Tom’s Quarterly Reads
Here is what I’ve been thinking about, plus the best articles I read over the past three months, mostly all finance-related. Your feedback is always welcome, and please share this with anyone else who might be interested. Subscribe here.
Just Read This
Nobody Wants Money (Breaking the Market): “Nobody wants money for money’s sake. Everyone wants money because it gets you something else. Money itself has no value. At all.” This article looks at why we all chase money, with a particular focus on ‘rational’ versus ‘irrational’ investments. “Are the rational people those who evaluate the worth of something based only on its future cash flows? Or–if we don’t truly want money in the first place–are they the irrational ones?”
Tom’s Thoughts: Investing Lessons from the Little Mermaid
The Little Mermaid: A classic Disney film, tale of a young woman’s longing, and teaching tool for investment fundamentals.
We’ve been watching some movies with our two-and-a-half-year-old recently that I watched growing up. The Little Mermaid is one, and Finding Nemo has been on quite a bit too. (I had completely missed the name Mount Wannahockaloogie in Finding Nemo whenever I watched it years ago, and almost died when I caught it this time around.) Reaching the Little Mermaid in particular made me realize there are some good investing parallels to be had, so please enjoy.
For those that haven’t finished the movie yet, fair warning that there are some spoilers below.
Ariel: Avoid chasing ‘more’. In Part of Your World, Ariel lays this out pretty explicitly: “Wouldn’t you think I’m the girl / The girl who has everything?…You want thingamabobs? I’ve got twenty! / But who cares? / No big deal / I want more.” Invest with specific goals in mind, so that you can evaluate your progress and make informed decisions. Otherwise, you’re left chasing ‘more’: a never-ending quest to increase the size of your portfolio – which usually leads to excessive risk-taking or poor decision-making (like signing away your soul). The interesting thing with Ariel is that there is a pretty clear distinction between the ocean and land – for investors, the size of our portfolio has no such clear delineation between ‘enough’ and ‘too much’. Ariel was willing to overreach to bridge that gap, but one could argue she at least made an informed decision to risk her soul. If we don’t set goals, we don’t even know where our sea ends and the land begins.
Ursula: Be careful with leverage. Ursula successfully leveraged Ariel’s longing to get her into a contract, which she then leveraged to get Triton’s crown and trident. Using leverage (aka debt) to try and increase your investment returns magnifies the ups as well as the downs. The resulting extreme outcomes can look great on the way up, but don’t be surprised when it ends with a broken bowsprit to the abdomen.
King Triton: Don’t trade angry. Triton liquidates Ariel’s portfolio of human collectibles in a less-than-calm moment, evoking a somewhat predictable reaction from his teenage daughter. While the stock market is not a teenager, it won’t remotely take your feelings into consideration when determining the investment performance of trades you make based on emotion.
Prince Eric: Know what you’re investing in. Eric was so enchanted by Ursula/Ariel’s voice that he avoided any pretense of due diligence on Ursula before literally walking down the aisle with her. Luckily, he was saved by some wild animals interrupting the ceremony. It’s always important to understand what you’re investing in and what drives its value, so you can have reasonable expectations and make informed decisions (to hold it or sell it) based on changes to those economic drivers. Some investments sound like a great idea, but ignore Ariel’s voice and learn what the investment really is before buying. (The phrase I usually use regarding investments is “know what you own” but since we’re using marriage as a metaphor, that seems much too seventeenth century.)
Scuttle: Accept uncertainty and luck. The confidence with which he identifies dinglehoppers and snarfblats is staggering – but only because we, the viewers, know how off-base he is. Humans hate uncertainty, and so seeking out experts, oracles and predictions is our natural way of coping – just like Ariel wanted Scuttle to put a label on each human item (whether accurate or not). Even his discovery of Ursula’s disguise was pure luck since he happened to be flying by at the right moment. We have to determine what degree of uncertainty we are comfortable with in our investment portfolio and also accept that timing luck will play a much larger role in our investment outcomes than we’d like to believe. In general, the primary antidote to uncertainty and luck is your time horizon. The longer you have between now and when you need to fund a certain goal, the more uncertainty you can accept and you likely won’t be impacted as much by luck.
Sebastian: Don’t just watch. After being assigned to keep a watch on Ariel, Sebastian is basically along for her wild ride throughout the movie. He does accidentally spill the beans about who Ariel is in love with, but even that isn’t something he voluntarily discloses. He could have tried to warn Triton *before* Ariel signed Ursula’s contract, but didn’t. Despite performing one of the all-time great Disney songs (Under the Sea), he might as well be watching the movie with us on the couch. The investing parallel here is how often you check your investment portfolio versus what changes you are actually going to make to said portfolio. If you’re not going to actually do anything to your investments, then don’t check on them! If you’re going to day-trade individual stocks or cryptocurrencies, then it makes sense to stay on top of your investments on an hourly/daily/weekly basis. But if checking your investments doesn’t yield any actionable data, then consider checking less often. Like, a lot less often. The stock market is as erratic as a love-sick teenager, so checking more often than you need to will only lead to extra anxiety.
I’m resisting the urge to do this with Frozen characters, but I’ve seen Frozen 2 so many times that I actually believe it has a coherent plot. Hopefully we move to a non-Disney topic next time.
The Economics of Rudeness (ETF Trends): If people keep being rude to service workers, there will be fewer of those workers, and prices could go up. Higher prices wouldn’t cause rude people to be more rude and angry, could they?
I just learned I only have months to live. This is what I want to say (Boston Globe): A longtime journalist gets some very tough news and writes a beautiful and poignant piece about what he and his family are experiencing.
The Unanswerable (Finding Joy): There were countless articles about the end of the American military presence in Afghanistan – many more than I could stand to read. I found this one quite good, but would be happy if others shared their favorites with me.
‘American Families Plan’ Tax Proposal (Jeff Levine): If you’re looking for a highly detailed overview of the recently proposed tax law changes, this is for you. There’s even a choice between the article version or the Office-gif-themed-tweetstorm. But remember none of this is enacted legislation, so it seems very early to take any action based on any of this.
My ‘Too Hard’ Pile is Pretty Big (Morningstar): The idea of a ‘too hard’ pile in investing is a great one – these are the investment opportunities that are outside my circle of competence or require more time than what’s available. My personal ‘too hard’ pile is pretty big, and isn’t hugely different from what the author outlines here as her pile.
Go Big, Then Stop (Of Dollars and Data): Save a lot, very early, for a major goal (think retirement). Fantastic advice, but tough to act on when most people start with low salaries that slowly grow into bigger ones over the decades as they get close to retirement.
Too Smart (Morgan Housel): “And like wealth, there are situations where people become too smart for their own good, where intelligence is a liability and blocks good decisions.”
The Great Divide over Market Efficiency (Institutional Investor): This is my obligatory overly wonky investment article for this newsletter. The question of whether investment markets are efficient is a debate that will likely never end, but this article does a great job of framing what market efficiency is, and the range of viewpoints on the question. Spoiler: markets are mostly efficient, but not perfectly so.
Welcome to Patrick Figgatt! Claire is excited to have a baby brother.