Author: OnceUSave

Albert Einstein is a universal symbol of genius. He discovered the theory of relativity, won a Nobel Prize in physics, and made scientific advances in gravity, cosmology, radiation, theoretical physics, statistical mechanics, and quantum theory. So, wouldn’t an investor be blessed to have the smarts like his?

Einstein lost his life savings – including his Nobel Prize money – on bonds that defaulted in the crash of 1929.

Sir Isaac Newton, one of the greatest mathematicians this world has ever known, was in fact a savvy investor. But even he couldn’t avoid falling victim to FOMO (fear of missing out). He lost the bulk of his wealth speculating in shares of the South Sea company.

But Einstein and Newton likely had better things to think about than money but not the folks running Long Term Capital Management (LTCM), a hedge fund built to manage other people’s money. LTCM was launched in 1994 by a team that included Nobel Prize winning economists and renowned Wall Steet traders. The fund was designed to profit from inefficiencies in global bond prices. The investment team behind the fund was supremely confident that they had eliminated all risks from their process.

And once you’ve eliminated all risks, why not lever up and bet big? So bet big they did, borrowing twenty-five times the fund’s value and accumulating positions to the tune of one and a quarter trillion dollars.

But of course, they hadn’t eliminated all the risks. So when Russia defaulted on its debt in the summer of 1998, it led to a series of cascading events that ended with the fund becoming insolvent. LTCM shareholders who made money hand over fist in the preceding years, lost it all in a matter of months. To contain the after-effects of that debacle, the then Federal Reserve chairman Alan Greenspan had to orchestrate a bailout to unwind that setup. Investors in the fund though lost everything.

Then we have Mensa and their investment club. Mensa is a society that welcomes people from all walks of life, provided their IQ is in the top two percent of the population.

But these folks could stand to benefit by picking up a copy of Investing for Dummies. Finance writer Eleanor Laise analyzed the performance of the Mensa Investment Club between the years of 1986 and 2001, a 15-year stretch when the stock market averaged 15.3% a year.

The Mensa Investment Club on the other hand eked out a measly 2.5% annually. That isn’t just lagging performance. That is like getting left behind at the station.

Two things stand out from all these stories…

• Some of the smartest people in the world can make for being terrible at investing.
• Holding on to wealth is hard.

Getting money and keeping money are two different skills. Getting money requires taking risks, being optimistic, and putting yourself out there.

But keeping money requires the opposite of taking risks. It requires humility, and fear that what you’ve made can be taken away from you just as fast. It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be relied upon to repeat indefinitely.

Morgan Housel, Collab Fund

And many think the investment process works something like this…

1. You make an educated guess about the economy.
2. You use that to build a hunch around what the stock and bond markets are going to do.
3. You then pick investments based on that hunch.
4. When things don’t pan out as expected, you look for a new theory and change your investment strategy.
5. You rinse and repeat and then you are suddenly sixty.

On that note, the Wall Street Journal polls fifty-five of the nation’s top economists twice each year to gauge what lies ahead for the economy, interest rates and the dollar. Most get their forecasts wrong.

Pity the poor Wall Street economist. Big staffs, sophisticated models, reams of historical data, degrees from Ivy League schools and still they forecast about as well as groundhogs.

Jesse Eisinger, Wall Street columnist

And it is not their fault. Forecasting anything to do with a complex, adaptive system that is our global economy is hard.

I am not a fan of watching mainstream financial media. I seldom do. But we have all seen experts that come on these shows and recommend investments as if that is all it takes.

Because they don’t know you. They don’t know about you. It is a great deal for them when you watch these shows but a very, very bad deal for you if you act upon the mostly non-contextual advice being dispensed.

The solution then is to design a good process, a process built with you and your lifecycle in mind, a process that is going to reliably take you to your goals and beyond.

And a process built around contextual nudges along the way just like how a captain steers his ship towards its destination.

Getting the process right is crucial. A bad process with a temporarily great outcome is when you get LTCM-type situations. Never invest in anything when you know deep down that there is something off with the process.

And never stop investing when you know that the process is right, but the outcome is temporarily dull. In fact, it is a great deal for you if you are an aggressive saver.

But once the process is figured out, letting the investment returns fall where they may within a rough probabilistic band while applying tax-optimal tweaks along the way is how you get to your goals.

Behavioral finance says that emotions play a big role when holding on to investments, especially of the paper kind that we own in our 401(k)s and brokerage accounts. Because it’s easy to hold on to houses. They are illiquid. We don’t see their price move up and down by the minute. We can touch and feel them.

But holding on to financial assets requires conviction. And conviction does not come easy. It takes years of concerted effort and yet you are never done. It is a forever endeavor.

But building conviction in the process that feeds a good-enough plan while affording a great life is how we win. That is how we all win.

Thank you for your time.

Cover image credit – Yaroslav Shuraev, Pexels

Tim Urban in one of his posts, The AI Revolution: The Road to Superintelligence, attempts to measure the accelerating rate of human progress through something called the Death Progress Units (DPU). Take George Washington for example, our first president and likely a very curious dude from the mid-eighteenth century and say we transport him to today.

But imagine his times. There was no electricity. There was no running water. Transportation was a horse. Long distance communication meant that either you’d use smoke signals, fire a cannonball, or send a letter through a horse carrier.

But today, he sees metal cans whizzing by on freeways at speeds incomprehensible to him during his times. You show him the airplane. That he could be anywhere in the world in less than a day. You tell him about the International Space Station. You show him the internet. The iPhone. That you can make video calls and talk to anyone, anywhere across the globe. You play him music that was recorded 50 years ago. Flabbergasted would be the least of what you would expect him to be. He would die of shock seeing all this progress.

Now take Leonardo da Vinci who lived in the 1500s and say we transport him to George Washington’s times in the 1750s. What does he see? Just like in his times, there is no electricity. There is no running water. People still commute by horse. And the same set of communication devices exist. Some improvements here and there but not much change.

And certainly not at a scale that would kill him of shock. One would have to go back 1000s of years to see a big difference.

So how far into the future one must go to literally die of shock watching the scale of progress. That is what Tim Urban means by DPUs.

And 250 years in the grand scheme of things is nothing. It is a recent, recent history like yesterday. Yet, look at the world today compared to the world just a few centuries ago. The difference is night and day.

And DPUs are getting shorter and shorter…so short that we could witness that level of progress in one lifetime like what could take George Washington 250 years to witness.

This pattern—human progress moving quicker and quicker as time goes on—is what futurist Ray Kurzweil calls human history’s Law of Accelerating Returns. This happens because more advanced societies have the ability to progress at a faster rate than less advanced societies—because they’re more advanced. 19th century humanity knew more and had better technology than 15th century humanity, so it’s no surprise that humanity made far more advances in the 19th century than in the 15th century—15th century humanity was no match for 19th century humanity.

Tim Urban

So, progress is happening at a faster and faster rate due to the compounding nature of knowledge.

The computing revolution is another example where we observe compound growth in real-time. We started off with vacuum tubes and look at where we are today. This ad for Apple products from the bad old days of 1995 is exhibit A signifying the scale of progress. And this was the cutting edge then.

Do not miss out on the $6,400 in 1995 dollars for a laptop with 32MB of RAM – less than a thousandth of what we’ll find in the cheapest of phones today.

And assuming customers flocked to the stores to buy these products meant that Apple as a company made profits. And say that was a 100 million dollars in 1995.

Apple was a public company then, so those profits belonged to the shareholders. Apple had some decisions to make with that money…

1. Distribute 100% of it back to the shareholders in the form of dividends.
2. Distribute some as dividends and use what remains for reinvesting in research and product development.
3. Retain all profits with none going to the shareholders…for now.

Clearly option 1 would have been a disaster for the company as well as for the shareholders as none of the profits would have been used to build the next set of products that made Apple what it is today.

And of course, a disaster for their customers as well. Imagine life without a smartphone 🙂 .

Option 2 would have depended on what rate of return the company could generate by reinvesting the profits back into their business. And the fact that the company didn’t start issuing dividends until recently proves that Apple’s management had better use for the money. Option 3 hence is what they chose.

And that clearly proved to be the right call as we all got to see. At least in theory, it was the right call, not discounting the fact that they almost went bankrupt until Steve Jobs orchestrated the kind of turnaround that’ll probably be the recorded best in business history.

But that is the nature of the game. No business embarks on a project with the intent of losing money. They will make mistakes but a collection of businesses, in aggregate, must and will make profits or progress stops.

And option 3 is the preferred route for many businesses in the growth stage of their lifecycle as they need continuous influx of capital to build and grow.

But as a business starts to mature with more profits coming in than it finding ways to profitably deploy, they start to return some of those profits back to the shareholders in the form of dividends and/or stock buybacks (indirect form of dividends).

So, of the total return you get investing in stocks over the long run, part of it comes from dividends and the remaining comes from appreciation through reinvestment of profits back into the business. But eventually, all the accumulated profits will be paid out as dividends.

This below is the historical dividend yield for US large company stocks as represented by the S&P 500 index, a convenient proxy for stocks. Convenient because reliable historical data is available for S&P 500 but not so for the other corners of the market.

Dividend yields were higher during the 1950s because investors were still recovering from the trauma of the Great Depression followed by the Second World War. Nobody wanted to own stocks. To entice investors, businesses paid out almost all their profits as cash dividends. Stocks acted like bonds with profit growth muted due to limited reinvestment. That fortunately changed and here we are today.

But say you were transported back to 1950 (I love time travel) with the economy about to transform from catering to wartime industries into meeting domestic consumer demand of the post-war economy.

And say you as a baby happen to come into $100 through gifts that your mom then took and invested in the stock market. That money was then left to compound till today.

And say along the way, you had a choice to make; take the dividends out and spend them or reinvest them each year back into the same portfolio of businesses.

To highlight the compounding nature of this process, we will first look at the first half (1950 to 1986) of the 72-year timeframe.

The first half first…

The difference between dividends being reinvested vs. not reinvested is starting to diverge but does not look like it is as big a deal.

And then the law of compounding returns kicks in.

But you say $100 was big money back then for any family to save up. But then a pack of cigarettes cost 25c back in time. That is about 100 dollars’ worth of cigarettes each year if you smoked a pack a day. And many did. So, a manageable sum for any family.

And more importantly, how long did it take for that portfolio to throw off in dividends equivalent to the amount that was originally invested? Because that is what you are after. That is what will set you free.

Zooming into that $100 dotted line using log scale…

With dividend reinvestment, you got to the proverbial freedom in 30 years. Without that, you’d pretty much wait the entire timeframe.

But why would anyone just invest once and call it a day? You’ll want to do it over and over again because that is what you are supposed to do.

So, take that same family and instead of investing just a single $100 at the start of the period, say they invest that sum every year through the entire timeframe.

And this is their final tally…

This is compounding returns at its best. The first half of the timeframe is hardly exciting, but the second half is equivalent to the DPU scale of progress of your savings.

A word of caution: now don’t go realigning your investments with dividends as the sole focus. Because you will likely end up with businesses that don’t have much juice left. You want natural dividends that are an outcome of the capital allocation decisions a diversified set of businesses make. You don’t want the businesses you own to go out of their way to make dividends available to you regardless of their ultimate cost. Because that will be like artificially curtailing progress and that will never be a good thing.

Thank you for your time.

Cover image credit – Julia Kuzenkov, Pexels

Johnny Depp was once the highest paid actor with a net worth of $650 million¹. In 2017, he filed a lawsuit against his business managers accusing them of stealing all his wealth and leaving him penniless.

His managers countersued claiming that Depp spent $2 million a month maintaining his lavish lifestyle that included spending $500,000 on rental warehouses, $200,000 on private jets and $3,000 a month on wine².

No amount of money is enough when the expense side of the equation remains out of whack. And this is not the only story.

Back to the real world, say $50,000 is all you’ll spend each year in retirement. Income from Social Security is on top of that. And say you have got $2.5 million saved up. Is there a reason you should own anything but stocks?

Standard retirement planning advice states that as you get closer to retirement, you should own less stocks and more bonds because stocks are risky. That is how most target date funds work.

And with a less risky portfolio with bonds mixed in, you can confidently withdraw money from your accounts without ever running out.

A 4% safe withdrawal rate has become the gold standard which means if you save up to 25 times your expenses (1/0.04 = 25), you are done.

Dividend yield on stocks these days is 2% so clearly, an all-stocks portfolio will run the risk of running out of money at a 4% withdrawal rate. Stocks are volatile and when you draw income from an all-stocks portfolio when they decline in price which they do from time to time, you won’t have much stocks left when their prices eventually recover.

Hence you mix in bonds that yield (interest income) more than stocks (dividends) to smooth out the ride.

But anytime you add bonds, you give up on growth, so you’ll end up with less when you are no longer around…if that matters to you. And you end up with less money when you add bonds to a portfolio because interest income from bonds is a cost to a business issuing those bonds. That business hence needs to earn more than its input costs or else it goes extinct.

The simplest way to think about it is with how the banking system works. Banks are in the business of lending money. They take our deposits and pay us interest. They then turn around and loan our deposits to borrowers at a higher interest rate than they pay us.

And if they don’t earn more than the interest they pay us, they cease to exist. The same logic applies to businesses who go out in the bond market and borrow money. If they don’t out-earn their interest expense, they cease to exist. Hence, it is structural for stocks to outperform bonds in the long run.

But say you have designed your happy life on $50,000 a year after accounting for income from Social Security and you have got $2.5 million in savings, do you then ever need to own bonds?

You don’t because $50,000 is 2% of $2.5 million that you can safely expect as dividends each year from an all-stocks portfolio.

Plus, dividends grow over time. In fact, the growth rate on dividends is designed to exceed inflation. Dividends are a portion of the profits that come back to you as a shareholder of the businesses you own and businesses are not in the business of losing money.

So, when input costs for a business rise due to inflation, it has two choices – either absorb those costs without raising prices for the stuff they sell and slowly wither away or pass down those costs to their end customers while preserving their profit margins.

Businesses in aggregate tend to do the latter and hence dividends continuing to outpace inflation in the long run makes sense. And the data proves that³.

But an all-stocks portfolio is going to be way more volatile than a balanced mix of stocks and bonds but that only matters if you make it matter.

Risk and return are inextricably intertwined. In almost every country where economists have studied securities returns, stocks have had higher returns than bonds. Further, if you want those high stock returns, you are going to have to pay for them by bearing risk; this is a polite way of saying that in the course of earning those higher returns, your portfolio is going to lose a truckload of money from time to time. Conversely, if you desire perfect safety, then resign yourself to low returns. It really cannot be any other way.

William Bernstein

But what about real estate? First, you’ve got plenty exposure to real estate if you own a home.

Second, by being owners of corporations that make up the stock market, you already have a sizable implicit exposure to real estate through real estate investment trusts and through direct ownership of physical real estate these corporations own. Take McDonald’s for example. A fifth of its market value is derived from the physical ownership of real estate that it leases to its franchises.

And last, just like interest on bonds, the rent or the mortgage you pay is also an indirect cost to the businesses you own through the stock market. The company has to pay you enough in your paychecks to enable you to live wherever the company decides to create that next job and still clear profits.

If it cannot, it will not be creating that job which then reduces demand for real estate and eventually denting their prices.

So back to drawing income from your savings, if the size of your savings can help you sustain on a 2% withdrawal rate, you can choose to own an all-stocks portfolio and depart this planet with lasting generational wealth.

But if you need more income, then you’ll need to own bonds. Income from Social Security is like owning an inflation-indexed annuity (guaranteed income for life) so I wouldn’t go overboard with bonds. The guideline below is what I recommend and of course, it varies based on individual circumstances.

In short, if you are rich, you are set 🙂 – rich not just in terms of having great possessions but rich in terms of having fewer wants.

Thank you for your time.

Cover image credit – Tima Miroshnichenko

¹ Stephen Rodrick. “The Trouble With Johnny Depp“, MarketWatch. June 21, 2018.

² Eriq Gardner. “Johnny Depp Settles Blockbuster Lawsuit Against Business Managers“, The Hollywood Reporter. July 16, 2018.

³ Mark Hulbert. “You need to pay more attention to dividends — this math shows why they beat inflation“, MarketWatch. April 23, 2022.

You know the end of working for a paycheck is coming but when you are in your 20s, that end seems so far that it might not as well come. Plus, life has a way of getting in the way.

But then you wake up one day when you are 45 and you start to get stressed. So, here is a plan to get de-stressed.

The first thing you’d want to know is how much of your pre-retirement paycheck needs replacing. You won’t need the whole thing because most life expenses will be done by the time you retire. Expenses like…

• Income taxes

• Mortgage payments

• Paying for college

• Saving for retirement (yes, that was an expense while you were working)

Plus, you’ll have income from Social Security which regardless of what you hear, is going to be there.

So, say that plus $50,000 a year in income is all you need.

But that is in today’s dollars when you are 45. You’ll need to inflation-adjust that to when you retire, say at age 65.

So, this is what today’s $50,000 will look like when you retire 20 years from now, at age 65 and through retirement.

This is planning for a 100-year life expectancy which you might think is long, but it may not be.

So, to recap, you are 45, just getting started and plan to retire at 65 and draw $50,000 a year in income in today’s dollars from your savings for 35 years in retirement.

How much would you have to realistically set aside each year from now till you retire?

$63,000 😮 .

We get that number through standard annuity math that we can find in any finance textbook.

And with those savings deployed into a decent portfolio of investments, this is how you’d build up and draw down your wealth…

But $63,000 is a lot of money to save each year but that unfortunately is the implication of lost time. And the fact that you are reading this means you are likely not starting out with zero savings so that helps lessen the burden a bit, which we’ll see later below.

But back to the original discourse, say you could somehow delay retiring for another 5 years. That pushes your retirement age to 70 so now you only have to pay for 30 years in retirement.

This is what that same $50,000 a year in purchasing power looks like with that delayed retirement…

And the amount you need to now save drops to $42,000 a year, a bit more manageable sum than before.

Working longer has other benefits besides just making our finances easier. Work keeps us engaged and thinking which helps stave off diseases that mess up our brains. And if we’ve found our life’s work, we’d be happier and healthier long into old age. I say never retire but that’s me.

But back to the discourse, again, say you have been doing some savings here and there and were able to stash away $100,000 by age 45. And with a delayed retirement to 70, the amount you need to now save each year further drops to $33,000.

That is manageable on many fronts including the fact that you can do a good chunk of it in your 401(k) plan at work.

So, this is roughly how to plan for any goal, not just retirement. We can play around with the inputs but time, as we all know, coupled with systematically investing our savings into a reasonable plan sets us on easy street. And the earlier the start, the easier that street gets.

Starting late is never fun, but it is what it is. Overreaching for yield to compensate for lost time is not the solution though. We control what we can and that is how much we save, how much we spend and how long can we delay the start of the retirement spending cycle.

Thank you for your time.

Cover image credit – Andrea Piacquadio, Pexels

I get to listen to the radio sometimes and I still find (unfortunately) a plethora of shows where people call in to ask whether a given stock is a buy, sell, or hold.

So, think about this. You call into a radio show to talk to a stranger, okay a professional stranger, who knows nothing about you, doesn’t know your circumstances, doesn’t know about your work or about your family, doesn’t know what other investments you own or how a particular investment fits into your overall pie and what else are you doing with the rest of your money, whether you are afloat or drowning in debt, none of those things.

And yet you ask him (always a him) whether you should buy, sell or hold a stock? Crazy I say but this is how many invest.

So, there is this person who hosts this radio show where people call in for what I deem non-contextual advice but, in an attempt to sound relevant, he throws out terms like stochastic indicator this and Bollinger Bands that, moving average this and sideways trend that. Lots of fancy jargon that some consider investing but has nothing to do with the real business of investing.

And all that word magic is what they call technical analysis. It is about identifying patterns in past stock prices and using them to predict future prices. That is to say that profits don’t matter, interest rates don’t matter, valuations don’t matter, long-term sustainability of a business don’t matter. The only thing that matters are the zigs and zags in stock prices and profiting from it, if that was ever possible.

But we know technical analysis is dumb. Anyone who gives any credence to anything that has technical analysis in anything they say, their entire premise is dumb. And a quick search will lead us to countless studies that prove that it is dumb.

And I bet the host of that show knows deep down that it is dumb. But then he’s got an audience to serve.

Technical analysis is what I would call making investing decisions based on data without theory. You look at the time-series data for a stock, concoct some smart-sounding theory around it and call it something technical.

If what transpires deviates from what was predicted, you concoct a new theory and call it something else. And it must sound technical of course.

Talk about concocting a theory, Tyler Vigen runs a site called Spurious Correlations that attempts to fit all sorts of totally unrelated data series to each other. Like say the number of people who died from getting entangled with their own bedsheets versus say the amount of per capita cheese consumption.

And with correlation coefficient between the two totally unrelated data series approaching 0.95 means that if you want to save people from their own bed sheets, make sure they don’t eat cheese. That is technical analysis in a nutshell.

Gary Smith in his book, Standard Deviations continues with the fun by generating some stock price charts for a fictional company whose stock price starts at $50 and then each day, the price changes based upon the outcomes of 25 consecutive coin flips. If the coin lands a head, the price goes up fifty cents and if it lands a tail, the price goes down by 50 cents.

So out of the 25 consecutive coin flips, if fourteen landed heads and eleven landed tails, the stock price would rise by $1.50 the next day.

And I bet if these charts were to be shown to that person on the radio show, he would get all technical and describe it as…

And quite naturally, if the stock price is trending upwards, it would continue to trend upward to the moon and beyond so buy, buy, buy.

Or if you get a chart like below, a death spiral, you never want to go near it because this is where your money goes to die.

The chart below had a strong support at $30 and then it was pierced. And we know once that support is pierced, it is all over.

Or the one below that shows clear resistance at $58 but now that the stock price has broken through that impregnable resistance, it is again all the way to the moon and beyond.

We know how silly all this sounds. But it stops being silly once we find out how much money is transacted each day based upon all this silliness.

Thank you for your time.

Cover image credit – Katie, Pexels

I wish we would see a day when a majority women are at the helm of our businesses and the markets. I wish child-rearing, toddler-totting mothers someday rule Wall Street and investment houses across the globe.

Consider me biased being a dad to two beautiful daughters but there is plenty of anecdotal evidence that corroborates the fact that women not only are more judicious risk-takers, but that trait also helps make them better investors. They make for better business leaders because they focus more on sustainable, long-term profit maximization instead of the usual gun-slinging, macho-capitalistic, short-termism that is the norm in today’s male-dominated world.

Plus, the protective, nurturing instincts women bring to the table would undoubtedly make the world a better place while reducing systemic risks and the associated savagery the world has endured since time immemorial, mostly again due to male domination in business, politics and the markets.

Case in point, Iceland, a country that right up until 2008 was rated by the United Nations Human Development Index as the best place to be a human being on this planet earth.

And then it almost went bankrupt when three of its largest banks collapsed, holding debts more than 10 times the size of that country’s GDP and in turn impinging a lot of grief and misery on its generally happy citizens.

The country’s almost entirely male-run banks levered up big and gambled customers’ savings into ‘can’t lose’ investments that turned out to be so complex that no one had any clue what they owned.

And no one cared to ask the hard questions because all parties involved were making money hand over fist in the years leading up to the collapse. The only financial company that survived and remained profitable throughout that episode – Audur Capital, an almost all-women run firm.

Iceland’s doing fine now because the country learned its lessons and put in place a set of laws requiring that the system be adequately represented by the fairer sex at all levels of government and businesses. A segment from this Der Spiegel link sums that episode well.

“The crisis is man-made,” claims banker Halla, 40, who like all Icelanders, is only addressed by her first name. “It’s always the same guys,” she says. “Ninety-nine percent went to the same school, they drive the same cars, they wear the same suits and they have the same attitudes. They got us into this situation — and they had a lot of fun doing it,” she says. Halla criticizes a system that focuses “aggressively and indiscriminately” on the short-term maximization of profits, without any regard for losses, that is oriented on short-lived market prices and lucrative bonus payments. “It’s typical male behavior,” says Halla, who compares it to a “penis competition” — who has the biggest?

That brings us to this aptly titled paper, Boys Will Be Boys by Brad M. Barber and Terrance Odean of UC Berkeley’s Haas School of Business. It concludes that men in general, trade their portfolios 45 percent more than women and earn annualized risk-adjusted returns that are 1.4 percent less than those earned by women. These differences are more pronounced between single men and single women; single men trade 67 percent more than single women and earn annualized risk-adjusted returns that are 2.3 percent less than those earned by single women.

And I know the reasons why. Some of us are compulsive gamblers and cannot help ourselves. Others think that they are in this race, and they must beat this other guy at this ‘game’. Why worry about the long-term when you get to brag about the killing you just made on this one stock with no mention about the rest of the losers you own in your portfolio?

The problem though is that this is widespread. I see it all the time. Why are you holding so much cash? Oh, I thought the market was going down, so I cashed out my 401(k).

Really? That was the reason you sold? When you sold, someone else bought. Who do you think that someone else is?

But then when the market eventually recovers, which it invariably does, they remain stuck. That one blunder sets them back years if not decades.

And we all know who makes most of these market-timing calls? Almost exclusively the men in the households.

And if you see what I see out there with the portfolios I encounter, it makes me wonder if they would have been better off locking their money off in annuities and junky whole-life policies. At least they wouldn’t be able to touch their savings without encountering stiff withdrawal penalties. And I can almost bet that most would do better with these egregiously inferior products than what they currently do with their investments.

But enough talking about the folks who appear to know what they are doing and let us talk about the folks who should have known what they were doing. They had seemingly cracked the code to endless profits with never a loss in sight.

And all Nobel-laureates at that and of course all men, who started Long Term Capital Management (LTCM), a hedge fund that tried to capitalize on bond mispricing and to really make a killing, they levered up 25 to 1.

It worked like a charm until it didn’t, and poof went all the money – literally overnight.

This is just one example of many of the supposedly best in the business and almost exclusively all overconfident men at the helm running people’s life savings into the ground.

But back to why I think women are genetically predisposed to be better at investing is because we know they’ll approach this entire process from the safety-first angle.

Many of the great financial disasters we’ve seen have been failures to foresee and manage risk.

Howard Marks

That overconfidence, that self-delusion is seldom found amongst women. They are more likely to ask questions, seek help when needed and in general, don’t tend to go near the “too hard to understand” pile.

That is the general theme around how I invest my own money and the money our client families entrust us with. I am waiting for the day where I can build a portfolio of mostly women-led businesses that offers me just the right amount of diversification. And I bet when that portfolio eventually rolls around, it’ll beat the pants off of any other portfolios you could find.

That day is not here yet, but it is coming and we should all welcome it because in this fight between testosterone and estrogen, we want estrogen to win. Our future is riding on it.

And a message to the wives, the mothers and the daughters out there, you need to get involved with what is happening with your household finances. This is supposed to be a family affair after all, and for the clients we serve, we intend to keep it that way.

Thank you for your time.

Cover image credit – Jonathan Borba, Pexels

The stock and the bond markets are the most efficient places to invest your savings. Owning stocks means owning pieces of businesses while owning bonds means becoming a lender to the same businesses or sometimes to the governments.

In case a business goes bankrupt, the bondholders get paid first before the stockholders get anything. But in exchange for that apparent safety, you give up on returns, a lot of returns.

Interest payments on bonds are fixed and hence more predictable than dividends from stocks, another reason for the lower perceived risk with bonds than with stocks. And lower perceived risk means lower expected returns.

The price of a stock depends upon the level of current and future dividends and then you must discount those dividends at some discount rate to arrive at fair value. Everyone has different interpretations of these numbers and their collective opinions, including of those who participate to just gamble like it is some sort of a casino, gets reflected in the prices we see quoted each day. All this means that stock prices are volatile and will remain volatile.

Dividends from small company stocks are more unreliable (riskier) than from large company stocks and hence are even more volatile than just stocks as a category. So, more risk should equal more reward, but we shall see.

I’ve got monthly returns data for three categories of investments going back to January of 1987.

• Bonds and specifically, long-term Treasury bonds. By buying these bonds, you are lending money to the Federal government for a decade long timeframe. And since the Federal government cannot go bankrupt, this is as risk-free of an investment as it can get, assuming you hold on to it till it matures.

• LargeCapStocks or large company stocks. By owning them, you own little pieces of some of the biggest businesses in America.

• SmallCapStocks or small company stocks. These businesses are nimble. They can grow fast. They can also fail easily. The risk is high, and you want to get compensated for taking on that risk. So, the expected returns should be high. Finance textbooks tell us that.

And this is how the three investments behaved.

Probability density tells us the proportion of months out of the total months where returns varied between any two ranges. Take the sub-plot for bonds for example. We can state by eyeballing it that for about 60 percent of the months, the monthly returns were between zero and 10 percent. In fact, we can make that claim for all three categories of investment.

I show three vertical lines for each sub-plot: at zero percent in black, at -10 percent in red and at +10 percent in blue. A few observations…

• You know that if you bought and held any of these investments from the start of the period to the end, you made money. And in some cases, a good chunk of money. How do we know that without doing any number-crunching? By estimating the area under the curves for each investment that fall to the right of the black dividing line that marks the zero percent line. The area under the curve for each one of them is greater to the right of that line than to the left. That means that at any given time, your returns were more positive than negative and that compounding over months and years is what gets you to that good chunk of money.

• As you go down the plot from bonds to small cap stocks, the distribution of returns gets wider and flatter. Bonds have the tightest distribution; small cap stocks have the widest and flattest distribution. What does that mean? An increasing level of volatility as the distribution gets flatter. Some use volatility and risk interchangeably but volatility is not really risk as broad-based asset classes don’t go to zero. That is not true with individual securities. Bonds have the tightest distribution which in statistical terms means the smallest standard deviation (volatility). Small cap stocks, on the other hand, have the widest distribution and hence are considerably more volatile than bonds.

• It is not as apparent but if you were to observe the peaks to the right of the zero-marker black line for each sub-plot, the peaks drift a little farther away from that line for stocks as compared to that for bonds. That implies that on average, monthly returns for stocks were higher than for bonds. Again, nothing pathbreaking, just one more observation.

Most mistakes happen in the tails…

Then there are those long tails and specifically the left tails below the -10 percent line. The tails are visible for stocks but not noticeably visible for bonds. So, zooming in…

Bonds had virtually no instance where you suffered a monthly decline of more than 10 percent.

That is not true for stocks. Of all the months (432 in total), you’d have to endure a monthly decline of more than 10 percent for large cap stocks six different times.

The worst monthly decline for large cap stocks was -22% in 1987. For those who know, that month includes the ominous Black Monday. The rest of the “bad” months happened during major market panics caused by events like the Asian financial crisis, the Dot-com tech crash, the banking crisis of 2008 and of course, the Covid pandemic.

These “bad” events are what forms the left-tails in the plot above. And that is where the gravest of all mistakes happens. No one panic sells during the right-tail months, also called the “good” months.

But if you have a plan and a conviction to act, the “bad” months in fact are the best months to invest new money. And the “good” months quite naturally are the worst. You are buying future cash flows (dividends). You should be euphoric when you get to buy the same amount of cash flows at 20 and 30 percent discounts.

Bull markets begin with the feeling that the market can only go lower. Bear markets begin with the feeling that the market can only go higher.

Peter Atwater

Back to the data, things get a bit wilder with small company stocks where you’d have to endure 14 separate monthly declines of more than 10 percent. That is more than double the number of months for large cap stocks. There was even a month in the year 1987 when small company stocks declined by a good 32 percent. That is in a single month. Imagine waking up a month later with a third less money?

The natural question then is that you’d have made more money investing in small cap stocks, right?

Well, no. You made more money in stocks than bonds and that was expected. But you made less money with small cap stocks than with large cap stocks. That is even after taking all that risk. Isn’t that interesting?

So, does that mean we abandon small cap stocks? No. What this means is that we don’t have a way to predict what an investment will do in any given cycle. And we don’t know when those cycles will turn. We just have to wait for them to turn.

This discussion as always comes down to the process. If you have the right process built around a good financial plan, you just have to accept the occasional vicissitudes of the markets and invest away.

Thank you for your time.

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Ralph Wagner, the legendary manager of the Acorn Fund, once likened the stock market to an excitable dog on a long leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle through Central Park to the Metropolitan Museum. At any given moment though, there is no predicting which way the dog will lurch, but we know that directionally, the dog is headed northeast because that is where the owner wants to go.

Casual observers, though, trying to gauge which way both the dog and the owner are headed, will have their eye on the dog instead of on the owner.

If you missed Mr. Wagner‘s analogy, the stock market is that excitable dog while the value of the underlying businesses resembles the owner. The stock market reflects the collective prices of businesses at any given moment and as we know, stock prices are volatile.

And they’ll remain volatile because the stock market is trying to decide on the right price for a business based on the profits that business generates today and is going to generate long into the future. Imagine trying to predict profits for a business many years and decades down the road. Not that easy.

And not just that, the prevailing and future interest rates also play a role because they dictate the discount rate. And discount rate is what gets used to discount those future profits and bring them back into the present.

The aggregate value of all those future profits, once brought back to the present, is what makes up the fair value for a business (stock). More reading here if interested.

And millions of market participants, knowingly or unknowingly, duke it out each day in the stock market to arrive at the fair value for a business. Every new piece of information that changes the trajectory of those profits or those of the discount rates gets immediately reflected into a stock’s price so again, volatility will remain an inherent component of a stock market’s life.

But over the long haul and as Mr. Wagner was implying, the value of a portfolio populated with a healthy serving of diversified businesses will rise. It must rise because dividends, stock buybacks (indirect form of dividends) and the reinvestment of profits back into those businesses provides that perpetual upward lift to the value of that portfolio.

Benjamin Graham, the father of value investing, once explained this by stating that in the short run, the stock market is a voting machine, tallying up which firms are popular and unpopular. But in the long run, the stock market is a weighing machine, assessing the true substance of a company.

A roundabout way of saying that is that in the short run, stock prices can get stupidly volatile, both on the upside and on the downside. But that doesn’t and shouldn’t change the long-run value of a ‘good’ business.

How do we know if we own a long-run ‘good’ business? We don’t. We can hypothesize and create all sorts of scenarios that reduces the odds of ending up with a lousy business but then a totally unexpected event turns a perfectly fine business upside down, a business that has weathered pandemics and World Wars, a business that has survived recessions and depressions, a business that lasted for more than a century of everything the world can throw at it, can still go belly up overnight aka Lehman Brothers.

Or Bear Stearns.

Or a blue-chip business that steadily declines over decades like Sears.

Or Xerox.

You say Xerox? I saw that coming.

Not really.

Xerox was the Google of its time. Palo Alto Research Center or PARC, a subsidiary of Xerox, was in large part responsible for breakthroughs such as laser printing, ethernet, the personal computer (imagine that), the graphical user interface, the computer mouse and many other technologies that literally changed our lives.

And you had every right to be a believer in that company and continue to remain a shareholder but if that was all you owned or if that was a big chunk of what you owned, you lost a bunch.

And hence we diversify.

Owning ten different businesses in the same sector is not diversification. Because entire sectors can disappear or be left in a lurch for a long time. We don’t want to end up owning the next generation’s buggy whip and leather industries.

And when we are building a 50-year financial plan, we have to make certain assumptions, and those assumptions should revolve around investments that can survive that timespan. They sure are not going to be those few stocks we think will get the job done because concentrated portfolios seldom deliver over decades long timeframes.

Portfolio design requires intentionality. We can’t just slap things together with a stock here and a bond there and hope things work out. An ideal first step is to start with a baseline financial plan and incorporate investments that serve the primary intent behind that plan. Each investment in our portfolio must have a job to do.

And each investment in a portfolio should talk to other pieces in that portfolio. In fact, the many pieces should talk across accounts. Your 401(k) should talk to your partner’s 401(k) and your partner’s 401(k) should talk to your Roth IRA and so on. Compartmentalizing by account is never efficient. Some investments work better in tax-favored accounts like a 401(k) and others work better in taxable accounts.

And we want to expose enough of our money towards the many pieces in our portfolio to make a difference. One or two percent exposure to an investment category is not going to matter even if it were to shoot the lights out.

Getting the baseline structure right is key. And then building a process around how we maintain that structure as our lives evolve.

Lasting money is an outcome of good financial planning. Money of course is not everything, but it buys some of the best things money buys – peace of mind, great lived experiences and above all, independence…independence to live a life on our own terms.

Thank you for your time.

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A business makes capital allocation decisions such as expanding a factory or investing in new tech with the intent of recouping that investment over a timeframe that spans years and decades. Not all capital allocation decisions pan out but the process that is followed is with the intent of getting as high a return on investment as possible.

And the capital that a business needs can come from the profits it generates and if that is deemed inadequate, it raises that capital from the stock and the bond markets. Raising capital from the stock market means selling pieces of the business to investors while raising capital from the bond market means borrowing money from investors.

So, imagine a bank lending you money to help you buy your home and then turning around and asking for their money back the very next day? Banks of course can’t do that by law, but you see how absurd that sounds.

So why should you approach the allocation of your savings any differently? Because structurally, you are making the same kind of capital allocation decision as a business, or a bank makes which is long-term, risk-optimized and goal-oriented.

And just like how a business won’t expect a return on its investment right away, you shouldn’t either. Exchanging pieces of paper (trading your portfolio) with each other is not how you get rich.

You get rich through long-term ownership of businesses while receiving a portion of the profits those businesses generate in the form of dividends and share buybacks while letting the businesses reinvest the profits that remain, back into their respective businesses. That last part by the way is where true magic happens, not just for you but also for society.

We have it so good these days that we forget how far we have come in a mere span of a century where the poorest of the poor in most advanced economies live far richer lives than John D. Rockefeller, the richest man did in his times. He lived through life with no TV, no internet, no air-conditioning, no airplane travel, no mobile phones and not even penicillin¹.

Free-market capitalism through which entrepreneurs and businesses work to find new ways to profitably invest and reinvest into their businesses to serve their customers and ultimately their shareholders is what made widespread access to all these wonders possible. We want that machine to continue churning out the goods but that takes time and is not possible with a short-term mindset.

But we are unfortunately hardwired to think only in the short term.

Human nature desires quick results. There is a peculiar zest in making money quickly…compared with their predecessors, modern investors concentrate too much on annual, quarterly and even monthly valuations of what they hold, and on capital appreciation.

John Maynard Keynes

And the data proves it.

Plus, the gamification of the investing process these days with instant access and micro-second level updates to what is happening to our money does not help. It incentivizes us to act thinking that doing something helps.

But this bias towards action is poison to your money. And to the game of soccer. What?

Michael Bar-Eli, et al. in a paper published in the Journal of Economic Psychology, highlights how this bias towards action amongst elite goalkeepers hurts a team’s chance with scoring goals. Soccer as we know is a low scoring game (about 2 goals on average) where a penalty kick is a big, big deal. A team that earns it has an 80 percent chance of scoring a goal.

The stakes hence are high and pretty much all the burden of preventing a goal from being scored comes down to how the goalkeeper acts. The authors of the study analyzed data on 311 penalty kicks and found that the direction of the kicks was roughly evenly distributed between the left, center and the right quadrants of the goal box.

But the goalkeepers displayed a distinct action bias by diving to the left or to the right 94 percent of the time instead of choosing to remain in the center. Because had the goalkeepers done that, they could have saved 60 percent of the kicks aimed at the center, a far higher number than they did by diving to the left or to the right. The goalkeepers however stayed in the center only 6 percent of the time.

So, knowing that, why would they still dive rather than stand in the center? Because they wanted to appear as if they were making an effort even though making an effort was clearly disadvantageous.

Similarly, this bias towards action in investing makes us feel better, thinking that at least we are making an effort. But that is precisely the wrong thing to do, and you are likely going to do that at precisely the worst possible times.

Investing should be dull. It shouldn’t be exciting. Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas, although it is not easy to get rich in Las Vegas, at Churchill Downs, or at the local Merrill Lynch office.

Paul Samuelson

Your money is like a bar of soap – the more you handle it, the less you’ll have.

Eugene Fama

But that does not mean you don’t do nothing. There are still things that you have to get right, and they pertain more to learning how to not act than act. It is an evolutionary process that comes with time through continuous refinement until you get to a point where you are more likely to subtract and simplify than to add and complicate your money.

The outcome of the process then becomes a three-stage exercise:

• Defining a portfolio’s purpose that feeds different stages in your financial plan. Things like saving for college, buying a home, saving for financial independence come to mind.

• Building a structure that supports that purpose through those life stages as you work towards your goals. This is where you decide the splits in your investment mix and how they evolve as your life evolves.

• And only then, you go seeking investment products that fulfils that structure.

You only mess with the last stage if the products you chose have drifted away from their intended role or if any aspect of the first or the second stages change.

Let the rest of the world waste their lives chasing meme stocks and hot sectors. You work on getting the process right while refining at the margins and you’ll not only be at peace with your plan, but you’ll also be at peace with your work, your family and your life.

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¹ David Henderson. “Richer than Rockefeller“, Econlib. February 8, 2018.

Let me introduce you to Jason. He retires in the year 1969 with today’s equivalent of a million dollars. That is, he retires with an amount of money that has the same purchasing power as what million dollars buys today.

And he knows a thing or two about the ravages of inflation and hence, to preserve his purchasing power, he has his entire portfolio invested in the stock market.

He has also heard about the 4% rule. That is, if he were to draw 4% from the starting value of his portfolio and adjust that amount in subsequent years to match inflation, he in theory would never run out of money for a 30-year planned retirement.

Bella on the other hand, retires a year later (1970) with the same million dollars in purchasing power. Her retirement portfolio is invested just like that of Jason‘s in the stock market.

And she expects to draw the same 4% from her portfolio and inflation-adjust that amount each year for the same 30-year retirement.

These are the portfolio returns each one of them experience…

Jason‘s retirement starts on January 1, 1969 and ends on December 31, 1998. That is a 30-year span of drawing inflation-adjusted income that we talked about.

Bella retires on January 1, 1970 and is done retiring by December 31, 1999. That again is the same 30-year span of drawing inflation-adjusted income from her portfolio.

So where is the problem? I mean you don’t expect to see much difference between the two scenarios, right?

But there happens to be a world of difference between the two. Jason exhausts his portfolio in year 26 of his planned 30-year retirement.

Bella on the other hand leaves a sizable legacy behind.

Maybe that was not her goal but the fact that her portfolio is able to deliver on the income she planned while leaving behind that kind of money is striking. And that is just because she retired a year later.

And the money that Bella left behind is in 1999 dollars. If that money remained invested in the same portfolio, it would easily be multiple million today. Not that she gets to care though because she has longed since departed.

So, what made all that difference? The starting year stock market performance combined with inflation.

The real, after inflation returns for both are as shown below…

Jason‘s money took a big hit right off the gate while Bella‘s didn’t suffer as much. Jason, hence, was drawing income from a smaller portfolio value than that of Bella‘s and that made all the difference.

Some takeaways hence…

• Jason just got unlucky. Out of the 66 periods of 30 years each starting with 1928, there were only five such periods where one would have run out of money following the 4% guideline. And this timeframe accounts for literal world ending depressions and recessions, World Wars and oil embargos, inflationary and deflationary times, bubbles and busts and yet only five such periods. That is not to say that we should be complacent because future market returns could be lower but again, not as dire a situation as I probably made it sound.

• Most retirement portfolios, as one nears the point to start drawing income, would not be holding all stocks. And even if they did, they would or should not be holding stocks in one market, exposed to one type of investment so the chances of a retirement outcome like that of Jason gets even slimmer.

• No living soul that the world knows off will watch the inflation index and adjust his or her spending precisely in line with what the latest numbers show. I talked about this in the retirement spending smile because most normal earthlings won’t spend what they think they’ll spend when they are in the thick of their respective retirements. I am especially talking about the types that got this far reading stuff like this.

• And if leaving behind a chunky legacy is your goal, you might want to ratchet down that safe withdrawal rate from 4% to say 3% of the portfolio’s value. If done right, this money at this new withdrawal rate will last forever and beyond.

But then as life expectancies rise, 30-year retirements might feel short, especially if you retire early. I wouldn’t stress too much but it is good to crunch the numbers every once in a while to make sure you are on track. And a tad bit of conservativeness in your planning never hurts.

Thank you for your time.

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