Links for December 2022

Links for December 2022

Yet another reminder about the impossibility of predicting the future. Pilots love to say that the enemy you don't see is the one that shoots you down: https://www.mindfullyinvesting.com/if-youve-already-won-the-investing-game-should-you-stop-playing/

More sense and sensibility from Mindfully Investing: https://www.mindfullyinvesting.com/fitting-square-inflation-data-into-a-round-stock-market-narrative/

Just stumbled across Joshua Kennon's blog, and it's filled with wisdom! Ignore his lessons at your own peril! P.S. the comments are usually excellent, too.

• Never invest in something you don't understand: https://www.joshuakennon.com/how-joe-campbell-found-himself-106445-56-in-debt-to-his-broker-in-a-matter-of-minutes-because-he-didnt-understand-the-risks-of-shorting-stock/
• The risk of investing in individual stocks: https://www.joshuakennon.com/gt-advanced-technologies-bankruptcy/
• Note: this is exhibit #407 on why the Froogal Stoodent recommends low-cost index funds!
• https://www.joshuakennon.com/lets-talk-about-the-gamestop-short-squeeze/
• https://www.joshuakennon.com/assumptions-are-the-enemy-of-the-rational-thinker/
• Perspective: https://www.joshuakennon.com/won-lottery-yet-people-still-think-world-going-hell/
• https://www.joshuakennon.com/the-valuation-levels-prior-to-the-1929-crash-were-absurd/
• https://www.joshuakennon.com/food-stocks-and-the-great-depression/
• A heartbreaking study called "The Night Black Wall Street Burned to the Ground:" https://www.joshuakennon.com/night-black-wall-street-burned-ground/
• A good policy analysis: https://www.joshuakennon.com/lets-talk-about-elizabeth-warrens-proposed-wealth-tax/
• I think there's a lot of great points in this analysis: https://www.joshuakennon.com/who-is-the-future-self-made-american-millionaire/
• Essentially, there have always been two main paths to wealth: 1) make enormous amounts of income, or 2) careful stewardship of what resources you have. Essentially, prioritizing either 1) offense or 2) defense.
• Joshua's analysis seems to focus mainly on 'offense,' or earning power. He's not wrong on that point, but consider my commentary on the case of MC Hammer, among others. Championships are generally won by well-rounded teams that play good offense and good defense; similarly, the wealthy almost always need to have some elements of both. But some will be best-suited, by disposition, to prioritize offense. Others, like myself, will be best-suited to prioritize defense.
• Defense is probably the slower route to wealth, but it's also more sustainable during dark economic times. That is, you can't always depend on being able to make a big income. As such, risk-averse people like me tend to prefer an emphasis on cost control.
• I was fond of his concept of 'economic drag' (as in 'drag show'). People who live two lives: one with a normal house and ordinary car, and another life, with much more extravagance, around other wealthy people. Related: stealth wealth.
• An interesting (and mathematically correct) use of capital: https://www.joshuakennon.com/how-one-of-my-family-members-used-shares-of-u-s-bancorp-to-build-substantial-wealth/
• My own aversion to debt would make me reluctant to behave in a similar manner. But I will admit that history suggests this would be a better course of action.

An interesting human-interest piece with a retrospective on the life of A&P heir Huntington Hartford: https://web.archive.org/web/20220120053932/https://www.vanityfair.com/news/2004/12/hartford200412

Interested in accounting methods? Probably not. Interested in how the federal government spends money? Probably so. Many people don't realize how the two are interconnected: https://www.nationalaffairs.com/publications/detail/the-case-for-fair-value-accounting

The Intelligent Investor: A Froogal Stoodent review

 The Intelligent Investor: A Froogal Stoodent review

The Intelligent Investor by Benjamin Graham – Notes and Quotes

Ninth in a series of book reviews by The Froogal Stoodent

No doubt thanks in part to Warren Buffett’s recommendation, Benjamin Graham’s classic The Intelligent Investor remains highly regarded by investors everywhere.

Now, I can say that I have read it for myself. Twice, in fact.

So, do I recommend that you read it too? Surely, if it’s good enough for the greatest investor alive, it’s good enough for you, right?

Let’s read on and see.

Links for October 2022

Links for October 2022

Uh-oh. https://www.bloomberg.com/news/features/2018-05-24/small-time-bankers-make-millions-peddling-mortgages-to-the-poor

Another reason to be cautious about crypto: https://www.thestreet.com/investing/cryptocurrency/another-prominent-crypto-lender-goes-down

And, in fact, I don't find this surprising at all: https://www.cnbc.com/2022/10/06/celsius-executives-withdrew-millions-before-freeze-on-customer-funds.html

A Redditor did some calculations on things like rent-to-income ratio across different generations. https://www.newsweek.com/worker-shares-proof-gen-z-must-work-twice-hard-boomers-survive-viral-reddit-1724722 However, the author of this Newsweek piece states "[these] figures and claims were not analyzed by experts." 

Unlike the author, I don't need 'experts' to verify somebody's conclusions if they provide their data source. #IAmAnExpert 

But, this is also known. How's the stamp of the Economic Policy Institute for 'expert verification?' https://www.epi.org/blog/growing-inequalities-reflecting-growing-employer-power-have-generated-a-productivity-pay-gap-since-1979-productivity-has-grown-3-5-times-as-much-as-pay-for-the-typical-worker/

Hmm...I can apparently use Google better than this 'journalist' who gets paid to write clickbait - oops, I mean 'articles' about what people are saying on Reddit - for Newsweek. 🤔

Is college worth the cost? The doubt is going mainstream: https://www.usatoday.com/story/news/education/2022/07/11/colleges-student-loan-debt-high-cost/7768824001/?gnt-cfr=1

Do you want an optimal withdrawal rate? Or a safe one? The answer to this question is pretty important for retirees to consider: https://retirementresearcher.com/difference-safe-optimal-withdrawal-rates-retirement-spending/

In my reading, I keep running across the power of incentives to govern human behavior. It's far more powerful than you probably think: https://collabfund.com/blog/incentives/

An astute analysis of the power of mass and social media to distort reality: https://dariusforoux.com/rich-and-famous/

Another excellent analysis from Morgan Housel: https://collabfund.com/blog/incentives/

"Sounds like the free market is working just fine." I'll have to remember that one! https://www.newsweek.com/baby-boomer-millennial-debate-workers-pay-free-market-1721501

Does successful investing have more to do with offense (generating big gains) or defense (preventing losses)? https://paulmerriman.com/the-biggest-challenge-to-successful-investing/ 

___

Check out my book-review series, available now:

1. Debt: The First 5000 Years by David Graeber

2. Rich Dad Poor Dad by Robert Kiyosaki

3. The Clash of the Cultures by John C. Bogle

4. Principles (Life and Work) by Ray Dalio

5. When Genius Failed by Roger Lowenstein

6. The Practicing Stoic by Ward Farnsworth

7. Gold: The Once and Future Money by Nathan Lewis

8. The Changing World Order by Ray Dalio

Why Invest?

 Why Invest?

Sometimes, people ask me: Why invest?

Well, I thought of a great answer, and I wanted to write it down so I don’t forget. Now, I can just send those folks a link to this page :) And hopefully, other people can benefit from these answers!

As explained below, the answer to this question is: I’d rather die with money than live without it.

A Conversation on the 4% Rule

 A Conversation on the 4% Rule

I had a brief conversation with Steve of the SteveArk blog, in his thought-provoking post on the 4% rule.

My initial comment was WAY longer than it should have been, but the thoughts and resources just kept pouring out of me, as I couldn’t help but think “what if somebody runs across this, a few years from now, and wants to know more?”

So I figured I might as well turn this into a post on my own blog! Perhaps I can do a better, more well-thought-out (and well-edited!) version here. So here goes:

Value Laptops 2022

Value Laptops 2022

Want the best value for your money on a laptop in 2022?

This is targeted mainly at students and bloggers; people who need a do-it-all laptop that won't bust even a modest budget.

I'm very pleased with the direction that the industry has gone in the last few years. I've long recommended computers with an SSD, or solid-state drive, because they truly are that much better than the old spinning hard drives. It's like comparing a 1975 Cadillac Sixty Special Brougham (they called them 'land yachts' for a good reason!) to a modern Shelby Mustang - in terms of performance or reliability, there's simply no comparison.

I no longer need to make that recommendation, because you'll be hard-pressed to find a laptop without an SSD these days.

Links for June 2022

Links for June 2022

Sad situation: https://www.marketwatch.com/story/were-headed-for-a-family-feud-my-father-offered-his-3-kids-equal-monetary-gifts-my-siblings-took-cash-i-took-stock-its-soared-in-value-and-now-theyre-crying-foul-11648697565?

• I wonder if his siblings would be equally eager to give the Letter Writer money if his stocks had gone down in value?...

How to lose your job in 10 years, courtesy of the Banker on FIRE: https://bankeronfire.com/how-to-lose-your-job-in-10-years

Found a couple good reflections, with a lot of perspective (and, dare I say, wisdom):

• https://eversightwealth.com/why-perfectionism-ruins-portfolios/
• https://awealthofcommonsense.com/2021/01/its-ok-to-build-wealth-slowly/
• I'm always a fan of Ben Carlson of Ritholtz Wealth Management. In fact, several employees of that firm run insightful blogs. Really good way to share your outlook and attract the kind of clients you want!

Speaking of wisdom and perspective, George Sisti of On Course Financial Planning has a great monthly newsletter! I'm particularly fond of this recent one: https://oncoursefp.com//images/Vectors%20Apr%2022%20final.pdf

Another good one from Banker on FIRE--here are the people who beat the stock market: https://bankeronfire.com/beat-the-stock-market

• For the rest of us, there are index funds! And they work pretty well, too...

Tsunami stones, a physical representation of how important it is to avoid unnecessary risk: https://www.atlasobscura.com/places/tsunami-stones

Several articles on Universal Basic Income:

1. The first one I ever came across from this guy. I found it well-reasoned and surprisingly persuasive: https://www.scottsantens.com/engineering-argument-for-unconditional-universal-basic-income-ubi-fault-tolerance-graceful-failure-redundancy/
2. Why UBI? Because "Computer technology is already eating jobs and has been since 1990." https://medium.com/basic-income/deep-learning-is-going-to-teach-us-all-the-lesson-of-our-lives-jobs-are-for-machines-7c6442e37a49
3. How are we supposed to pay for all this? Yes, Santens has a comprehensive plan: https://medium.com/economicsecproj/how-to-reform-welfare-and-taxes-to-provide-every-american-citizen-with-a-basic-income-bc67d3f4c2b8
4. Won't that just cause rampant inflation and defeat the whole purpose? Not necessarily: https://www.scottsantens.com/would-unconditional-universal-basic-income-cause-inflation-ubi/
5. Wouldn't it be better to target only those who really need it? In short, no:  https://medium.com/basic-income/the-progressive-case-for-replacing-the-welfare-state-with-basic-income-e8bd02c5875e
6. FAQs: https://www.scottsantens.com/basic-income-faq/

The Best Way to Wealth

The Best Way to Wealth

A Tweet recently caught my eye: “One of the best ways to get rich is to be born into a rich family.”

I politely disagreed, and thought it was worth elucidating in a longer post here. Inheritance is probably the easiest way to wealth.

Doesn’t that make it the best way?

Not in my book.

Let me tell you a quick story about easy money. I’ll provide a link to the full story, if you’re interested in all the gory details. But first, the thumbnail sketch:

In 2002, West Virginia’s Jack Whittaker won the Powerball for $314 million, which was (at the time) the largest lottery payout for a single ticket. Whittaker took a much smaller lump sum that amounted to about $113 million after taxes.

Still, $113 million is a lot of money. Even to Whittaker, who owned a contracting business laying pipe.

He had reportedly built a $17 million business already, so he didn’t really need the Powerball funds. So, Whittaker promised to start a charitable foundation to benefit the needy, and donate millions more to build a new church.

People begged him for money in person, and submitted heartbreaking sob stories via mail. In fact, Whittaker got so much mail, he had to hire three people to sort through it, and also hired private investigators to verify the details of some of these requests.

But Whittaker wasn’t interested only in charitable causes. He also wanted to enjoy the rest of his life, as he had some health issues and figured he’d have about a decade left. So, on New Year’s Eve of 2002, just a couple days after his big win, Whittaker went to the local strip club and plunked down $50,000 on the bar.

That was just the first sign of what was to come.

Whittaker was the victim of numerous attempted robberies and lawsuits. Public opinion turned on him too, after a little while.

It was mainly brought on by his own behavior—he was seen in clubs and casinos, pawing at women other than his wife, and he was charged with DUIs on more than one occasion.

But that was the happiest part of the sad saga.

• Thanks to his drinking and womanizing, Whittaker’s wife left him, after almost 40 years of marriage.

• His granddaughter Brandi—15 at the time of Whittaker’s Powerball win—got involved in drugs, enabled by a constant flow of cash from Paw-Paw Whittaker. In September 2004, Brandi’s boyfriend was found dead of an overdose, in the bedroom of a home owned by Whittaker. And in December, almost 2 years to the day after Whittaker bought the winning ticket, Brandi herself was found dead at a friend’s property, her body wrapped in a tarp. Cocaine and methadone were found in her system.

• In July 2009, Whittaker’s only daughter, Ginger, was found dead. The cause of death was not made public, but authorities said they do not suspect foul play. She had apparently been fighting cancer for several years, though it is not public whether that was the cause of her death.

• In 2016, Whittaker’s house burned down, and he did not have insurance on it.

• And Whittaker claimed that, in an apparently carefully-planned heist, thieves simultaneously hit 12 different branches of a bank and robbed him of much of his money.

The clerk who sold Whittaker the winning ticket summed it up best: “It seems like money brings out the ugly in people.”

April Witt’s entire story on the matter, first published by the Washington Post in 2005, is well worth a read. But if you consider the tragic story for a while, you just might come up with some powerful insights.

For example: if money brings out the ugly in people, why wasn’t Whittaker already getting himself into trouble?

After all, he already had his own company. He already had a pretty nice amount of money even before winning the lottery. So why wasn’t he already driving under the influence, or frequenting strip clubs and grabbing at women who weren’t his wife?

Why wasn’t he already giving his granddaughter enough money to buy drugs? With a $17 million business to his name, he clearly could have afforded it!

I think the answer is clear. Whittaker accumulated his money slowly, over a long period of time. He had to work for it. And think carefully about how to handle it.

I’d like to amend the clerk’s quote a bit. “Easy money brings out the ugly in people.” Or perhaps, “fast money brings out the ugly in people.”

People might be a little jealous if, over the course of a lifetime, you accumulate a couple million dollars by retirement age. But if they think it came to you easily, or quickly—in essence, that you didn’t do anything to earn it—that seems to be when the claws come out.

Maybe it’s pure jealousy. Maybe it comes from a sense of injustice, as if they’ve been wronged by fate because this good thing happened to someone else. Or maybe people have a sort of instinctive disdain for ease, an understanding that the good fortune can vanish as quickly as it arrived. “Easy come, easy go.”

I suspect it’s probably a combination of them all.

Back to the initial Tweet: while everybody thinks they want to inherit money, nobody actually likes an heir. Nobody respects someone who didn’t earn his or her own money.

So, if inheritance isn’t the best way to acquire wealth, what is?!

My response on Twitter sums it up pretty well, I think. I’d rather earn it, save it, and invest it for myself. In the process, I’ll learn. And, hopefully, I’ll learn enough to avoid the fatal errors that ensnare so many.

Like Jack Whittaker.

___

Check out my book-review series, available now:

1. Debt: The First 5000 Years by David Graeber

2. Rich Dad Poor Dad by Robert Kiyosaki

3. The Clash of the Cultures by John C. Bogle

4. Principles (Life and Work) by Ray Dalio

5. When Genius Failed by Roger Lowenstein

6. The Practicing Stoic by Ward Farnsworth

7. Gold: The Once and Future Money by Nathan Lewis

8. The Changing World Order by Ray Dalio

Battle of the Investments: Stocks, Bonds, and Real Estate

Battle of the Investments: Stocks, Bonds, and Real Estate

Stocks, bonds, and real estate—oh, my! 

These are the three main classes of investments. 

You may notice the absence of gold and Bitcoin. Gold actually has poor inflation-adjusted returns over time, and cryptocurrencies are too new to have established a track record across different types of market conditions. 

Plus, one thing that gold and Bitcoin have in common is that they’re unproductive assets. You buy them and they just...sit there.

Stocks, however, represent partial ownership in a business. That business is [presumably] a productive enterprise that generates money by selling a product or service that people will pay for. 

Bonds are loans to businesses and governments. The business or government entity uses the money to make improvements, which is [presumably] an efficient—and value-generating—use of that money. 

Real estate provides installments of cash on a regular basis, because people need space to live, work, and store stuff. They will therefore make periodic payments to accommodate that need. 

You’ll notice that stocks, bonds, and real estate are alike in that they actually do something to provide value to people.

Gold has some industrial uses, but its main uses have always been as 1) a store of value, and 2) a way to show off one’s wealth. Bitcoin has many aspects, but it’s best thought of as an experiment in deregulated currency. 

You probably wouldn’t trade your money for a bunch of rupees, expecting it to rocket upward in value relative to the U.S. dollar. And India is an actual country with well over a billion people, people who live and work and buy stuff. And pay taxes. And have a military. 

So why would you trade your money for a bunch of Bitcoin, expecting it to rocket upward in value relative to the U.S. dollar? Especially when it’s not guaranteed by a government, or tax revenue, or military force? Or supported by actual useful work? 

Due to that reasoning, I’ve deliberately excluded nonproductive assets like precious metals (gold, silver, platinum) or cryptocurrency (Bitcoin, Ethereum, Ripple) from this analysis.

Remember also that a wise investor is concerned not only with rate of return, but also with preservation of one’s principal. 

So let’s get started.

The Changing World Order: A Froogal Stoodent review

The Changing World Order: Where We Are and Where We’re Going by Ray Dalio – Notes and Quotes

Eighth in a series of book reviews by The Froogal Stoodent

If you’ve read my review of Life and Work Principles, you know Ray Dalio is the founder of a hedge fund, Bridgewater Associates.

If you’ve watched his viral video, “How the Economic Machine Works,” you know Dalio has been sharing insight about economic matters for years.

For example, this video explains that while money is money, debt is also money. To explain this, imagine using a mortgage—which is debt—to purchase a house. The seller of the house accepts money from the bank, and the bank is accepting your promise to pay. So your promise to pay (mortgage debt) becomes the bank’s asset, and that promise enables you to purchase a house.

On a broader scale, expanding the amount of debt in circulation can cause some of the ups-and-downs of the so-called ‘business cycle.’

Well, The Changing World Order expands on that 30-minute video, by explaining these and other principles in greater detail, and also highlighting some of the broader world implications for the future. In fact, he and his team have created a video specifically to go along with this book, too.

Dalio made his unedited, working version of this book publicly available during 2020, when many businesses and organizations were closed down. This is the version I read, so it probably won’t be exactly the same as the final published version. Indeed, I identified places where a sharp editor would rephrase things, or insert punctuation, to make the point clearer and more easily readable.

And, of course, since I read this as a web page, there was no pagination, so I’ll have to simply specify the chapter instead of the usual page numbers.

But polished or not, Dalio’s insights are certainly helpful! So let’s dig in.