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. 

Your feedback is always welcome, and please share this with anyone else who might be interested. Subscribe here!

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.

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.

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: 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).

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.

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. 

Your feedback is always welcome, and please share this with anyone else who might be interested. Subscribe here!

The Twenty Craziest Investing Facts Ever (Irrelevant Investor): Everyone loves a good list – and this delivers on the clickbait-sounding title. This is great even if you don’t have a lot of context in investing; some facts provide context for each other.

The Number, Trade-offs and Optionality (Abnormal Returns): When I discuss retirement with clients, I often ask whether they see retirement as a cliff (stop working completely on a specific date) or as a ramp (slowly transition, decreasing work over time). For those that take the “ramp” approach, this piece (with links to two others) urges readers to think about “optionality” in place of “retirement”. There isn’t a single all-powerful Number that controls when you exit; instead, being able to choose how and where to spend your time and your money is the ultimate goal.

Using Flexible Spending to Achieve Financial Goals (Alpha Architect): A common shortcut in retirement is to withdraw a fixed percentage of your account and spend it each year – the “4% rule” is often thrown around. This piece dives into the benefits of taking a slightly more flexible approach to your expenses, which can help your nest egg last longer.

Can’t You Hear Me Knocking: A Contrarian Look at Inflation (Charles Schwab): This is a well-reasoned and non-alarmist reminder that inflation, which has been at or under 3% for over 20 years, could be higher in the future than we’ve come to expect.

Owning Quant Funds is Not Easy (Behavioural Investment): There is a growing set of funds available – many of them ETFs – that invest in a systematic, numbers-driven manner. Adding some of these to your portfolio as a complement to cheap index funds can add quite a bit of value, but you have to understand what you’re buying.

Yield Curve Inversion: Maybe It’s Different This Time (SVRN): Provides a primer on yield-curve inversions as well as a discussion of factors surrounding the recent inversion. Normally the 10-year US Treasury yield is higher than the 3-month US Treasury yield, but that recently changed and inversions have tended to presage recessions by no more than two years. (Note: my comments below about trading on politics apply to his analysis; I don’t think there is information to trade on here, just good perspective.)

House Rules (Humble Dollar): There are many benefits to home ownership, but the drawbacks and risks are often overlooked or underestimated. Owning a home is one of the least-diversified bets you can make, and you’re taking on debt to do it. Also, don’t buy and sell too frequently. Personally, I’ve seen many military families buy and sell a house every three years as they move, and very often the transaction costs alone make that a losing proposition.

Real Estate vs. The Stock Market (A Wealth of Common Sense): Comparing owning your home with an investment in the stock market is an apples-to-oranges comparison; you need to stay diversified. As Ben says: “Your home should certainly play a role in your financial plan but it shouldn’t be the entire plan.”

Status as a Service (Eugene Wei): Eugene looks at many of the technology companies today (don’t just think of social networks) as tools that allow people to amass social capital – aka “status”. And while we may think of these companies as allowing people to transmit information or their own content, these networks are really built on the fundamental human desire to cater to one’s own ego. And to use a Bitcoin analogy, the number of followers/likes/retweets/etc that a user can generate is the “proof of work” that enables them to monetize their account.

Michael Kitces – The Past, Present and Future of Financial Advice (Invest Like the Best Podcast): This is a great discussion that dives pretty deep into the world of financial advisors. It’s well worth a listen for advisors, clients, and anyone thinking about working with an advisor.

Now seems to be a good time to invoke Rudyard Kipling: “Oh, politics is politics, and investing is investing, and never the twain shall meet in my financial decision-making.” Or maybe that was from Dr. Seuss; I was never very good in English class. But the point stands: never let your political views impact your investment decisions.

Studies have shown that politics does impact financial decisions, and this applies to all of us. (If you think it doesn’t consider starting here and coming back later.) Further, Kempf and Tsoutsoura found that “The effect is more pronounced in periods of high partisan conflict and for [those] who vote frequently.”

Humans are bad at forecasting in general, but possibly one of the most interesting and relevant biases is that we’re bad at predicting futures we don’t want to see happen. And when we’re proven wrong, we tend to look for proof that the evidence is wrong instead of changing our views.

So regardless of which side of the aisle you sit on, or if you’re standing in the aisle, or if you’ve stood up and walked outside, keep these two tips in mind:

1. Don’t assume you know what political outcome will occur – and be most wary if you project the outcome you want.
2. Definitely don’t assume you know how markets will react to your projected outcome.

Welcome to Tom’s Quarterly Reads

As we move into 2019, I’m trying something new – a quarterly summary of great finance-related content (I cheated on this first one and used stuff from all of 2018). The links are put into groups based on how into the weeds they get; the further you scroll down the newsletter, the deeper things dive.

Your feedback is always welcome, and please share this with anyone else who might be interested. Subscribe here!

The Psychology of Money (Collaborative Fund): If you want to pick just one thing in this entire email, read this. All of Morgan Housel’s work is worth your time, but this look at “flaws, biases, and causes of bad behavior” is easily his best piece to date.

Prediction vs. Preparation (A Wealth of Common Sense): No one knows exactly what is going to happen in the market – making specific predictions is a fool’s errand. This is another way of approaching the principles I lay out in my thoughts below. [Go deeper: The Prediction Polka.]

Shaping a Life of Money and Meaning (Bps & Pieces): Brian Portnoy’s new book outlines great principles to guide your financial life. Two keys among them: 1) focus on continuous planning, not just the one-time plan; and 2) think of wealth not as a quantity, but rather as “funded contentment”.

Negative Space: Why It Always Feels Like the Top (Mullooly): As the market goes up, the rising line on the chart has an ever-increasing blank space below it. The higher the market goes, the more that space can look like a gaping crater waiting to swallow up all the gains. Remember this when the market recovers, and don’t fall for it.

Trust the Process (Alpha Architect): Using the Philadelphia 76ers’ rebuilding process as a lens, this outlines the need to have a process that you stick to when investing. [The short version: A book called Shut Up and Wait.]

The Myth of Passive Investing (Prag Cap): Everyone makes some sort of active bet when setting up their overall portfolio, the most common of which is being overweight stocks in your home country. Additionally, just because an ETF is rules-based doesn’t mean it’s an index fund. None of this is necessarily bad, but an investor must be aware of the choices they are making.

The State of Technology at the End of 2018 (Stratechery): Ben Thompson is one of the best observers and writers about tech out there today. [Go deeper: The Future of Tech podcast with Chris Dixon.]

A Sober View on Crypto (Invest Like the Best): Here is the obligatory Bitcoin/cryptocurrency item. In all seriousness: if you want to consume one piece of content about cryptocurrencies, make it this podcast. [Go deeper: start with Episode 1 of the ILTB Hash Power series if you want to understand the nuts and bolts of cryptoassets like Bitcoin.]

Negative Equity, Veiled Value, and the Erosion of Price-to-Book (OSAM): A phenomenal research piece that builds on the idea that a stock’s price-to-book ratio may have lost the predictive power that it once had, since it doesn’t capture important things like brand names and truly long-term assets. [Go deeper: Why Financial Statements Don’t Work for Digital Companies looks at specific accounting issues, and An Evolve-or-Die Moment for the World’s Great Investors takes a larger look at the ongoing question of whether value investing is dead, evolving, or neither.]

Failing Slow, Failing Fast, and Failing Very Fast (Newfound Research): Risk and reward are inextricably linked in investing, but figuring out the right amount of risk to take is difficult. Taking too much risk can lead to ruin quickly; taking too little risk may guarantee your nest egg will never grow to the size you are planning on. [Go deeper: this overview of trend-following gives greater detail on using it as a risk-management tool within a portfolio.]

Is there a signal in the noise? Yield Curves, Economic Growth and Stock Prices (Musings on Markets): The yield curve has been flattening and portions have inverted or come very close. Yield curve inversions have historically presaged recessions, but on highly variable timelines. There is no one perfect signal about when to enter or exit the stock market.

Asset Diversification in a Flat World (Alpha Architect): A cornerstone of investment portfolio construction is the inclusion of different assets (i.e. stocks, bonds, and real estate) that are somewhat uncorrelated – they behave a bit differently over time. This article takes a look at whether globalization and increasingly correlated assets across the world mean we should ditch diversification across countries. Hint: you should still diversify. [Go deeper: Understanding the correlation of equity and bond returns and 3 Correlation Myths In Portfolio Construction.]

The Big Change (Frederick Lewis Allen): Published in 1952, this book provides a great perspective on how America evolved from 1900 to 1950, without a narrative shaped by subsequent events. This passage could just as easily have come from a book written today:

How This All Happened (Collaborative Fund): In some ways, a companion piece to The Big Change. It covers American consumerism from WW II to now, and acknowledges that its narrative is guided by where we are today.

Exploring The New Science of Psychedelics (Tim Ferriss Show): This podcast is a bit out there, but that’s what makes it worth your time. I’m not all-in on psychedelics after listening, but I’m no longer outright dismissive of them either. Yes, it’s a long episode – just start listening and give it a chance.

The quarterly cadence of this newsletter means that by design this is not a news source. Since short-term market news tends towards overreaction and loud noise, it isn’t conducive to sticking to one’s long-term financial plan. Instead of news or market predictions as we end a rocky 2018, I’ll stick to some core principles:

1. Identify your financial goals, let them drive your planning, and keep them up to date.
2. Align your investment portfolio with your goals, and establish rules (write them down!) for managing the portfolio that you will stick to in good and bad markets.
3. I can’t predict what the market will do in the short term, but I’m confident that stocks will perform quite well in the long run.