
Does Amazon create value by partnering with small businesses to allow them to connect with a larger footprint than ever before or does it destroy the fabric or our culture by sterilizing and globalizing the consumer experience?
Does a brewery perpetuate a society's challenges with alcohol or does it create a space for connection that combats society's struggles with loneliness, depression and anxiety?
Does a car manufacturer provide access to vehicles that allow us to be productive, see the world, and connect with others or is it one of the cornerstones of society's poor relationship with debt, social comparison, and inability to embrace public transportation?
Plenty of companies have generated phenomenal investment returns capturing significant value for their owners, while pushing our society further away from a long term state of flourishing.
Differentiating between creation and extraction is quite complex in the moment, and can even still be pretty murky in hindsight.
This third form of investing is more akin to actively selecting companies than indexing, but the filter with which those companies are evaluated is quite different from only maximizing profit and minimizing volatility.
Additional Reading
Shadows and light by Seth Godin
Is there any perfect company? by Sherrie Johnson Smith
69 | In Defense of Actively Picking Companies: A Walk Down Franklin Street
Actively picking companies is a style of investing in which, instead of owning the entire group of companies available, you decide to intentionally own a subset of companies from a group.
This is how investments have been evaluated since the very first investment opportunity came about - investment opportunity presented, due diligence performed, and decision to own or pass on ownership made.
Actively selecting companies implies a belief that individuals have the ability to evaluate, buy, and hold companies whose value will increase more than the value of other companies over time.
A Walk Down Franklin Street
I went to school at UNC-Chapel Hill from 2006 to 2011. Four years of undergrad followed by one year of grad school.
The campus buts up against Franklin Street - a bustling street full of restaurants, retailers, condos, and all other types of businesses that are often packed with people, especially during most Marchs and Aprils.
Some storefronts have been the same for decades and others have turned over every other summer for decades.
Franklin Street isn't that different from hubs of activity in cities and towns across the world - its history is marked by companies that have stuck around, newcomers that have taken off, and old and new companies alike that have gone belly up.
Some of the businesses have been around for ages and seem like they could stick around for ages more...
- Top of the Hill
- Yogurt Pump
- Julian's
- Chapel Hill Tire
- The Carolina Inn
- The Bicycle Chain
- Sutton's
- Cat's Cradle
- Johnny T-Shirt
Some of the businesses have popped up in recent years and have become stalwarts of their own very quickly…
- Al's Burger Shack
- Target
- Trader Joe's
- Hampton Inn
Some quality businesses have succumbed to the harsh reality that all business can't last forever...
- Ye Olde Waffle Shop
- The Rathskellar
- Walgreens
- Spanky's
Some businesses were bad ideas or sketchy from the start and failed immediately, or worse, are still limping along today. Out of respect, I won't list these by name.
I'd wager that many people could have "predicted" some of these outcomes - maybe not the precise timing or the magnitude of failure, but certainly the inevitability of failure.
The reality is that an investment in any of the companies in the first group or second group could have returned 10x or 100x or 1,000x, while those in the third group and fourth group may have not returned the initial investment to an owner.
If given $100,000 to invest in any mixture of these companies, how could you not make an honest effort to pick the ones that would stick around and avoid the ones that seemed destined to fail?
68 | In Defense of Actively Picking Companies: You Can See It and You Can Feel It
Actively picking companies is a style of investing in which, instead of owning the entire group of companies available, you decide to intentionally own a subset of companies from a group.
This is how investments have been evaluated since the very first investment opportunity came about - investment opportunity presented, due diligence performed, and decision to own or pass on ownership made.
Actively selecting companies implies a belief that individuals have the ability to evaluate, buy, and hold companies whose value will increase more than the value of other companies over time.
You Can See It and You Can Feel It
Almost everyone can spot a good company when they see it.
If you can't see it, then you can certainly feel it.
Customer service that makes you feel like family. A sterling reputation in the community. Rave reviews that spread like wildfire. Lines out the door. Immediate sell outs of products and services. Owners and employees who are “cut from a different mold”.
Without looking at the numbers, I think most of us can identify companies that will outperform, last longer, and add more value to society than others.
The types of companies that lead people to say, "If only I could have bought a share of that company 20 years ago!" after a single interaction.
The characteristics of a successful business are often easy to observe firsthand.
The reality is that these things don't change just because the company isn't located in our neighborhood, or the company operates in an industry that we don't interact with each day.
Identifying and owning these companies is at the core of the active investing philosophy - some companies will perform better than others and others will not keep up, so be sure you pick the right ones.
Of course, there is a cost to selecting these companies. Someone must experience the customer service, feel the reputation, hear the reviews, see the lines, account for the sell outs, and talk to the employees, and this work requires some mixture of capital, time, attention, and energy to be expended.
This task is easier on paper than it is in practice, but history has shown us that the people who can do it well can generate significant investment returns.
67 | In Defense of Actively Picking Companies: Winners and Losers
Actively picking companies is a style of investing in which, instead of owning the entire group of companies available, you decide to intentionally own a subset of companies from a group.
This is how investments have been evaluated since the very first investment opportunity came about - investment opportunity presented, due diligence performed, and decision to own or pass on ownership made.
Actively selecting companies implies a belief that individuals have the ability to evaluate, buy, and hold companies whose value will increase more than the value of other companies over time.
Winners and Losers
If there is one reality with investing, it is that there will always be winners and there will always be losers.
Every investment decision has two parties, one that is buying and becoming an owner and one that is selling and giving up their ownership.
From that point forward, if the value goes up then the new owner "wins" and the old owner "loses".
If the value goes down, then the new owner "loses" and the old owner "wins".
This fact alone would lead you to believe that it's important to know more about the investment than the other party to the transaction.
Like most other things in life, a more experienced, knowledgeable person is more likely to outperform a rookie.
A chef is going to plan a meal, acquire supplies for a meal, and cook a better meal than a rookie cook 100 times out of 100.
A marathon runner is going to prepare more efficiently, have a reduced risk of injury, and outpace a rookie runner 100 times out of 100.
A plumber is going to bring the right tools, access the pipes more effectively, and eliminate a leak more quickly than a rookie homeowner 100 times out of 100.
Understanding the company's financial health, the quality of its employees, the quality of its relationships with stakeholders, its standing within its industry, or the potential future demand for its products and services is integral to making a good decision about whether to own it or not.
Winners and losers are inherent to the system, so spending a little time trying to increase the odds that you can become one of the winners is table stakes for successful investing.
66 | In Defense of Indexing: Meet People Where They Are
Indexing is a style of investing in which, instead of intentionally selecting a subset of companies from a group, you decide to own the entire group.
Groups of companies come in all shapes and sizes - a group could be all of the big companies in the United States, all of the energy companies in the world, all of the small companies in developing countries, or any other combination of geographies, industries, or company sizes.
Indexing meets people where they are.
When it comes to investing, many people struggle to understand and fully appreciate the details of a specific investment strategy. This is not a problem - real limits of time, experience, and interest create significant barriers to developing even a baseline understanding of investing. Indexing acknowledges this reality.
We know that relative wealth is more important to people than absolute wealth. We also know that people feel the pain of losses more than the pleasure of gains. Indexing allows your investing experience to be like many people instead of different from most. Inherently, indexing allows you to “keep up” with others in seasons of positive returns and ensures that you don’t “lose ground” relative to others in seasons of negative returns.
We know that people dislike paying taxes, particularly when they might not fully appreciate or understand why they are paying them. The feelings are compounded when taxes are generated from one account and the tax bill is paid out of a bank account many months later. Indexing reduces turnover which in turn reduces ongoing taxes.
We know that people dislike paying fees, particularly when they might not fully appreciate or understand why they are paying them too. Given our human tendency to demand short term results and feel losses more acutely than gains, it can be extra difficult to pay fees and see an index fund outperform a more expensive investment even for a brief season. Indexing requires minimal due diligence in company selection which continues to drive fees towards zero.
We also know that simplicity beats complexity. Outside of buying individual stocks and bonds, indexing is about as simple as investing gets – a group of companies and you own them all. No layers of decision-makers, portfolio managers, fund managers, or unnecessary complexity and activity to abstract what is actually happening.
Whether an investment expert or purist likes indexing or not, it meets people where they are.
Additional Reading
Good Enough by Morgan Housel
The Error-Proof Portfolio: Why the Best Questions Might Be the 'Dumb' Ones by Christine Benz
65 | In Defense of Indexing: Capture the Upside
Indexing is a style of investing in which, instead of intentionally selecting a subset of companies from a group, you decide to own the entire group.
Groups of companies come in all shapes and sizes - a group could be all of the big companies in the United States, all of the energy companies in the world, all of the small companies in developing countries, or any other combination of geographies, industries, or company sizes.
Indexing knows that capturing the upside is more important than avoiding the downside.
It's easy to think that avoiding companies that struggle or under perform is the most important part of successful investing.
The reality is that the bigger risk is missing out on owning the companies that out perform.
While psychologically this might seem backwards. Mathematically it is pretty simple.
If you own a company that fails, the maximum amount that you can lose in that single investment is 100%.
On the flip side, if you own a company that is wildly successful you can gain 100%, 200%, 500%, or 1,000%+ on that single investment.
It's pretty easy to see that one successful company can offset and totally wipe out the under performance of one or multiple struggling companies.
Indexing ensures that you own all the companies in a given group and, even though you might include a few companies that struggle, it ensures that you also hold all of the companies that exceed expectations.
Additional Reading
Tails, You Win by Morgan Housel
Portfolio thinking by Seth Godin
64 | In Defense of Indexing: More Humility than Naivete
Indexing is a style of investing in which, instead of intentionally selecting a subset of companies from a group, you decide to own the entire group.
Groups of companies come in all shapes and sizes - a group could be all of the big companies in the United States, all of the energy companies in the world, all of the small companies in developing countries, or any other combination of geographies, industries, or company sizes.
Indexing is more humility than naivete.
Carl Richards says, "Risk is what's leftover after you've thought of everything."
The list of things that could cause any single company to fail is literally endless.
To name a few...Pandemic. Natural disaster. Bad product launch. Poor culture. Bad accounting. Unexpected lawsuit. Rogue employee. Cyber security breach. Volatile CEO. Bad relationship with a supplier. Angry customers on social media. New legislation. Rising interest rates. Falling interest rates. And a million more things.
To even pretend that someone could have a pulse on this endless list of things that could go wrong is almost comical. If the CEO of a company can't do it, how in the world is an investor outside of the company going to have a chance of doing it?
This is the challenge of selecting 1 company to perform well, much less a portfolio of 30, 100, or 500 companies.
On top of that, this only addresses the "numbers" side of the investing equation. Gleaning from Morgan Housel, the "story" side of the equation is just as vital and depends on the past, current, and future emotions, feelings, thoughts, and beliefs of the 7+ billion people on the planet and their perception of each business.
If you thought evaluating the company for its merits alone was challenging, good luck trying to reconcile your analysis to the rest of the world.
Indexing acknowledges that all risks that can run a business into the ground are created equally and that trying to keep tabs on them all is an endless, time-consuming endeavor.
Instead of attempting to play an unwinnable game, indexing is a humble acknowledgement that a game that can't be won does not need to be played.
Additional Reading
The natural size by Seth Godin
A Number From Today and A Story About Tomorrow by Morgan Housel
Market forecasting isn’t like the weather… by Carl Richards
63 | Less is More
This post is Part 3 of 3 of the "Trusting Simplicity Instead of Increasing Complexity" series.
You already know everything that you need to know to achieve financial well being - the hard part isn't the knowing, but the ignoring and the doing.
The list of things that are out of our control serve as great places to hide and excuse ourselves from real progress - interest rates, the debt ceiling, politics, taxes, market commentaries, daily return figures, and credit card rewards to name a few.
These things like to paralyze us. They like to consume all of our time. They like to invite second-guessing. They like to create confusion. They like to spread fear and FOMO.
Every single one of those things is responsible for increasing complexity and none of them actually matter when it comes to making real progress.
Yes, I realize that other advisors and news executives are scoffing right now, but from a numbers perspective, all financial well being (or stress!) rolls up to three simple concepts.
Ensuring you always have enough cash in the bank to live your life. Stress management.
Spending less than you make on average for your lifetime. Flexibility management.
Keeping tabs on the relationship between what you have and what you need. Expectations management.
Like it or not, if you can address these three things, there is nothing else to accommodate from a numbers perspective.
If we buy the complexity that we’re peddled on a weekly basis, then the numbers never mean anything and we struggle to reach a place of real financial well being.
If we trust simplicity, then we can focus on a couple of numbers, ignore the circus, and continually move closer to a place of real financial well being.
Trusting simplicity allows us to quiet the noise of the world and rest our minds.
Trusting simplicity allows us to see and tell our story more clearly.
Trusting simplicity allows us to move from fearing the future to constructing it.
Trusting simplicity allows us to find contentment in a world of discontentment.
Trusting simplicity allows us to move through the chaos of complexity without falling prey to its false hope.
62 | Simple is Hard
This post is Part 2 of 3 of the "Trusting Simplicity Instead of Increasing Complexity" series.
Simple is hard because deep down we want to believe it's more complicated than it is - there is too much at risk psychologically.
When we struggle on something that we perceive as simple or easy, it's demoralizing and we get stuck in cycles of shame that get us further away from where we want to go.
The mistake is thinking that simple and easy are describing the same thing.
In basketball, if you score more points than the other team then you win - pretty simple. But to call basketball an easy game would be quite an oversight.
With that said, the feedback loop in basketball is quick enough that you have an opportunity to learn the game as you go by making adjustments after a timeout, a quarter, or between games.
The scoreboard makes it easy to keep track of the objective and the natural cadence of the game allows you to make adjustments and close feedback loops.
With money, the objective is simpler than it seems, but the execution is anything but easy.
We're bombarded by alternatives, opinions, suggestions, circumstances, trade-offs, and misunderstandings that are constantly challenging our definition and perception of "enough", so the objective fades into the background or disappears completely.
And as Michael Lewis says in the Big Short, "The problem with money [is that] what people [do] with it [has] consequences, but [they are] so remote from the original action that the mind never [connects] the one with the other", so the feedback loop - for positive and negative outcomes - is nearly impossible to recognize.
It's important that we don't get confused about what we're calling simple.
The objective of the game - to have "enough" - is simple, but because of the constant noise and the missing feedback loops, the actual execution is hard.
Simple is hard because of the things that keep us from getting to it, but once we’ve experienced it and started to trust it, we come to realize that it’s priceless…
61 | Complexity is Sexy
This post is Part 1 of 3 of the "Trusting Simplicity Instead of Increasing Complexity" series.
Complexity is sexy for the person seeking it because it appears to cover over all the potential faults.
Complexity is sexy for the person offering it because it sells itself.
Complexity has been an unfortunate hallmark of the financial services industry since its earliest days.
From investments to projections of the future to insurance products, on the surface they seem different, but the underlying theme remains the same - more complexity is the only answer to a complex world and our complex feelings.
The reality is that complexity isn’t a solution, but more a symptom that we've abandoned the simple concepts that drive 95+% of the outcome.
It's a little bit like reading the textbook in school and understanding the governing principles of a topic. Once you have a baseline understanding of them, they seem relatively simple, even a little like common sense.
Then as a rookie you move into some role that is governed by those concepts, but you're too far down the org chart to see them in action and everything feels more complex than you ever imagined.
If you can't ever orient and move past the complexity of the rookie tactics and responsibilities, then you never see the "other side" where the simple concepts truly do govern everything.
Complexity is a cheap substitute for real financial well being and it torpedoes our relationship with money for at least a couple of reasons...
It's easy to assume that if you can't understand something then the person promoting it must be smarter than you are and therefore "right".
At best, this undermines your confidence and at its worst it allows many an "advisor" to continue profiting off of innocent naivete without actually improving well being.
It's also easy to think that if it's complex, then it must lead to "more".
This one is a double whammy because complexity might not (usually doesn't!) lead to "more", and even if it did, "more" isn’t always what it's cracked up to be.
Complexity is the easy way out and we all know that the easy way doesn't work in the long run.
Simple is what works, but simple is harder than it seems…
60 | It’s Just Not That Simple
The advice is simple - spend less than you make.
But it's just not that simple.
Time and time again we get confused and that relationship becomes harder to keep tabs on than we ever imagined.
All the "one time" things make it tricky, because we don't want to count the car repair or the vacation or the medical bill in our "normal spending".
If we've built up some amount of cash on hand, it's tricky to tell if the dollars spent came out of our paycheck or our savings account.
If we use debt, it's tricky because in spirit we've "spent" the full amount of the loan, but the monthly payments make it seem like we've spent much less.
If we use a credit card, the moment we've swiped the card the dollars are spent, but the statement 30 or 45 days later makes it seem like the swipe wasn't the real decision to spend.
If we receive a gift and spend it, it's tricky because there's a chance that we've increased our baseline spending expectation without the promise of a repeat gift.
The trouble is that even a simple financial household with one or two of these nuances makes it difficult for most folks to know how much they spend.
Because we assume that everyone knows how much they spend (they don't!), spending advice quickly gets reduced to categorizing transactions and the level of engagement for non-CPA- and non-engineer-types plummets to zero.
Instead, start with figuring out how much you spend.
That's it. Nothing else.
That alone will put you ahead of most of the population.
There's too much emotion tied to the categories, particularly if you're leaning into the exercise for the first time.
When we reduce it to the numbers, we temporarily take the emotion and personal preferences out of the "quality" of the spending that is or isn't happening.
Even the least financially savvy person knows that you can't spend more than you make forever, but too many spending conversations get stuck debating the merits of individual categories that we lose track of the bigger picture.
The reality is that if you don't know how much you spend, then you don't have a prayer of determining how much is enough.
Don't worry about the categories until you know how much.
59 | “Give Until It Hurts” is Bad Advice
It's too abstract.
It ignores the nuance of people's life experience and unique personality.
It ignores the nuance of different types of resources.
It lets some people with a low bar for "what hurts" off the hook.
It drives others with a high bar for "what hurts" into tough spots.
It's impossible to create any kind of accountability.
It pretends like it's black and white, and once "it hurts" you have arrived at a state of enlightenment.
The reality is that it's a lot grayer than that.
I think there are two spectrums that begin to provide some direction for where we're trying to go.
The first has to do with the resources that are being released or given away.
Relatively speaking, time and talents are typically easier to give away than financial resources.
Some percentage of your income (purple) is harder.
Some portion of what you have accumulated in cash, investments, and real estate (blue, gray, and yellow) is even harder.
With each step, you're releasing more power, control, discretion, authority, and optionality to someone else and that is a hard thing for most humans to do.
The second has to do with where or with whom the released resources land.
*This feels more personal to a person's specific worldview and faith convictions, but I am using our own personal Christian faith as the basis for this spectrum.*
Relatively speaking, releasing resources to your own personal interests is the lowest level of engagement or "others-centeredness”.
Giving that contributes to the common, social, or cultural good is a higher level of "others-centeredness".
Giving that reallocates financial wealth and repairs relationships with the most vulnerable members of our society is the highest level of "others-centeredness”. We typically view our traditional tithe as a component of this category.
Personally speaking, our aim with our finances is to continually move up each spectrum over our lifetime keeping in mind that...
Giving before death is greater than giving after death for refining our own relationship with money.
Giving relative to our own level of financial wealth is greater than the absolute amount of the gift for our own relationship with money.
My hope and belief are that this framework allows us to participate in the redemption of all things, refines our heart to be more like it was created to be, and in turn, plays a role in helping us clarify and discover "how much is enough".
Thanks to CC for helping clarify these thoughts!
58 | The Wizard Behind the Curtain
In a conversation with a close friend, we arrived at a crossroads.
He asked/said, "The way I understand our investments is that we send money 'behind the curtain to the Wizard of Oz' and he messes with it trying to grow it to be as large as possible so we can retire, pass some along to our kids, and maybe help pay for college. Isn't this all that is happening?"
My only response was, "No, that is not right."
I wasn't abrupt because he made a mistake or because I was frustrated.
I was abrupt because he articulated a modern-day perspective towards investing so clearly and I had to be sure we didn't get further into the spin cycle that flashy marketing and a deluge of information have created.
The "grow as large as possible" and "isn't this all that is happening?" are topics for another day.
The concept of the curtain and the Wizard of Oz is what I want to lean into here.
A couple of decades ago, there was a curtain and there were keepers of secrets that could provide access or information that was important.
In what has been a positive trend for a couple of decades, the "curtain" has been removed and we have shifted into a world where everyone has access to all the information (and investments!) they could ever need.
At times, I think this trend is hard to recognize because the industry that is dedicated to improving "financial well-being" is not organized in a manner that can embrace this new reality.
The industry continues to cling to managing investments when they aren't what matters most, presenting information as if it's a secret, and promising certainty that doesn't exist.
This failure to re-organize has created one set of problems, but the attempts at "financial advice post-curtain" have only compounded the issue.
As the curtain has fallen, the industry's response has been a deluge of information in the form of tips, tactics, and products that are more redundant and inapplicable than ever before.
We've traded the curtain for confusion.
For as much confusion and anxiety as the curtain caused, I think the deluge of information post-curtain has had the same effect - maybe more.
If we're picking tools to navigate the post-curtain world, a leaf blower that can push away the cheap info is much more useful than the pre-curtain vacuum that could suck up every particle of available info.
You have all the access you need, there is no Wizard of Oz behind the curtain, and a leaf blower is more useful than a vacuum.
If we can acknowledge these realities then we can get onto the things that actually allow us to take the reins on our relationship with money. Sustainable income. Content spending. Accessible savings. Patient investing.