Negative Space – 2019 Q2


Tom’s Quarterly Reads

Here are the best articles I read over the past three months, mostly all finance-related. I’ve moved to grouping the links by topic, but the topics will shift each quarter based on the set of articles. 

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Just Read This

Your Professional Decline Is Coming (Much) Sooner Than You Think (Atlantic): This article explores two aspects of the later stages of a career. First, people’s cognitive abilities tend to drop off sooner and more precipitously than we tend to assume. And secondly, high-achievers can be hit harder emotionally by this transition, particularly if they rely on their job to provide self-worth.

In the News

Facebook, Libra, and the Long Game (Stratechery): Facebook announced a new cryptocurrency called Libra. This takes a look at how it will actually work, and why it’s not another Bitcoin. Ultimately, Libra looks like it will be somewhere between a more efficient Bitcoin (more payments per second) and a Venmo account where your balance can fluctuate in value.

Who Pays the Tariffs? (Global Macro Monitor): Exactly what the title says. No rhetoric, just a look at what tariffs are and what some of the actual impacts of recent tariffs have been.

The Long-Term Stock Exchange, Explained (Recode): A new Silicon Valley-centric stock exchange is being launched to try and allow companies to focus on growing and making long-term decisions instead of worrying about hitting earnings projections every quarter.

Personal Finance

The Path to Financial Independence in Detail (The Simple Dollar): The FIRE (Financial Independence, Retire Early) movement is pretty active – and often evokes strong reactions. This looks at the Financial Independence portion of FI can actually mean.

The Not So Obvious Reasons Why People Want To Achieve Financial Independence (Financial Samurai): This is a refreshingly introspective look at FIRE by someone who’s going through it now, but I think its even more useful as a tool to force ourselves to reflect on why we have certain goals (financial or otherwise) in life.

Finding the Line Between Frugal and Cheap (Medium): “Frugality turns into cheapness when it unnecessarily robs you of your time.” Tips for finding the right balance of saving but still enjoying life.

Interview – You Can Learn How to Be Rich (The Compound): Ramit Sethi, author of “I Will Teach You To Be Rich” talks about his tips and approach to personal finance in this 20-minute video. (Warning: some cursing.)


Individual and Group Responses to Confinement in a Skyjacked Plane (American Journal of Orthopsychiatry): Not financial, and written in 1973, but I cannot recommend this enough; it’s the most gripping academic paper you’ll ever read. From the abstract: “The author was among 149 passengers and nine crewmembers skyjacked to the Desert of Jordan and confined to the plane for almost a week.”

Five Lessons from History (Collaborative Fund): If Morgan Housel writes it, it’s worth reading. Here’s the best of him this quarter; five loosely financial lessons from history.

Is the Low Volatility Anomaly Universal? (S&P Dow Jones Indices): This is my obligatory investment deep dive. There is evidence that the bedrock of investment theory – the Capital Asset Pricing Model (CAPM) – is wrong. You may not have to accept more risk to get higher returns, and market-cap weighted indexes (which is how the S&P 500, etc are built) are likely sub-optimal investment vehicles.

Private Equity: Two Perspectives

Private Equity: Overvalued and Overrated? (American Affairs Journal): This article takes a dim view of private equity returns, pointing out structural reasons to question its recent good performance as well as valuation-based concerns about whether returns will be as good going forward.

Private Investing for Private Investors: Life Can Be Better After 40(%) (Cambridge Associates): This takes a rosy look at private equity’s fantastic returns, delivered with lower volatility than public markets. They recommend a private equity allocation for families with multigenerational wealth (the article’s target audience).

Tom’s Thoughts

The stock market has done very well over the last few months, and yet that gets many people worried. Why? There are a number of factors but I think the best and simplest answer is negative space. The longer we go without a cataclysmic market drop, the more the anticipation of said cataclysm increases. After all, don’t you think we’re overdue for one? For visual types (like me), look at a graph of the market going up and up – the growing empty abyss underneath the line going up and to the right is an ever-larger potential hole for the market to fall back into.

Identifying the issue and figuring out how to deal with it are very different animals. We cannot put our heads in the sand and pretend that there will never be another bear market; nor can we ignore legitimate long-term signals that a recession may in fact be looming. But we also don’t want to run for cash as soon as we reach an all-time high and just camp out until the next drop; highs tend to come in bunches, and it could be years and years until the next big drop happens, and we’d miss out on a lot of growth in the meantime. Trying to time the market is notoriously difficult and will likely cost you both time and heartache.

So, what to do? Examine 1) your portfolio and 2) the rules for your portfolio. For money you don’t plan on using in the next few years, ensure you have a mix of stocks and bonds that can take advantage of continued good performance for however long it continues, but that you’re comfortable holding if there’s trouble. And make sure you’re diversified – across industries, companies and countries (these charts of Japan and Greece should illustrate why).

But the rules are key because they’ll help you make better decisions during stressful times. Put together your playbook before gameday; drawing up plays in the dirt while everything is crashing around you is a good way to do something you’ll regret. Write the rules down (pen, crayon, Google doc, whatever) and share them with someone so you aren’t as likely to re-imagine them later. And if the rules allow for some movement from stocks to bonds and/or cash, it’s best to make those shifts only apply to a small portion of the portfolio. If you need a rule about going from 80% stocks (and 20% bonds) to 100% cash, that probably means that you shouldn’t have had 80% in stocks to begin with.

Set up your investment allocations, then avoid the talking heads who shout opinions that have s half-life measured in seconds, and – this is critical – don’t check on your portfolio too often.

Reading bedtime stories to Claire is awesome, but I’m really just jealous of the sleep suit she gets to wear. Too bad there isn’t an adult-sized version (yet).


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