Jack’s Links

Back with a new edition of the best links on the interwebs. With apologies to Scott Sumner, I’ll be putting a moratorium on links to posts of his through at least the end of February. Here’s his website.

AQR with a great article addressing the “FANGs” that have been blamed by many a money manager for their underperforming of the benchmarks this year. Reminds me of the rule of thumb about retail stocks that blame the weather for poor results…

“X people have more wealth than the poorest 50% of the world’s population” memes have had a revival. I expect this will continue for the rest of my life, but it still is a totally meaningless and borderline asinine thing to say. Felix Salmon had a nice rebuttal the last time this pox came around. If everybody who saw the X vs 50% meme read this instead, the world would be a better place.

Extremely interesting paper (free download) about mutual funds vs. hedge funds, especially momentum vs. contrarian. I’m not sure why they kept controlling for momentum effects. It seems like that is a key feature, not a side-effect of mutual funds (especially index funds, which are taking a larger and larger share of the market). The persistence of the results they found for hedge funds was also interesting. h/t abnormal returns.

People are sheep who interpret everything through the lens of their political tribe. Unless you offer them a dollar for the truth. Not sure if this means that people are actually sheep or that ‘normal’ polling is a foolish exercise.

Betterment sent out this email about people checking their portfolio too much. Going to be very curious to see how much of a behavior gap emerges once ‘roboadvisors’ have had a chance to have a full cycle or two of results under their belts.

A sad one: Fireside Markets, the monthly podcast that James Osborne of Bason Asset Management puts out, is going on hiatus. There’s a serious dearth of financial podcasts that can keep my attention, so this is a rough blow. Here’s the link to all of them: http://www.basonasset.com/category/podcasts/

It’s easy to forget the value of cash, times like this make for a good reminder.

Another study that found that ‘simply doing X for 2 minutes can increase [insert desirable hormone]’ failed to replicate. This time it was the very well known (thanks to a hugely viral TED talk) “Power Pose”.

Fun conversation between &  about Medicare for all (and by loose association, Bernie Sanders). Something you should definitely read if you plan to talk to anyone about politics in 2016.

Statistical analysis from GestaltU on the relative importance of asset allocation versus security selection vis-à-vis portfolio returns. As we should all know by know, the pond you’re fishing in matters a lot more than the bait you’re using. I’ll take this opportunity to link my August 2015 post about asset allocation, especially if you happen to live in a (relatively) small country. I.e., virtually anywhere besides the US.


The Purpose of Investing

Everyone knows what to do with money — you invest it. Few people sit back to ask the question ‘Why?’. As will be a recurring theme in the basics series, it is in answering the question of ‘Why invest?’ that you can most easily figure out how to invest.

So then, Why? Why do we invest?

The first answer that people usually come up with is ‘to keep up with inflation’, and in the long run, they are right. Savings that sits in cash will slowly become worth less and less, until it’s nearly worthless. However, inflation takes a long time (usually). For most people, their first priority has nothing to do with inflation and everything to do with getting more money so they can achieve more of their goals.

For the vast majority of people in the world, having more money means they will be able to use it to do things that give them immense pleasure or comfort. Most people don’t think about it when they are in the accumulation phase of their financial lives, but at some point, some of those dollars became the dollars that let them help their kids buy a house. Those dollars became the dollars that meant they could support their elderly parents when they needed skilled nursing care. Those dollars became the dollars that meant they could stop working and not worry about running out of cash.

Once a person (or couple, or group) has enough money that they can expect with a great degree of confidence that they will be able to accomplish all of their goals, the question shifts from how to grow their money to ‘Why take more risk?’ — the risk inherent in investing. Now, some argue that human wants are infinite, and that people can always spend more money, but I find that most people have a ceiling above which it is actively hard to spend more money without being purposefully frivolous. My theory on this is that time is actually the limiting factor, and that most of the successful people I know spend so much time doing things they enjoy that aren’t obscenely expensive, that even if they travel often, splurge occasionally, and don’t keep a budget, spending more than $20-25k/month would be a challenge.

Now, don’t get me wrong, optionality is one of my favorite things in the world. And with more money certainly comes more options. Said another way, if you start to take risk off the table because you’ve accomplished your goals, you start to reduce your ability to accomplish goals that you simply haven’t thought of yet. In most cases, the really high marginal utility goals (never have to ask the kids for money, pay for kids’ college, can stay in the home forever, can retire at a reasonable age, etc.) are pretty obvious. The loftier goals (e.g., endowing a wing at the alma mater) have a pretty low utility/$.

However, that theoretical optionality often comes with a very real cost — stress. Stress comes in many forms, and most people would (and do) pay a lot of money to reduce stress in their lives. However, stress is unique when it comes to investing because it is often the root cause of the biggest mistakes people make. Moved to cash in 2009 and are still there? You can bet it was stress. For most people, even those who have seen countless market cycles, seeing a swing of 30, 40, or 50% in the value of a portfolio (often the majority of their net worth) is a huge stressor. That stress (both the physical and psychological costs, as well as the existential threat that stress poses to an investment strategy) can easily outweigh the marginal benefit of the 99th goal on someone’s list. And that’s before even addressing the possibility that someone takes more risk than they need and actually reduces their options because markets move against them (or even just a poor sequence of returns relative to their spending).

There is a sort of zen-state that some people can reach that flips the equation on its head. Once someone has truly internalized the fact that they can easily accomplish their goals with the assets they have (think 1% withdrawal rate), even if the markets were to go against them in the worst way, there is an opportunity to break free of the stress (at least for the most part). When the true time horizon for that money becomes ‘the long run’, and the short run will never be in jeopardy, then the opportunities can once again outweigh the stress, because the stress starts to disappear (though not completely). This can create a positive feedback loop throughout a lifetime (or several lifetimes within a family). More secure finances leads to lower stress that leads to better risk/reward trade-offs of investing that leads to better returns that leads to more secure finances. And so the cycle continues.

We can see then, that the purpose of investing is not just to reach your goals, but to find the balance between reaching goals and reducing stress. Everybody is going to fall somewhere on that risk/reward spectrum, and most people will fall on different places throughout their lives. People understand this concept innately (whether or not they are practicing it correctly), and that’s why the most common rules of thumb in investing have to do with taking less risk when you have the means to accomplish more of your goals.

The purpose of investing isn’t the bottom line, and it’s not checking off item #500 from your wish-list. It’s striking the right balance that will maximize your happiness through a blend of adding things to your life that make it better and subtracting those things that make it worse.


Jack’s Links

Scott Sumner on Rents – I agree with Sumner on rent-seeking being abhorrent. I often think of this article from 2014 whenever Elon Musk is brought up (usually extremely favorably; someone I interviewed recently gave Elon’s name as the answer to ‘Who would you have lunch with if you could have lunch with anybody that has ever lived?’). I’ve met a lot of homeowners here in Santa Barbara who say they believe it is their duty to preserve the beauty and character of the city, and I generally believe that they are not being duplicitous. However, if you looked at their actions, the zoning they favor, etc., they are indistinguishable from land owners seeking as much rent (both in the normal sense of the word and economic, I suppose) as they can possibly get.

Scott Sumner on Exchange Rates – Everybody understand on some intuitive level what it means for one country’s currency to be ‘strong’ versus another – that they can buy more goods in the ‘weak’ country than they could buy of similar goods in the ‘strong’ country. This is usually best seen by going to a developing country from a developed one, and whenever the scenario deviates from this familiar one, people start making errors, conflating cause and effect, and being generally confused.

A few notes:

  1. Knowing ‘how many’ of one currency you can get for another doesn’t help decide if one is stronger than the other.
  2. Knowing how the exchange rate has changed does not help unless you also know how the underlying price levels have changed AND which currency was ‘stronger’ to begin with.
  3. As a country develops, it is a lot simpler to think of their citizens as being able to command a more competitive wage (usually because they have more capital) rather than trying to think of it as an effect of ‘strengthening currency’.

Jack’s Links

How to properly interpret personal exemption phaseouts and Pease limitations — a 1% surtax.

Really interesting statistics post about why some small countries are better than large countries at ‘X’ (the example used is soccer, but widely applicable) — don’t double your population, double your affinity.

The inevitability (or illusion) of history — real estate bubble edition.

Someone else is trying guaranteed income — this time it’s Finland.

Great paper on interest rates, Yellen, the Fed — AEI

Vox has been putting out some pretty questionable pieces of late: “There’s no evidence the FDA blocks innovation or makes innovation harder or makes it more costly,” said Kesselheim. — FDA edition (original vox article here).

Budgets as training wheels.

Book Review: The Selfish Gene

I can’t remember where I saw it, but somewhere I saw a reference to The Selfish Gene and decided I shouldn’t wait any longer to read the book that brought Richard Dawkins to fame (no idea if this is true, I’m not even sure if the 1970s even happened, but I’m pretty sure it is one of his early published works). Continue reading “Book Review: The Selfish Gene”

Jack’s Links

It’s been two months since my last post, but with the exception of a trip to the Grand Canyon, Zion, & Bryce, I have been collecting links the whole time.


Instead of dumping all of the links, here are just the highlights:

Chinese Recession: This was from almost two months ago, and I don’t think it’s clear yet if Scott or Tyler is more correct.

WSJ: Don’t Raise Rates Yet: This was before the non-rate increase.

Psychological Studies & Reproducability: (Hint: you usually can’t). I wonder if there is some gold standard other than something totally without human error like CS for setting up procedures that will make a result reproducable as often as you’d expect (i.e., as often as you’d expect without biases).

Shorter Titles Get More Citations: ‘Nuff said.

Investing All At Once vs. Averaging In: Schwab gave their article a much more provocative title, but an interesting article nonetheless.

Sanders on Immigration: He is Ron Paul.

Why Investment Bankers Work Long Hours: Pretty easy to extrapolate this to other professions that do as well.

On Abolishing Capital Gains Taxes: What does a progressive consumption tax look like in the real world?

A Tale of Two Housing Inflations: Really fun to read article — cities should pay heed if they don’t want to end up with a bunch of San Franciscan housing problems.

Don’t Raise Rates to Cut Them Later:  A rare article that I found good important enough to send around my office. It seems obvious, but somehow gets lost that just leaving rates low is a better strategy than raising them to cut them later in the case of ‘headwinds’.

Congratulations to Angus Deaton!: I’ve started to make a habit of reading at least a small selection of Nobel winners’ work — Tyler makes this really easy with his great review.

Tasks Are More Pleasurable Once You Start: This lines up with my own experience, interesting implications for how efficiently people are actually spending their time.

Insider Trading Reviewed: Great treatment of insider trading rulings/norms from bloomberg.

And one terrible article, extra points if you can find the problems before reading them in the comments:

An Interview with a Tax Strategist: To be fair, this is a guest post, but this has to be the worst thing ever posted to WCI. With the frequency of guest posts (seemingly) increasing, they are going to need to tighten up quality control or risk losing some of WCI’s reputation for high standards.

Patriotism is Killing Your Portfolio

Unless you’re an American, in which case you are still too patriotic, but much less patriotic than people from other countries.

The tendency to invest in your own country’s assets is known as home bias.

I’m writing about home bias because recently, when I was on vacation in Seattle (and watching the best DotA players in the world), it occurred to me that I have no idea how much of a portfolio a person in a country not called America is supposed to have in their home market versus the rest of the world. Americans routinely have foreign equity exposure of something like 20-40% of their equity portfolios. That strikes me as very reasonable from a gut-check level. On the other hand, I have no idea how much people from, for instance, England, France, Japan, or Australia have in their portfolios, I have no idea what is recommended by professional advisors, and I have no idea what is theoretically optimal.

I pondered for a few weeks after I got back, then I started looking. As far as google — about all I could find was a bunch of USA-centric portfolios that were ‘adapted’ for other countries (replacing the S&P 500 with the FTSE 100, for instance), something struck me as obviously inappropriate given the relative sizes of our economies.

A little further research provided me with almost nothing in the way of recommendations from professionals (although it was incredibly easy to find free high quality advice for Americans). I’ll disclaim now — while I’m usually pretty good at interneting, it is possible I missed some obvious sources or that the sources I was seeking did not show up because I’m in America.

However, fortunately for us mortals, what financial advisors have seriously neglected, economists have been puzzling over for years.
Continue reading “Patriotism is Killing Your Portfolio”

Jack’s Links

It’s been a month, but here are the links. Try not to panic tomorrow if things are kinda downish.

Free > Paid when paid doesn’t adapt.

A dozen things: Charlie Munger

Bason Asset dropping the best statistic of the weekend. 46 times.

See if you can spot all of the terrible logic errors in this article about social security. If you can make it through without saying “that’s not how that works” to yourself at least three times, you need to try again.

WCI with a good post on whether you should buy whole life insurance. And asset location. And bonds. Okay I’m going pretty far back on these, but great posts.

Rate cuts? QE IV? I don’t know – been seeing some smart people get confused on this lately.

Give the people what they want.

This pope is extremely confused and confusing. He makes me very uncomfortable.

Good 538 article on dating. Probably applicable to other stuff.


  • The simple pattern: People who display a certain trait prefer other people who display that trait; people who don’t prefer people who don’t.
  • The subtler pattern: Everyone prefers people with a certain trait, but people who have the trait themselves display a stronger preference for other people with that trait.

Somehow poisoning the horns of rhinos doesn’t feel like the easiest answer.

Rent control always seems to have the same result. v. Stockholm


Jack’s Links

I have no idea when people will stop saying that rates are being [insert devious sounding adverb-ly depressed], but if they read this post they might stop sooner.

Interesting article about the hot-hand. I don’t really get it.

I was incredibly confused by the Greek referendum -> austerity measures, the vote was some sort of political theater?

Bernie Sanders is the left’s Ron Paul.

Interesting dissection of dueling editorials.

Why people who pick fund managers based off of track record are probably wasting their time.

(near) Octogenarians say some things I don’t think they would have said 20 years before – reminiscent of Jack Bogle railing against foreign stocks a few months (years?) ago.

A dozen things – VC – Sam Altman

Wade Pfau on whether it makes sense to pay a financial advisor.