Broken Money – Lyn Alden

Broken Money by Lyn Alden
Date read: 4/2/24. Recommendation: 9/10.

Alden arms readers with an understanding of the evolution of money—where it came from, where it’s going, and what’s at its foundation. She digs into the modern financial system, financialization, the long-term debt cycle, currency debasement, and digital currency. It’s particularly relevant to today’s economic environment—in order to understand where we’re heading, we must understand how we got here and how things have transpired in the past. Similar to Ray Dalio’s The Principles for Dealing with the Changing World Order, in that regard, but far more detailed. A great read for those interested in finance, economics, and wealth preservation.

Check out my notes below or Amazon for details and reviews.

My Notes:

Primary question:
“Who controls the ledger?”

“The answer, geopolitically, is that in the telecommunication age, whichever country has the most economic and military prowess is likely to have the primary control over the world’s ledger, unless or until there is a better solution, or until no single nation is large enough to force its will onto the rest of the world.” Lyn Alden

Currency debasement:
“Problems inevitably arise in every realm, and time and time again authorities inevitably turn to the creation of more currency to soften those problems and devalue various debts in a non-transparent way.” Lyn Alden

“When the government establishes a central bank, and especially if it outlaws gold ownership, it takes monetary power away from the people and gives it almost entirely to the banks and government authorities. People at that point have limited ability to custody their own scarce and liquid assets, and instead must rely on the central banking ledger; they must therefore submit to the risks of currency debasement and must give up most of their privacy. Government officials can now more easily take purchasing power away from savers—not just through transparent taxation but also through non-transparent inflation of the money supply—and channel it toward their goals.” Lyn Alden

Governments learned taxes were too transparent, people could see what they were paying for. Whereas printing more money over time was less obvious and allowed them to achieve the same outcome. “…this new capability represented a tremendous power shift from those who use the ledger to those who control the ledger.” Lyn Alden

“Rather than blaming individual politicians for handling the budget of countries poorly or blaming individual central bankers for handling private sector credit poorly, I instead point mainly toward sound money principles being nearly impossible to implement with the current level of monetary technology that we’ve had over the past century and a half. With the ability for central banks to print fiat currency as needed, and the speed of hard physical monies (e.g., gold) being too slow to present a realistic alternative payment system compared to fiat currency ledgers, it inevitably shifted political incentives toward constant fiscal deficits, constant credit growth, and constant currency devaluation, with little or no resource for those who disliked this situation.” Lyn Alden

Gold vs. fiat:
20th century was the only time in history, on a global scale, where weaker money (fiat) won adoption over harder money (gold). “And it occurred because telecommunication systems introduced speed as a new variable into the competition. Gold, with its inherently slow speed of transport and authentication, couldn’t compete with the pound, the dollar, and other top fiat currencies with their combination of speed and convenience, despite gold being in scarcer supply.” Lyn Alden

Speed: “This mismatch or gap in speed had been a foundational reason for the greater and greater levels of financialization that the world has seen over the past century and a half.” Lyn Alden

World reserve currency:
Many people think there must be a world reserve currency…”The world is instead shifting toward a multipolar, neutral reserve currency system, rather than a system where one country issues far-and-away the most dominant world reserve currency. No country, whether the United States or China or anyone else, is big enough to issue a fiat currency that the whole world can use and would want to use. The only thing that can be big enough is a form of supranational money; one that has natural scarcity and is not issued by a government.” Lyn Alden

“No structure, even an artificial one, enjoys the process of entropy. It is the ultimate fate of everything, and everything resists it.” Philip K. Dick

Qualitative easing vs. qualitative tightening:
QE: The Federal Reserve can create new base money through QE. Creates new bank reserves out of thin air, buys existing assets like Treasuries or mortgage-backed securities with new reserves.

QT: The Federal Reserve can also decrease the amount of existing base money by performing QT. Sell Treasuries or mortgage-backed securities for reserves and therefore delete those reserves. 

Inflation:
2% inflation target = prices double every 35 years

Price deflation is a good thing: “Ongoing productivity gains should make prices lower over time, not higher. Central bankers do everything in their power to make sure prices keep going up. To put this another way, central bankers do everything in their power to ensure that deflationary productivity gains are continually offset by a greater amount of currency debasement, so that nominal prices of goods and service keep marching higher at a slow and steady pace despite becoming more efficient to produce.” Lyn Alden

But deflation is bad for highly leveraged financial systems. That’s why policymakers and economists fear it. 

“There is little or no political incentive to run a surplus in any near term, and so it is rarely ever done.” Lyn Alden

Bitcoin:
Volatility due to how new it is as an asset class. Monetized from zero to more than a trillion-dollar market cap in its first 12 years. Only held by small fraction of global population. “Only once it is closer to its total addressable market, with extremely high levels of liquidity and user adoption, can its notorious price volatility realistically diminish.” Lyn Alden

Guaranteed to be cyclical (higher-highs, higher-lows): “A new type of emerging money cannot be widely adopted quickly This is because if too many people adopt it at once, it drives up the price and incentivizes leveraged buyers to enter it. This leverage eventually causes a bubble to form and to pop, which sets the price back and disillusions people for a while until it builds the next base and grows from there. Due to the attachment of leverage, Bitcoin cannot realistically have a fast and smooth adoption curve like non-monetary technologies can.” Lyn Alden

Same as Ever – Morgan Housel

Same as Ever by Morgan Housel
Date read: 1/29/24. Recommendation: 8/10.

People are obsessed with trying to predict the future. In Same as Ever, Morgan Housel cautions us against trying to predict specific events and instead focus on predicting people’s behaviors, which have remained the same for thousands of years. We still respond to fear, greed, uncertainty, and social persuasion in the same ways that we always have. If we want to understand a rapidly changing world, it’s far more effective to focus on what stays the same. Each of the 23 short stories in this book offers a different framework to help us understand risks, consider opportunities, and build more meaningful lives. We would all benefit from spending more time reflecting on the wisdom we’ve earned through our past.

Check out my notes below or Amazon for details and reviews.

My Notes:

Focus of the book:
Base predictions on people’s behaviors, not specific events. “Predicting what the world will look like fifty years from now is impossible. But predicting that people will still respond to greed, fear, opportunity, exploitation, risk, uncertainty, tribal affiliations, and social persuasion in the same way is a bet I’d take.” Morgan Housel

In victory, know when to stop:
“An important life skill is getting the goalpost to stop moving. It’s also one of the hardest.” Morgan Housel

Moderation:
“Money buys happiness in the same way drugs bring pleasure: incredible if done right, dangerous if used to mask a weakness, and disastrous when no amount is enough.” Morgan Housel

Challenging assumptions:
“You gotta challenge all assumptions. If you don’t, what is doctrine on day one becomes dogma forever after.” John Boyd

Evaluate probabilities and play to the 51%:
“Most people get that certainty is rare, and the best you can do is make decisions in which the odds are in your favor….But few people actually use probability in the real world, especially when judging others’ success.” Morgan Housel

Uncertainty blinds us:
People claim they want an accurate understanding of the future. But this is a lie. They want certainty. And they will ignore reality to get here. 

“We need to believe we live in a predictable, controllable world, so we turn to authoritative-sounding people who promise to satisfy that need.” Morgan Housel

Patience + scarcity:
“Most great things in life—from love to careers to investing—gain their value from two things: patience and scarcity. Patience to let something grow, and scarcity to admire what it grows into.” Morgan Housel

It’s supposed to be hard:
Pain is a necessary, important part of life. The more you come to accept this, rather than always seeking shortcuts, the better off you’ll be.

Seinfeld on getting asked if he could have outsourced writing to a consulting company like McKinsey to keep the show going: “If you’re efficient, you’re doing it the wrong way. The right way is the hard way. The show was successful because I micromanaged it—every word, every line, every take, every edit, every casting.” 

“If you can get your work life to where you enjoy half of it, that is amazing. Very few people ever achieve that.” Jeff Bezos

Margin of safety:
“The purpose of the margin of safety is to render the forecast unnecessary.” Benjamin Graham

How I Invest My Money – Joshua Brown and Brian Portnoy

How I Invest My Money – by Joshua Brown and Brian Portnoy
Recommendation: 8/10. Date read: 2/11/21.

Instead of financial gurus preaching what you should do with your money, this book is a collection of essays by 25 financial experts detailing how they invest, save, spend, give, and borrow in their own lives. Through reflection and personal stories, each expert breathes life into the how and why of their investments. Each investment strategy is quite different which illustrates a key point of the book, there’s no single “right” way. What matters most is that you’re thoughtful and true to yourself in your approach.

See my notes below or Amazon for details and reviews.

My Notes:

Independence:
“I did not intend to get rich. I just wanted to get independent.” Charlie Munger 

“I mostly just want to wake up every day knowing my family and I can do whatever we want on our own terms. Every financial decision we make revolves around that goal.” Morgan Housel

“Independence, to me, doesn’t mean you’ll stop working. It means you only do the work you like with people you like at the time you want for as long as you want.” Morgan Housel

Get the goal post to stop moving: “Independence, at any income level, is driven by your savings rate. And past a certain level of income your savings rate is driven by your ability to keep your lifestyle expectations from running away.” Morgan Housel

Define what is enough: simplify by finding the line between excess and satisfaction. 

Investing strategy:
High savings + patience: “My investing strategy doesn’t rely on picking the right sector, or timing the next recession. It relies on a high savings rate, patience, and optimism that the global economy will create value over the next several decades.” Morgan Housel

Get the big stuff right: “Getting the big stuff right—living within their means, setting a reasonable savings rate, staying employed—will be a bigger determinant of whether they reach their goals than will their investment selections.” Christine Benz

Invest in yourself: “Invest in yourself. Your ability to work is your safest and highest returning asset. By lifelong learning, and taking care of your physical health, mental health, and relationships, you are much more likely to lead a secure and satisfying life without regrets.” Carolyn McClanahan

You biggest asset is your earning power: “I’m about 40, and plan on working for another 20 years. So, my biggest asset is still my earning power—my ability to turn my time and effort into money.” Dan Egan

Working matters more than investments: “I wonder if the greatest trick the devil ever played on investors is making them think it is the investing part that matters most. The working part moves the needle more, both for the math of deposits but also in the discipline of a purpose.” Ryan Krueger

Maximize for choice: “Having options and a little bit of luck are the key to financial security.” Debbie Freeman

Avoid the herd: “The more intensely and emotionally a lot of people ‘hate on’ a particular investment, that is a good signal to buy.” Joshua Rogers 

Move with purpose:
“You have exactly one life in which to do everything you will ever do. Act accordingly.” Colin Wright

Karma:
“Karma may be important in achieving wealth accumulation, but karma is definitely important in wealth preservation.” Joshua Rogers 

The Psychology of Money – Morgan Housel

The Psychology of Money – by Morgan Housel
Recommendation: 8/10. Date read: 10/27/20.

Wonderful read from one of the best writers in personal finance and investing. Housel breaks the book up into 19 short stories on how we think about money and the role it plays in our lives. He hits on the usual themes of wealth, greed, and happiness. And he dives deeper into exploring the importance of perspective, the role of luck, how we define success, coming to terms with the fact that wealth is what’s hidden, and why it’s important to embrace the reality of change as we look ahead in our lives.

See my notes below or Amazon for details and reviews.

My Notes:

Perspective:
“We all think we know how the world works. But we’ve all only experienced a tiny sliver of it.” MH

Role of luck:
“But realize that not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when judging people, including yourself.” MH

Success:
“Success is a lousy teacher. It seduces smart people into thinking they can’t lose.” Bill Gates

In victory learn when to stop: “The hardest financial skill is getting the goalpost to stop moving.” MH

Align yourself with situations which have high upside, limited downside and even if you’re wrong half the time, you can still make a fortune: “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” George Soros

“If respect and admiration are your goal, be careful how you seek it. Humility, kindness, and empathy will bring you far more respect than horsepower ever will.” MH

Wealth is hidden:
“Someone driving a $100,000 car might be wealthy. But the only data point you have about their wealth is that they have $100,00 less than they did before they bought the car.” MH

“The world is filled with people who look modest but are actually wealthy and people who look rich who live at the razor’s edge of insolvency.” MH

“Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less about what others think of you.” MH

Accept the reality of change:
Humans change their minds. If you don’t allow yourself to grow, you’re attempting to stay frozen in time. 

“Some of the most miserable workers I’ve met are people who stay loyal to a career only because it’s the field they picked when deciding on a college major at age 18. When you accept the End of History Illusion, you realize that the odds of picking a job when you’re not old enough to drink that you will still enjoy when you’re old enough to qualify for Social Security are low.” MH

The End of History Illusion: tendency for people to be aware of how much they’ve changed in past but underestimate how much they will change (personalities, desires, goals) in the future.

Goal is independence:
“I did not intend to get rich. I just wanted to get independent.” Charlie Munger

A Wealth of Common Sense – Ben Carlson

A Wealth of Common Sense – by Ben Carlson
Recommendation: 9/10. Date read: 7/21/20.

One of the best investment books that I’ve read in years. Carlson is one of my favorite minds in finance and he also hosts one of my favorite podcasts. In this book he emphasizes how simplicity beats complexity in most investment plans. Many of the complex investment strategies in finance only serve to create the illusion of intelligence and control. Carlson discusses the value of long-term thinking, market myths, diversification, and the importance of self-awareness. As he explains, “Less is always more and trying to implement a more interesting or clever portfolio strategy is akin to threading the needle. Sure, it can work, but trying harder and increasing the number of decisions you make only increases the odds that you’ll make a mistake.” If I had to gift a single book on investing for someone to start off with or to help remind you to maintain perspective and patience in your investments, this would be the one.

See my notes below or Amazon for details and reviews.

My Notes:

Perspective:
“How you frame the world around you determines how certain events will affect your reactions to outside factors than can impact your financial decisions.” BC

Perspective allows you to ignore headlines, gurus, and acting on impulsive emotions that hinder good decision-making. 

Reduce external pressure: “Investing doesn’t have to be about beating others or beating the market. It’s about not beating yourself.” BC

Patience:
“Speculation is an effort, probably unsuccessful to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.” Fred Schwed

If you want to be a successful investor, learn how to harness the power of long-term thinking, cut down on unforced errors by reducing complexity), and find the patience to allow compound interest to run its course.

One of the biggest advantages individuals have over professional investors is the ability to be patient. There’s no one to impress and no one’s judging you against your peers. 

“Having the correct temperament is far more important than intellect over time.” BC

“Charlie and I always knew we would become very wealthy, but we weren’t in a hurry. Even if you’re a slightly above average investor who spends less than you earn, over a lifetime you cannot help but get very wealthy—if you’re patient.” Warren Buffett

Emotions drive the stock market over days, weeks, years. Fundamentals drive the stock market over decades. 

Complexity versus simplicity:
“Less is always more and trying to implement a more interesting or clever portfolio strategy is akin to threading the needle. Sure, it can work, but trying harder and increasing the number of decisions you make only increases the odds that you’ll make a mistake.” BC

Best answer to a complex system is not necessarily a complex response. In portfolio management, best method is based on simplicity, transparency, and reduced level of activities. 

Fragmentation benefits players in archaic industries who seek sophistication to justify their existence (see Nassim Taleb, Antifragile). Similar concept applies to the real estate industry. 

“The interesting thing about very intelligent and successful people is that they’re usually the ones who have figured out that making things simple is the correct path to success. Because they understand how things work, they are able to appreciate and utilize simplicity.” BC

Self-awareness:
“When ‘dumb’ money acknowledges its limitations, it ceases to be dumb.” Warren Buffett

“If you can get good at destroying your own wrong ideas, that is a great gift.” Charlie Munger

Also applies to product: “Most people will get much more out of destroying their own wrong ideas than trying to come up with new ones all the time.” BC

“There are many ways to make money, but when it really comes down to it, the easiest way to lose money is because of psychological and behavioral issues.” BC

Strategy:
“Low-cost passive strategies suit the overwhelming number of individual and institutional investors without the time, resources, and ability to make high-quality decisions.” David Swensen

The point of dollar cost averaging is admitting you don’t have the ability or emotional control to time the market. 

Low-quality companies can become bargains. High-quality companies can become overpriced. Great companies don’t always make for great stocks. Terrible companies can become solid investments at the right price point. Value stocks outperform the market (historically) between 2-5%. 

Chances of picking an individual winning stock is small while your odds of picking a loser are huge. Survivor bias leads us to think otherwise. 

“Instead of concentrating on the central issue of creating sensible long-term asset allocation targets, investors too frequently focus on the unproductive divisions of security selection and market timing.” David Swensen

Asset allocation accounts for 90% of a portfolio’s long-term gains. Market timing and ability to select individual securities account for only 10%. 

Diversification allows you to hedge against ‘what if I’m wrong?’

“Remember, there is nothing special about index funds. The biggest advantage they have over the majority of active mutual funds is the fact that they are disciplined.” BC

“Have a plan. Follow the plan, and you’ll be surprised how successful you can be. Most people don’t have a plan. That’s why it’s easy to beat most folks.” Bear Bryant

Tax inefficient assets (bonds, REITs, high dividend-paying stocks) should go in tax-deferred retirement accounts. Stock index funds and ETFs are more tax efficient and make more sense to include in taxable accounts. 

Conscientiousness:
Great investors are conscientious: “Conscientious-minded people tend to save more money because they don’t make impulse purchases or spend too much money on things they don’t need. In fact, those who exhibit this trait tend to accumulate more wealth than less conscientious people, even after accounting for things like education, income, and cognitive abilities.” BC

“Investment philosophy is really about temperament, not raw intellect. In fact, proper temperament will beat high IQ all day.” Michael Mauboussin

Top priority is to become a diligent saver. Save more than you make. 

Factors that lead to poor decision making:

1. Complex problem

2. Incomplete information or information changes

3. Goals change or compete with one another

4. High stress or high stakes

5. High interaction with others to make a decision

Timing the market:
Peter Lynch studied 30-year period from 1965 to 1995…

• If you invested every single year at the lowest day in the market, your return would have been 11.7% annually

• If you invested every single year at the highest day in the market, your return would have been 10.6%

• If you invested every single year on the first day of the year, your return would have been 11.0%. 

• Dollar cost averaging with a long time horizon is much less stressful and generates solid returns.

Generally stocks are up 3 out of every 4 years. In five years, it jumps to 90%. In 20 years, US stocks have shown positive returns of all 20-year periods in history.

“Investment wisdom begins with the realization that long-term returns are the only ones that matter.” William Bernstein

The Laws of Wealth – Daniel Crosby

The Laws of Wealth – by Daniel Crosby
Date read: 5/19/20. Recommendation: 8/10.

If you’re looking for a book on finance or investing (especially in today’s market), you could do worse than picking this one up. Crosby gives an accessible overview of behavioral finance and offers principles for managing your own investing process and behavior. I always find books like this incredibly insightful and an important reminder that developing greater self-awareness and managing behavioral risk is the best chance you have to avoid falling victim to irrational or emotional financial decisions. Crosby emphasizes that investor behavior—rather than fund selection or market timing—is the best predictor of wealth creation. And patience levels the playing field.

See my notes below or Amazon for details and reviews.

My Notes:

Patience:
“Individuals have to understand that no matter what innovations we see in the financial industry, patience will always be the great equalizer in financial markets. There’s no way to arbitrage good behavior over a long time horizon. In fact, one of the biggest advantages individuals have over the pros is the ability to be patient.” Ben Carlson

What’s within your control?
“The investor’s chief problem—and even his worst enemy—is likely to be himself.” Benjamin Graham

Investor behavior is a better predictor of wealth creation than fund selection or market timing.

“Emotions are the enemy of good investment decisions.” Ben Carlson

“Investors who own their mediocrity are able to rely on rules and systems—they do what works and reap the rewards. Investors mired in a need to be better than average insist on flaunting the rules in favor of their own ideas and pay a steep price for their arrogance.” DC

“Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.” Jason Zweig

Complexity is far easier than simplicity. Simplicity demands discipline, first principles thinking, and a deep understanding of the biases that you might be prone to.

Financial advisors:
Chief benefit to most people is not that of an asset manager, but as a behavioral coach. 

Value investing:
“Paying an appropriate price is the single greatest thing that you can do to ensure appropriate returns and manage risk.” DC

Two ways to profit from variability in stock prices—1) timing the market or 2) pricing. 

“The riskiness of an asset can never be divorced from the price that you pay for it; paying a fair price is the best friend of the risk-averse investor.” DC

“Value investing makes you rich over time, but growth investing can make you rich overnight.” DC

“Value investing requires us to overcome our fundamental tendency to attribute greater quality to things that are more expensively priced. Value investing requires us to sacrifice short-term opportunities at fantastic wealth for longer-term consistency of returns. Being a value investor requires us to ignore the positive stories surrounding glamour stocks.” DC

Avoid expensive stocks. 

Successful investing:
“Successful investing relies heavily on buying socks that have good prospects, but for which investors currently have low expectations.” James O’Shaughnessy

Average investors conduct postmortems to understand what went wrong and leverage those lessons in the future. Create investors conduct pre-mortem to challenge assumptions, anticipate gaps in logic, and make adjustments.

“Indeed, I have found that a large percentage of my winning trades begin with a rehearsal of negative, what-if scenarios in which I mentally invoke my stop strategy. Conversely, I have found that my worst trades begin with an estimate of my potential profits.” Brett Steenbarger

The Most Important Thing – Howard Marks

The Most Important Thing Illuminated – by Howard Marks
Date read: 1/19/20. Recommendation: 9/10.

One of the most important books you can read on investing. Marks details his investment philosophy through an accessible discussion of the market environment, cycles, investor psychology, and what factors contribute to success (or lack thereof) in this space. While the book focuses on investing, many of the lessons and principles outlined apply to life in general. It could double as a modern philosophy book. Marks digs into second-level thinking, contrarianism, patience, uncertainty, and risk. If you appreciate the Warren Buffett/Charlie Munger school of thought, this book will hit home.

See my notes below or Amazon for details and reviews.

My Notes:

“A philosophy has to be the sum of many ideas accumulated over a long period of time from various sources. One cannot develop an effective philosophy without having been exposed to life’s lessons.” HM

“Experience is what you got when you didn’t get what you wanted.” HM

Second-level thinking:
First-level thinking is simplistic and superficial, and just about everyone can do it. Second-level thinking is deep, complex and convoluted.

First test of an appealing investment idea should be, “And who doesn’t know that?” Second-level thinkers depend on inefficiency. The market (and humans) are prone to mistakes that can be taken advantage of. 

Value investing:
“There’s no such thing as a good or bad idea regardless of price!” HM

“Since buying from a forced seller is the best thing in our world, being a forced seller is the worst. That means it’s essential to arrange your affairs so you’ll be able to hold on—and not sell—at the worst of times. This requires both long-term capital and strong psychological resources.” HM

Good assets and good buys are two different things. Good buys are investment opportunities where price is low relative to value and potential return is high relative to risk.

“A high price both increases risk and lowers turn.” Christopher Davis

Market cycles:
Understanding that cycles are eventually self-correcting is one way to maintain some optimism when bargain hunting after large market drops.” Joel Greenblatt

Most dangerous premise that’s proven wrong every time: “this time it’s different.” Opportunity for profit for anyone who understands the past and knows it repeats.

“Ignoring cycles and extrapolating trends is one of the most dangerous things an investor can do.” HM

Don’t reach for returns (requires high risk and exception skill): “You simply cannot create investment opportunities when they’re not there.” Instead, buy when others are forced to sell. 

Investment markets follow a pendulum-like swing:
-between euphoria and depression
-between celebrating positive developments and obsessing over negatives, and thus
-between overpriced and underpriced

Investor psychology spends more time at extremes than it does at a midpoint.

Unknowns…
-How far the pendulum will swing in its arc
-What might cause the swing to stop and turn back
-When this reversal will occur
-How far it will then swing in the opposite direction

Three stages of a bull market:
-The first, when a few forward-looking people begin to believe things will get better
-The second, when most investor realize improvement is actually taking place
-The third, when everyone concludes things will get better forever

Three stages of a bear market:
-The first, when just a few thoughtful investors recognize that, despite the prevailing bullishness, things won’t always be rosy
-The second, when most investors recognize things are deteriorating
-The third, when everyone’s convinced things can only get worse

Negative influences:
“The gravest market losses have their genesis in psychological errors, not analytical miscues.” HM

“In the long run, the market gets it right. But you have to survive over the short run, to get to the long run.” Joel Greenblatt

“Never forget the six-foot-tall man who drowned crossing the steam that was five feet deep on average. Margin for error gives you staying power and gets you through the low spots.” HM

Contrarianism: “It’s certainly undesirable to be part of the herd when it stampedes off the cliff, but it takes rare skill, insight, and discipline to avoid to it.” HM

Be skeptical of what everyone else is saying or doing.

“The best opportunities are usually found among things most others won’t do.” HM

Uncertainty:
“We have two classes of forecasters: Those who don’t know—and those who don’t know they don’t know.” John Kenneth Galbraith

“It’s frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what’s going on.” Amos Tversky

“It’s more important to ensure survival under negative outcomes than it is to guarantee maximum returns under favorable ones.” HM

The thoughtful investor: 
Healthy respect for risk, awareness that we don’t know what the future holds, an understanding that the best we can do is view the future as a probability distribution and invest accordingly, insistence on defensive investing, and emphasis on avoiding pitfalls.

“When there’s nothing particularly clever to do, the potential pitfall lies in insisting on being clever.” HM

“Investment expectations must be reasonable. Anything else will get you into trouble.” HM

Your Move – Ramit Sethi

Your Move: The Underdog’s Guide to Building Your Business – by Ramit Sethi
Date read: 9/20/18. Recommendation: 8/10.

Ramit Sethi is one of my favorite humans and writers (I Will Teach You to Be Rich is a gem, if you haven’t read it). He’s someone who gets it. Whether it’s finance, or in this case business, he’s always focused on the things that matter and assigning things their proper weight. In Your Move he offers insight into handpicking customers, being more selective about who you target, and why that’s fundamental to success. He emphasizes authenticity and crafting a message that resonates with your target audience’s hopes, dreams, pain points, and fears. It’s a book that should be able to point you in the right direction whether you’re struggling with your initial idea, defining your audience, or putting yourself and your product out there. There’s actionable insight for each.

See my notes below or Amazon for details and reviews.

My Notes:

A successful business doesn't mean more money. It means more success, peace of mind and time.

Don't give things away for free:
-People value what they pay for
-Huge difference between free reader and paying customer
-Paying customer is far more likely to engage/open/use whatever they've paid for

"Most people reading this will not become millionaires because it involves extremely hard work and insane perseverance." -RS

Invisible risk of doing nothing > risk of starting a business

If you create value, people will be more than happy to pay for it.

Authenticity matters. Listening matters. When you sit down with customers, encourage them to open up by saying "Tell me about that." Or if you're sending emails, ask "What are you struggling with today?"

Make sure you've identified and are talking with your target market.
-If Ramit had talked to people his parent's age when writing his first book, he probably would have heard something about saving for retirement earlier. That message doesn't resonate with someone in their early 20s who wants to know what to do with their money, make it work for them, and buy a round of drinks for their friends.

Be selective and handpick your customers
-Allows you to target wants, needs, hope, fears, desires of that audience with pinpoint accuracy (and create products they want).
-"Students for life" philosophy.
-Regularly encouraging people to unsubscribe from newsletter (those who stick around are highly committed and engaged).

"Your biggest challenge is customer selection. You pick the right customer, you win. You pick the wrong customer, you lose. Focus on helping great people get better." -Marshall Goldsmith

Learn to embrace mistakes, otherwise, you get stuck in analysis paralysis (thinking instead of acting).

"Focus on being decisive and less on trying to make the 'right' decision. You'll never know until you try, and if you're wrong, you can always try again." RS

Beginners focus on the wrong things – worry about minutiae that won't change a thing and ends up exhausting.

Experienced pros have gone through this and know what to pay attention to (and what to ignore).

"Anyone can be 'efficient'–meaning they can do a given task pretty well. But very few can be 'effective,' meaning they select the right things to work on in the first place. Focusing on the right things is a true superpower." RS

Focus on your audience more, your competition less.

"Be different to be better. Don't be different for the sake of being different." RS

When you nail the right audience, price is a mere triviality. People will pay substantial money if you're solving a problem that's important to them AND they believe you can solve it.

Systems mentality: Life is always going to be messy. Successful people don't rely on "motivation or "working harder" to make things happen. They have systems for the big wins and let the inconsequential stuff fall by the wayside.

To sell you need to know four key things about your customers: their hopes, dreams, pain points, and fears.

Get comfortable being uncomfortable. The things that worked from $0 to $100,000 won't always work when you're trying to crack $500,000.

Change the words you use to sell your products and you can drastically increase revenue.
-Focus on the reader and their pains, challenges and frustrations as they relate to your niche.
-Articulate their biggest hopes, dreams, and goals.
-What do they want? What's frustrating? What's going on inside their heads?

Product or service tiers (i.e. intro, intermediate expert) changes the question from if I should buy, to which should I buy?

If you view yourself as their trusted advisor and you have a product that will help them, you should be doing everything in your power to let them know about it.

"Stop and ask yourself: Are your products awesome? Do they really help people? If the answer is 'No,' then you need to make a better product." Graham Cochrane

30% Raise:
-Change the words on your promotional pages (take focus off product, shift towards customers)
-Offer more expensive option (tiered pricing)
-Begin selling sooner and more often

Fooled by Randomness – Nassim Nicholas Taleb

Fooled by Randomness – by Nassim Nicholas Taleb
Date read: 8/28/17. Recommendation 8/10.

Deep dive into the role of luck in the financial markets and life. Taleb emphasizes how we tend to only accept randomness in our failures, never in our successes. He discusses concepts like Monte Carlo math, Russian roulette, the Pólya process, nonlinearity and the human brain, and Buridan's donkey. Our tendency to favor the visible, narrated, and neat models, leads us to being fooled by randomness. He summarizes best by suggesting we are all idiots who are mistake prone, but only a handful of us have the rare privilege of knowing it.

See my notes below or Amazon for details and reviews.

My Notes:

That which came with the help of luck could be taken away by luck (and often rapidly and unexpectedly at that). The flipside, which deserves to be considered as well (in fact it is even more of our concern), is that things that come with little help from luck are more resistant to randomness.

Lucky fools do not bear the slightest suspicion that they may be lucky fools–by definition, they do not know that they belong to such a category. They will act as if they deserved the money. Their strings of successes will inject them with so much serotonin (or some similar substance) that they will even fool themselves about their ability to outperform markets.

Had Nero had to relive his professional life a few million times, very few sample paths would be marred by bad luck– but, owing to his conservatism, very few as well would be affected by extreme good luck.

I thus view people distributed across two polar categories: One one extreme, those who never accept the notion of randomness; on the other, those who are tortured by it.

When I started on Wall Street in the 1980s, trading rooms were populated with people with a "business orientation," that is, generally devoid of any introspection, flat as a pancake, and likely to be fooled by randomness. Their failure rate was extremely high, particularly when financial instruments gained in complexity.

Such a tendency to make and unmake prophets based on the fate of the roulette wheel is symptomatic of our ingrained inability to cope with the complex structure of randomness prevailing in the modern world.

We are not wired in a way to understand probability.

MBAs tend to blow up in financial markets, as they are trained to simplify matters a couple of steps beyond their requirement. (I beg the MBA reader not to take offense; I am myself the unhappy holder of the degree.)

Journalism may be the greatest plague we face today–as the world becomes more and more complicated and our minds are trained for more and more simplification.

I remind myself of Einstein's remark that common sense is nothing but a collection of misconceptions acquired by age eighteen.

Any reading of the history of science would show that almost all the smart things that have been proven by science appeared like lunacies at the time they were first discovered.

Learning from history does not come naturally to us humans, a fact that is so visible in the endless repetitions of identically configured booms and busts in modern markets. By history I refer to the anecdotes, not the historical theorizing...

For me, history is of use merely at the level of my desired sensibility, affecting the way I would wish to think by reference to past events, by being able to better steal ideas of others and leverage them, correct the mental defect that seems to block my ability to learn from others.

In some respects we do not learn from our own history...For example, people fail to learn that their emotional reactions to past experiences (positive or negative) were short lived–yet they continuously retain the bias of thinking that the purchase of an object will bring long-lasting, possibly permanent, happiness or that a setback will cause severe and prolonged distress.

Our minds are not quite designed to understand how the world works, but, rather to get out of trouble rapidly and have progeny.

A mistake is not something to be determined after the fact, but in the light of the information until that point.

It takes a huge investment in introspection to learn that the thirty or more hours spent "studying" the news last month neither had any predictive ability during your activities of that month nor did it impact your current knowledge of the world.

A preference for distilled thinking implies favoring old investors and traders, that is, investors who have been exposed to markets the longest.

Over a short time increment, one observes the variability of the portfolio, not the returns.

Our emotions are not designed to understand the point. The dentist did better when he dealt with monthly statements rather than more frequent ones.

My problem is that I am not rational and I am extremely prone to drown in randomness and to incur emotional torture. I am aware of my need to ruminate on park benches and in cafes away from information, but I can only do so if I am somewhat deprived of it.

At any point in time, the richest traders are often the worst traders. This, I will call the cross-sectional problem: At a given time in the market, the most successful traders are likely to be those that are best fit to the latest cycle.

Recall that someone with only casual knowledge about the problems of randomness would believe that an animal is at the maximum fitness for the conditions of its time. This is not what evolution means; on average, animals will be fit, but not every single one of them, and not at all times.

One vicious attribute is that the longer these animals can go without encountering the rare event, the more vulnerable they will be to it.

Studying the European markets of the 1990s will certainly be of great help to a historian; but what kind of inference can we make now that the structure of the institutions and the markets has changed so much?

There is no point searching for patterns that are available to everyone with a brokerage account; once detected, they would be self-canceling.

Economics: you can disguise charlatanism under the weight of equations, and nobody can catch you since there is no such thing as a controlled experiment.

Nowhere is the problem of induction more relevant than in the world of trading–and nowhere has it been as ignored!

No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion.

Markets (and life) are not simple win/lose types of situations, as the cost of the losses can be markedly different from that of the wins.

The virtue of capitalism is that society can take advantage of people's greed rather than their benevolence, but there is not need to, in addition, extol such greed as a moral (or intellectual) accomplishment.

The survivorship bias implies that the highest performing realization will be the most visible. Why? Because the losers do not show up.

Remember that nobody accepts randomness in his own success, only in his failures.

Medical researchers are rarely statisticians; statisticians are rarely medical researchers. Many medical researchers are not even remotely aware of this data mining bias.

Assume you are standing in 1900 with hundreds of investments to look at. There are stock markets of Argentina, Imperial Russia, the United Kingdom, Unified Germany, and plenty of others to consider. A rational person would have bought not just the emerging country of the United States, but those of Russia and Argentina as well. The rest of the story is well-known; while many of the stock markets like those of the United Kingdom and the United States fared extremely well, the investor in Imperial Russia would have no better than medium-quality wallpaper in his hands. The countries that fared well are not a large segment of the initial cohort; randomness would be expected to allow a few investment classes to fare extremely well. I wonder if those "experts" who make foolish (and self-serving) statements like "markets will always go up in a any twenty-year period" are aware of this problem.

This chapter is about how a small advantage in life can translate into a highly disproportionate payoff, or, more viciously, how no advantage at all, but a very, very small help from randomness, can lead to a bonanza.

Nonlinearities = straw that broke the camel's back, drop that caused the water to spill.

These nonlinear dynamics has a bookstore name, "chaos theory," which is a misnomer because it has nothing to do with chaos. Chaos theory concerns itself primarily with functions in which a small input can lead to a disproportionate response.

Say you played roulette and won. Would this increase your chances of winning again? No. In a Polya process case, it does (probability of winning increases after past wins, and vice versa). Why is this so mathematically hard to work with? Because the notion of independence (i.e., when the next draw does depend on past outcomes) is violated. Independence is a requirement for working with the (known) math of probability.

Our brain is not cut out for nonlinearities. People think that if, say, two variables are casually linked, then a steady input in one variable should always yield a result in the other one...But reality rarely gives us the privilege of a satisfying linear positive progression: You may have to study for a year and learn nothing, then, unless you are disheartened by the empty results and give up, something will come to you in a flash...Most people give up before the rewards.

There are routes to success that are nonrandom, but few, very few people have the mental stamina to follow them.

Buridan's Donkey: Nonlinearity in random outcomes is sometimes used as a tool to break stalemates. *Randomness is not always unwelcome.

You stop when you get a near-satisfactory solution. Otherwise it may take you an eternity to reach the smallest conclusion or perform the smallest act. We are therefore rational, but in a limited way: "boundedly rational." [Herbert Simon] believed that our brains were a large optimizing machine that had built-in rules to stop somewhere.

There are two possible ways for us to reason:
Heuristics: effortless, automatic, associative, rapid, parallel process, opaque (i.e. we are not aware of using it), emotional, concrete, specific, social, and personalized.
Rationality: effortful, controlled, deductive, slow, serial, self-aware, neutral, abstract, sets, asocial, and depersonalized.

1) We do not think when making choices but use heuristics. 2) We make serious probabilistic mistakes in today's world.

Causality can be very complex. It is very difficult to isolate a single cause when there are plenty around. This is called multivriate analysis.

Unless something moves by more than its usual daily percentage change, the event is deemed to be noise. Percentage moves are the size of the headlines. In addition, the interpretation is not linear; a 2% move is not twice as significant as an event as 1%, it is rather like four to ten times. A 7% move can be several billion times more relevant than a 1% move!

My lesson from Soros is to start every meeting at my boutique by convincing everyone that we are a bunch of idiots who know nothing and are mistake-prone, but happen to be endowed with the rare privilege of knowing it.

People confuse science and scientists. Science is great, but individual scientists are dangerous. They are human; they are marred by the biases humans have.

Recall that epic heroes were judged by their actions, not by the results. No matter how sophisticated our choices, how good we are at dominating the odds, randomness will have the last word.

There is nothing wrong and undignified with emotions–we are cut to have them. What is wrong is not following the heroic or, at least, the dignified path. That is what stoicism truly means. It is the attempt by man to get even with probability.

Our attribution of heroism to those who took crazy decisions but were lucky enough to win shows the aberration–we continue to worship those who won battles and despise those who lost, no matter the reason.

Some degree of unpredictability (or lack of knowledge) can be beneficial to our defective species. A slightly random schedule prevents us from optimizing and being exceedingly efficient, particularly in the wrong things.

We know that people of a happy disposition tend to be of the satisficing (blend of satisfying and maximizing) kind, with a set idea of what they want in life and an ability to stop upon gaining satisfaction...They do not tend to experience the internal treadmill effects of constantly trying to improve on their consumption of goods by seeking higher and higher levels of sophistication. In other words, they are neither avaricious nor insatiable. *Optimizers = unhappy and always seeking a better deal.

We favor the visible, the embedded, the personal, the narrated, and the tangible; we scorn the abstract. Everything good (aesthetics, ethics) and wrong (Fooled by Randomness) with us seems to flow from it.

I Will Teach You to Be Rich – Ramit Sethi

I Will Teach You to Be Rich – by Ramit Sethi
Date read: 7/22/17. Recommendation: 9/10.

The most accessible, practical book I've read on personal finance. Sethi dismisses trendy advice, such as cutting back on lattes, and instead emphasizes saving on the big purchases that really matter. And he's hilarious. This book is all about optimizing your strategy, prioritizing what matters most, and making money work for you (instead of obsessing over the minute details). This is a must read for anyone in their 20s or 30s, and should be a required reading for all who can still take advantage of the most valuable asset in investing: time.

See my notes below or Amazon for details and reviews.

My Notes:

When it comes to weight loss, 99.99% of us need to know only two things: Eat less and exercise more. Only elite athletes need to do more. But instead of accepting these simple truths and acting on them, we discuss trans fats, diet pills, and Atkins versus South Beach. *Finance similar in debating minutiae and valuing anecdotal over research.

An abundance of information can lead to decision paralysis.

I also often hear the cry that "credit-card companies and banks are out to profit off us." Yes, they are. So stop complaining and learn how to game the companies instead of letting them game you.

The single most important factor to getting rich is getting started, not being the smartest person in the room.

Just as the diet industry has overwhelmed us with too many choices, personal finance is a confusing mess of overblown hype, myths, outright deception.

Frankly, your goal probably isn't to become a financial expert. It's to live your life and let money serve you. So instead of saying, "How much money do I need to make?" you'll say, "What do I want to do with my life–and how can I use money to do it?"

To be extraordinary, you don't have to be a genius, but you do need to take some different steps than your folks did (like starting to manage your money and investing early).

Spend extravagantly on the things you love, and cut costs mercilessly on the things you don't.

This book isn't about telling you to stop buying lattes. Instead, it's about being able to actually spend more on the things you love by not spending money on all the knucklehead things you don't care about.

Money is just a small part of being rich...If you don't consciously choose what rich means, it's easy to end up mindlessly trying to keep up with your friends.

Chapter 1: Optimize Your Credit Cards
Establishing good credit is the first step in building an infrastructure for getting rich. Our largest purchases are almost always made on credit, and people with good credit save tens of thousands of dollars on these purchase. Credit has a far greater impact on your finances than saving a few dollars a day on a cup of coffee.

It's fine to be frugal, but you should focus on spending time on the things that matter, the big wins.

If you miss even one payment on your credit card:
- Credit can drop more than 100 points
- APR can go up to 30 percent
- Charged a late fee
- Trigger rate increases on other cards

If you miss a credit card payment, you might as well just get a shovel and repeatedly beat yourself in the face.

To improve your credit utilization rate (makes up 30% of your credit score) you have two choices: Stop carry so much debt on your credit cards or increase your total available credit (if you're debt free).

Every year call your credit cards and ask what advantages you're eligible for. Often, they can waive fees, extend credit, and give you private promotions. "Hi there. I just checked my credit and noticed that I have a 750 credit score, which is pretty good. I've been a customer of yours for the last four years, so I'm wondering what special promotions and offers you have for me...I'm thinking of fee waivers and special offers that you use for customer retention."

Although closing an account doesn't technically harm your credit score, it means you then have less available credit...People with zero debt get a free pass. If you have no debt, close as many accounts as you want. It won't affect your credit utilization score.

If you're applying for a major loan (car, home, education) don't close any accounts within six months of filing the loan application. You want as much credit as possible when you apply.

Chapter 3: Get Ready to Invest
Over the twentieth century, the average annual stock-market return was 11 percent, minus 3 percent for inflation, giving us 8 percent.

Of employees age 25 and under:
- Less than one-third participate in a 401(k)
- Less than 4 percent max out their contributions
- Only 16 percent contribute enough to get the full company match (literally free money)

Financial institutions have noticed an interesting phenomenon: When people enter their forties, they suddenly realize that they should have been saving money all along. As a result, the number one financial concern Americans have is not having enough money for retirement.

By opening an investment account, you give yourself access to the biggest moneymaking vehicle in the history of the world: the stock market.

Ladder of Personal Finance:

• Rung 1: 401(k) match, contribute enough to get full match
• Rung 2: Pay off your credit card and any other debt.
• Rung 3: Open up a Roth IRA
• Rung 4: If you have money left over, go back to your 401(k) and contribute as much as possible to it.
• Rung 5: If you still have money left to invest, open a regular non-retirement account and put as much as possible there.

Benefits of 401(k):
Using pretax money means an instant 25 percent accelerator.

Chapter 4: Conscious Spending
Cheap vs. Frugal: Cheap people care about the cost of something. Frugal people care about the value of something.

Frugality, quite simply, is about choosing the things you love enough to spend extravagantly on and then cutting costs mercilessly on the things you don't love. The mind-set of frugal people is the key to being rich.

50% of more than one thousand millionaires surveyed have never paid more than $400 for a suit, $140 for a pair of shoes, and $235 for a wristwatch.

Instead of getting caught on a spending treadmill of new phones, new cars, new vacations, and new everything, they plan what's important to them and save on the rest.

A good rule of thumb is that fixed costs (rent, utilities, debt, etc.) should be 50-60% of your take-home pay.

A good rule of thumb is to invest 10 percent of your take-home pay (after taxes) for the long term.

Another solution is "The 60 Percent Solution" splitting your money into buckets. The largest being basic expenses (60%). The remaining split four ways: Retirement (10%), Long-term savings (10%), Short-term savings (10%), Fun money (10%).

Chapter 6: The Myth of Financial Expertise
Americas love experts....But ultimately, expertise is about results. You can have the fanciest degrees from the fanciest schools, but if you can't perform what you were hired to do, your expertise is meaningless.

More information is not always good, especially when it's not actionable and causes you to make errors in your investing. The key takeaway here is to ignore any predictions that pundits make. They simply do not know what will happen in future.

Recently, Helpburn Capital studied the performance of the S&P 500 from 1983 to 2003, during which time the annualized return of the stock market was 10.01 percent. They noted something amazing: During that twenty-year period. If you missed the best twenty days of investing (the days where the sock market gained the most points), your return would have dropped from 10.01 percent to 5.03 percent. And if you missed the best forty days of investing, your returns would equal only 1.6 percent–a pitiful payback on your money. Lesson: Do not try to time the market, invest regularly and for the long-term.

Ignore the last year or two of a fund's performance. A fund manager may be able to perform very well over the short term. But over the long term he will almost never beat the market–because of expenses, fees, and the growing mathematical difficulty of picking outperforming stocks.

Most people don't actually need a financial adviser–you can do it all on your own and come out ahead.

Many people use financial advisers as a crutch and end up paying tens of thousands of dollars over their lifetime simply because they didn't spend a few hours learning about investing. If you don't learn to manage your money in your twenties, you'll cost yourself a ton one way or another–whether you do nothing, or pay someone exorbitant feeds to "manage" your money.

Mutual funds use something called "active management." This means a portfolio manager actively tries to pick the best stocks and give you the best return. Index funds are run by "passive management." These funds work by replacing portfolio managers with computers. They simply and pick the same stocks that an index holds.

Index funds have lower fees than mutual funds because there's no expensive staff to pay. Vanguard's S&P 500 index fund, for example, has an expense ratio of 0.18 percent.

Passively managed index fund (.18% expense ratio, 8% return on investment of $100/month), after 25 years: $70,542.13
Actively managed index fund (2% expense ratio, 8% return on investment of $100/month), after 25 years: $44,649.70

*Half of actively managed funds between 1993 through 1998 failed to beat the market, and only 2% beat market from 1993 through 2003.

More than 90% of your portfolio's volatility is a result of your asset allocation (your mix of stocks and bonds, not individual stocks).

Your investment plan is more important than your actual investments. Just as the way I organized this book is more important than any given word in it.

1998: US large cap stocks +28.6%, international stocks +20%, REITs -17%
2000: US large cap stocks -9.10%, international stocks -14.7%, REITs +31.04%

If you're 25 and just starting out, your biggest danger isn't having a portfolio that's too risky. It's being lazy and overwhelmed and not doing any investing at all. That's why it's important to understand the basics but not get too wrapped up in all the variables and choices.

"I believe that 98 or 99 percent–maybe more than 99 percent–of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs." -Warren Buffet

"When you realize how few advisers have beaten the market over the last several decades, you may acquire the discipline to do something even better: become a long-term index fund investor." -Mark Hulbert

Lifecycle funds, also known as target-date funds, automatically pick a blend of investments for you based on your approximate age. The 85% percent solution, not perfect, but easy enough for anyone to get started.

If you're picking your own index funds, as a general guideline, you can create a great asset allocation using anywhere from three to seven funds. The goal isn't to be exhaustive and own every single aspect of the market. It's to create an effective asset allocation and move on with your life.

Dollar Cost Averaging: Investing regular amounts over time, rather than investing all your money into a fund at once, so you don't have to guess when the market is up or down. *Set up automatic investing at regular intervals so you don't have to think about it.

Chapter 8: Easy Maintenance
Ignore the noise: It doesn't matter what happened last year, it matters what happens in the next ten to twenty years.

Renting is actually an excellent decision in certain markets–and real estate is generally a poor financial investment.

Tax inefficient (i.e. income-generating) assets such as bonds should go into a tax advantaged account like an IRS or a 401(k). Conversely, taxable accounts should only hold tax-efficient investments like equity index funds.

Invest as much as possible into tax-deferred accounts like your 401(k) and Roth IRA. Because retirement accounts are tax advantaged, you'll enjoy significant rewards.

If you sell an investment that you've held for less than a year, you'll be subject to ordinary income tax, which is usually 25-35 percent.

If you hold your investment for more than a year, you'll only pay a capital-gains tax, which in most cases is currently 15 percent. This is a strong incentive to buy and hold for the long term.

Chapter 9: A Rich Life
Being rich is about freedom–it's about not having to think about money all the time and being able to travel and work on the things that interest me. It's about being able to use money to do whatever I want–and not having to worry about my budget, asset allocation, or how I'll ever be able to afford a house.

Raises:
When you receive a raise, don't feel bad about celebrating–but do it modestly...A mere increase in your income is not a call to change your standard of living.

Big Purchases:
When it comes to saving money, big purchases are your chance to shine–and to dominate your clueless friends who are so proud of not ordering Cokes when they eat out, yet waste thousands when they buy large items like furniture, a car, or a house. When you buy something major, you can save massive amounts of money–$2000 on a car or $40,000 on a house–that will make your other attempts to save money pale in comparison.

Buying a Car:
Let me first tell you that the single most important decision associated with buying a car is not the brand or the mileage or the rims (please jump off a bridge if you buy specialty rims)...Most important factor is how long you keep the car before selling it. You could get the best deal in the world, but if you sell car after four years, you've lost money. Instead, understand how much you can afford, pick a reliable car, maintain it well, and drive it for as long as humanly possible. Yes, that means you need to drive it for more than ten years, because it's only once you finish the payments that the real savings start.

Buying a House:
Can you afford at least a 10 percent down payment for the house? If not, set a savings goal and don't even think about buying until you reach it.

I have to emphasize that buying a house is not just a natural step in getting older. Too many people assume this then get in over their heads. Buying a house changes your lifestyle forever.

If you can afford it and you're sure you'll be staying in the same area for a long time, buying a house can be a great way to make a significant purchase, build equity, and create a stable place to raise a family.

Real estate is the most overrated investment in America. It's a purchase first–a very expensive one–and an investment second.

As an investment, real estate provides mediocre returns at best. Risk: If your house is your biggest investment, how diversified is your portfolio? Poor returns: From 1890 to through 1990, the return on residential real estate was just about zero after inflation.

If someone buys a house for $250,000 and sells it for $400,000 twenty years later, they think, "Great! I made $150,000! But actually, they've forgotten to factor in important costs like property taxes, maintenance, and the opportunity cost of not having that money in the stock market.

The truth is that, over time, investing in the stock market has trumped real estate quite handily–even now–which is why renting isn't always a bad idea.

When you rent, you're not paying all those other assorted fees, which effectively frees up tons of cash that you would have been spending on a mortgage. The key is investing that extra money.

I urge you to stick by tried-and-true rules, like 20 percent down, a 30-year fixed-rate mortgage, and a total monthly payment that represents no more than 30 percent of your gross pay. If you can't do that, wait until you've saved more.

If You Can: How Millennials Can Get Rich Slowly – William J. Bernstein

If You Can: How Millennials Can Get Rich Slowly – William J. Bernstein
Date read: 7/15/17. Recommendation: 7/10.

An easy-to-read overview of the topics covered in his earlier book, The Investor's Manifesto. I prefer the depth and detail of the latter. But if you're looking for an introduction to investing in low-cost index funds and the importance of developing a financial strategy at an early age, this is a good starting place. 

See my notes below or Amazon for details and reviews.

My Notes:

Start by saving 15 percent of your salary at age 25 into a 401(k) plan, and IRA, or a taxable account (or all three). Put equal amounts of that 15 precent into just three different mutual funds:

• A US total stock market index fund

• An international total stock market index fund

• A US total bond market index fund

     *Once per year you'll adjust their amounts so that they're equal again.

Rest assured that you will get Social Security; its imbalances are relatively minor and fixable, and even if nothing is done, which is highly unlikely in view of the program's popularity, you'll still get around three-quarters of your promised benefit.

Five Hurdles to Overcome:
1) People spend too much money.

2) You need adequate understanding of what finance is all about.

3) You need to learn the basics of financial and market history.

• "History doesn't repeat itself, but it does rhyme." Fits finance to a tee.

• Nothing more reassuring than being able to say to yourself, "I've seen this movie before and I know how it ends."

4) Overcoming yourself.

• Human beings are simply not designed to manage long-term risks.

• We've evolved to think about risk as a short term phenomenon.

• Proper time horizon of assessing financial risk is several decades

• From time to time you will lose large amounts of money in the stock market, but these are usually short-term events.

5) Recognize the monsters that populate the financial industry.

If you're starting to save at age 25 and want to retire at 65, you'll need to put away at least 15% of your salary.

A plumber making $100,000 per year was far more likely to be a millionaire than an attorney with the same income, because the latter's peer group was far harder to keep up with.

When you buy and sell stocks, the person on the other side of the trade almost certainly has a name like Goldman Sachs or Fidelity. And that's best case scenario. What's the worse case? Trading with a company insider who knows more about his employer than 99.9999% of the people on the planet.

If you want high returns, you're going to occasionally have to endure ferocious losses with equanimity, and if you want safety, you're going to have to endure low returns.

Reading Suggestion: Jack Bogle's Common Sense on Mutual Funds.

You should use your knowledge of financial history simply as an emotional stabilizer that will keep your portfolio on an even keel and prevent you from going all-in to the market when everyone is euphoric and selling you shares when the world seems to be going to hell in a hand-basket.

The real purpose of learning financial history is to give you the courage to do the selling at high prices and the buying at low ones mandated by the discipline of sticking to a fixed stock/bond allocation.

People tend to be comically overconfident: for example, about eighty percent of us believe that we are above average drivers, a logical impossibility.

We tend to extrapolate the recent past indefinitely into the future...Both long bear and bull markets also seem to take on a life of their own.

Humans are "pattern seeking primates" who perceive relationships where in fact none exist. Ninety-five percent of what happens in finance is random noise, yet investors constantly convince themselves that they see patterns in market activity.

To be avoided at all costs are: any stock broker or "full-service" brokerage firm; any newsletter; any advisor who purchases individual securities; any hedge fund.

Your biggest priority is to get yourself out of debt; until that point, the only investing you should be doing is with the minimum 401(k) or other defined contribution savings required to "max out" your employer match; beyond that, you should earmark every spare penny to eliminating your student and consumer debt.

Next, you'll need an emergency fund, enough for six months of living expenses.

Then, and only then, can you start to save seriously for retirement.

Your goal, as mentioned, is to save at least 15 percent of your salary in some combination of 401(k)/IRA/taxable savings. But in reality, the best strategy is to save as much as you can, and don't stop doing so until the day you die.

The optimal strategy for most young people is thus to first max out their 401(k) match, then contribute the maximum to a Roth IRA, then save in a taxable account on top of that.

Once a year you should rebalance your accounts back to equal status.

The Investor's Manifesto – William J. Bernstein

The Investor's Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between – William J. Bernstein
Date Read: 7/5/17. Recommendation: 8/10.

Champions an investment strategy focused on low-cost index funds that track the market, rather than attempting to guess on individual stocks. This is a must-read when it comes to investing. And it's not a massive encyclopedia. Bernstein offers a more rational approach to investing by detailing historic returns of various asset classes, the importance of diversification, and why you must play the long game if you have any hopes of coming out ahead. 

See my notes below or Amazon for details and reviews.

My Notes:

"In the past, stocks have had high returns because they have been really risky. But stocks are now so expensive that there are only two possibilities: either they are going to fall dramatically in price and then have higher returns after that (in which case investors are stupid for paying such high prices now), or there will be no big fall in price and little risk, but returns hereafter will be permanently low (in which case investors are smart). So which is it?

Diversification among different kinds of stock asset classes works well over the years and decades, but often quite poorly over weeks and months.

Investment wisdom, however, begins with the realization that long-term returns are the only ones that matter. Investors who can earn 8 percent annualized return will multiply their wealth tenfold over the course of 30 years.

Using historical returns to estimate future ones is an extremely dangerous exercise.

In the past, investors could expect only low returns when investing in safe assets; today this rule applies with a vengeance to Treasury bills, which currently have a near-zero yield.

Investors earn higher returns only by bearing risks–by seeking out risk premiums.

A house is most certainly not an investment, for one simple reason: You have to live somewhere, and you are either going to have to pay for it or rent it. Always remember, investment is the deferral of present consumption for future consumption, and if anything qualifies as present consumption, it is a residence. Further, if you pay for one in cash, then you are spending capital you could otherwise invest in something else.

How much does the price of a home rise over time? The best data on house prices suggest that, after taking inflation into account, the answer is slim to none.

Real house prices in the United States did not rise at all between 1890 and 1990.

If you own the house outright, you are tying up a large amount of capital you could profitably invest elsewhere, and the imputed rent, or use of the house, is your reward for doing so. On the other hand, if you have the ability to pay for a house outright but choose instead to rent, your unspent capital can earn a return in other assets, such as stocks and bonds.

The opposite reasoning applies if you cannot afford to purchase the house outright, but instead require a mortgage. By choosing to rent instead of own, you substitute rent payments for mortgage payments. True mortgage payments, at least early on, are largely deductible, but the advantage is more than offset by the catastrophic risk of default and repossession you take on with a mortgage.

Home ownership is not an investment; it is exactly the opposite, a consumption item. After taking into consideration maintenance costs and taxes, you are often better off renting.

A good rule of thumb is never, ever pay more than 15 years fair rental value for any residence. This computes out to a 6.7% (1/15th) gross rental dividend, or 3.7% after taxes, insurance, and maintenance.

Imputed rent does have one real advantage over the return from stocks and bonds, which is that it is tax-free.

The figure I keep in mind when house shopping is 150: the number of months in 12.5 years. After hearing a realtor's spiel, I will ask, "So, what would this house reasonably rent for?" If the number seems right, multiply it by 150; this will give you an excellent idea of the home's fair market value, above which you are better off renting.

On average the three small categories (growth, mid, value) had higher returns than the three large categories. This is not surprising; after all, small companies have more room to grow than large ones. Further, small stocks are certainly riskier than large ones, as well, since they have less diversified product lines and less access to capital and are more prone to failure.

How do value ("bad") companies tend to outperform growth ("good") companies in the stock exchange, when they manifestly do not in the consumer marketplace? Very simply, because they have to...In order to attract buyers for its far riskier stock, Ford must offer investors a higher expected return than Toyota.

"Efficient Market Hypothesis" (EMH), developed by Eugene Fama, which states, more or less, that all known information about a security has already been factored into its price.* This has two implications for investors: First, stock picking is futile, to say nothing of expensive, and second, stock prices move only in response to new information–that is, surprises. Since surprises are by definition unexpected, stocks, and the stock market overall, move in a purely random pattern.

*There are actually three forms of the EMH: the strong form, which posits that all information, public and private, has already been impounded into price; and the weak form, which posits only that past price action does not predict future price moves.

The implications of the EMH for the investor could not be clearer: Do not try to time the market, and do not try to pick stocks or fund managers.

In the long run, the advantages of the indexed and passive approaches over traditional active stock-picking are nearly insurmountable.

The investor cannot learn enough about the history of stock and bond returns. These are primarily useful as a measure of risk; they are far less reliable as a predictor of future returns.

Four essential preliminaries before making asset allocation decisions: Save as much as you can, make sure you have enough liquid taxable assets for emergencies, diversify widely, and do so with passive or index funds.

The consequences of oversaving pale next to those of undersaving.

Yes, picking a small number of stocks increases your chances of getting rich, but as we just learned, it also increases your chances of getting poor. By buying and holding the entire market through a passively managed or indexed mutual fund, you guarantee that you will own all of the winning companies and thus get all of the market return. True, you will own all of the losers as well, but that is not as important: the most that can vanish with any one stock is 100 percent of its purchase value, whereas the winners can easily make 1,000 percent, and exceptionally 10,00 percent, inside of a decade or two.

Asset allocation process, investor makes two important decisions:
1) The overall allocations to stocks and bonds.
2) The allocation among stock asset classes.

The rosiest scenario for the young investor is a long, brutal bear market. For the retiree, it most definitely is not.

The best time to buy stocks is often when the economic clouds are the blackest, and the worst times to buy are when the sky is the bluest.

The anticipation is better than the pleasure. Researchers have found that the nuclei accumbens respond much more to the prospect of reward than to the reward itself.

Caring, emotionally intelligent people often make the worst investors, as they become too overwhelmed by the feelings of others to think rationally about the investment process.

Advantages of mutual funds:
-Wide diversification
-Transparency of expenses
-Professional management (brokers = used car salesmen, fund managers = advanced degree)
-Protection (Investment Company Act of 1940)
-Ease of execution

The ownership structure of any financial services company ultimately determines just how well it serves its shareholders in the long run. Do not invest with any mutual fund family that is owned by a publicly traded parent company.

In the best of all possible worlds, the fund company has no publicly or privately owned shares and is instead held directly by the mutual fund shareholders. Only one fund company does this: the Vanguard Group.

Each dollar you do not save at 25 will mean two inflation adjusted dollars that you will need to save if you start at age 35, four if you begin at 45, and eight if you start at 55. In practice, if you lack substantial savings at 45, you are in serious trouble. Since a 25-year-old should be saving at least 10 percent of his or her salary, this means that a 45-year-old will need to save nearly half of his or her salary.

The possible adverse consequences of under-consuming in your youth or middle age pale in comparison to the risks of not saving enough for old age.

Retirement: My rule of thumb is that if you spend 2 percent of your nest egg per year, adjusted upward for the cost of living, you are as secure as possible at 3 percent, you are probably safe; at 4 percent, you are taking real risks.

For example, if, in addition to Social Security and pensions, you spend $50,000 per year in living expenses, that means you will need $2.5 million to be perfectly safe, and $1.67 million to be fairly secure.

The best annuity deal available: deferring Social Security until age 70. Waiting until 70 increases by almost one-third the monthly payment you would get starting at age 66...This calculates out to a guaranteed real return from waiting of 8 percent per year.

Dollar cost averaging (DCA): fixed dollar amount is periodically invested in stocks and bonds...Forces investors to invest equal amounts periodically. Lowers the average price paid for their purchases and increases overall returns.

Month 1: $100 purchase at $15/share = 6.67 shares bought.
Month 2: $100 purchase at $5/share = 20 shares bought.
Month 3: $100 purchase at $10/share = 10 shares bought.
*DCA = $8.18/share

Value averaging technique: based on targets.
Month 1: US Total Stock ($100), International ($100)
Month 2: US Total Stock ($200), International ($200)
Month 3: US Total Stock ($300), International ($300)
Month 4: US Total Stock ($400), International ($400)

If US Large Cap fund started Month 3 with $300 in assets, and then fell 10 percent in value over the next 30 days to $270, our saver would have to add $130, not $100, to top it off to $400 at the start of Month 4. Conversely, if international stocks rose by 10 percent to $330 in value, then only $70 must be added.

From time to time, the markets can go stark raving mad...Your primary defense against being swept up in the madness of such periods is a command of the history of the financial markets and the resulting ability to say, "I've been here before, and I know how the story ends."

Never forget that at the level of individual securities, the markets are brutally efficient. Whenever you buy or sell an individual stock or bond, you are likely trading with someone who is smarter and better informed than you are, and who is working harder at it.

The portfolio's the thing; do not pay too much attention to its best and worst performing asset classes.

Investors tend to be too susceptible to the emotional impact of the news and to the fear and greed of their neighbors. The better you can tune out this emotional noise, the wealthier you will be.

Human beings are pattern-seeking primates. Most of what goes on in the financial markets, by contrast, is random noise. Avoid imagining patterns; there usually are none.

Avoid fund companies that are owned by publicly traded parent firms.

You should live as modestly as you can and save as much as you can for as long as you can. Saving too much is not nearly as harmful as saving too little.

Consider tilting toward small and value stocks, since they will likely have higher expected returns than the overall market. Precisely how much you do so depends on the nature of your employment and your tolerance for temporarily underperforming the market for up to several years.