There Are Few Perfect Answers


Nothing is simple any more. At one time buying a TV was pretty straightforward. Screen size was pretty much dominant.

Not so much today.

About television decisions.

I read this article recently and I was quite fascinated at the depth of the problem in the LCD vs. OLED question. I can’t say I was too interested though.  Beyond the basics, TV sets are not a thing that interests me much.

I did notice an idea that applies to other things though.

Values clarification

We all do this in response to the, there is no perfect answer problem. I know I have done it in respect to computers. The basic is, “each one has strengths and weaknesses. Your job is to decide which strengths are more important and which weaknesses are less annoying to you.”

It’s all about you

If any two of us did the “values clarification” thing it is unlikely we would agree fully on the best mix of strengths and annoyances. Annoyances includes voids as well as things bolted on that you don’t want.

Apply to things non-electronic

Fixed income in retirement means trading off spending items. If I buy a Cadillac, I may have to curtail travel. Golf, or dining out more? Big house, or condo and more money for recreation?

Growth or security?

Physical fitness or physical problems?

Permanent or temporary life insurance?

Retire early and have more time but less income?

Decisions are harder when there are no perfect answers

For some odd reason we think that are answers for each problem. There are not. Some problems take so long to solve, or are so expensive to solve, that we decide they are not worth the trouble. Allocate the resources elsewhere.

We must learn to find optimal if not perfect answers.

Assess the values you must have, would like to have, don’t care about, would prefer not to have, or deal breaker.

That’s what values clarification is about. It does not take long to go through the list and it often leads to finding more information in a structured and focused way. It helps you find your unique meaning and that makes answers easier.

Remember rule one of risk management

If you can change your mind and afford to do so, the decision is riskless anyway. Values clarification will make that more easy to accept.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

 

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How Hard Is Stock Picking?


As it turns out stock picking is a process that proves Max Ma’s Law:

“That’s not a problem; that’s impossible.”

Impossible means what in the context of stock picking?

Jason Zweig did an interesting piece recently for the Wall Street Journal. His conclusion based on research by finance professor Hendrik Bessembinder of Arizona State points out some less than obvious details.

  1. Amazon stock sells for 49,000% more than it did at issue 20 years before.
  2. From 1926 to the end of 2015, 30 stocks out of 25,782 accounted for a third of the gain on the exchange.
  3. If you selected stocks by return and kept one in three hundred of those available, you picked up half the gains.
  4. If you took the best one in ninety, You got three quarters of the profit.
  5. The top one thousand, less than 4% of what was available, made all the money.
  6. You could have matched the returns on the other 96% by putting your money in 30-day t-bills.
  7. You have no reasonable expectation of finding a “super stock” if you own 25 securities. You would need to own hundreds or even thousands to cast a big enough net. And that exposes you to far more of the 96% that make nothing.
  8. Holding a total market index fund may the only cost effective way to do that.
  9. The only thing harder than finding a super stock may be holding on to it during the immense volatility that follows.

The future is always different.

The future unfolds differently than we expect because we base our expectations on the past. Daniel Khanamen has pointed out that the past is without risk. Everything is obvious and makes sense. The future is not like that.

Amazon looks easy to see now.  It was not in 1996 and even less so later.

Zweig’s Key Observation.

“The average return of the stock market, and the return of the average stock in the market, are nothing alike.”

Give up unrealistic expectations

If the average return is good enough to meet your objectives, why risk losing everything by chasing the vastly improbable.

The best performer over the entire 90 year period was Altria. 2,000,000 times your money. Who of us would have predicted that in 1926? Who among us would have held it through the ’30s.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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What Happens When You Fear the Solution?


This piece arrived from Seth Godin on the 23rd. If you do not yet subscribe to his daily thought you should. Go here.

Facts are not the antidote for doubt

Drink enough water and you will cease to be thirsty.

And yet, a doubting person can be drowning in facts, but facts won’t change a mind that doesn’t want to be changed. More facts don’t counter more doubt. Someone who is shaking her head, arms folded, eyes squinted and ears closed isn’t going to be swayed by more facts.

Instead, doubt surrenders to experience. And experience can only happen if there’s enrollment.

If someone is willing to find the right answer, willing to explore what might be effective, what might be confirmable, then enrolling in the journey to ease doubt opens the door to personal experience. Which, magically, can let the light in.

Experience, working it out, touching it, studying it, repeatedly asking why with an open mind… these experiences engage us, earn our attention and gain our trust.

Doubt comes from fear, which is why it’s so difficult to earn enrollment. People don’t want to commit to working their way out of doubt, because doubt is a perverse variation of perceived  safety, a paralysis in the face of the unknown. Earn enrollment first, a commitment to find a path, then bring on the process and the facts.

There is another side to this.

What if they know the fear and have enrolled in that, but fear the proposed solution. In my experience people fear life insurance products and their agents more than they fear imminent death.

Perhaps the sales folks need a new approach.

There are two obvious approaches.

  1. Stop selling product. The product is fearfully complicated. Clients should own insurance for what it does, not for what it is. Relate to the need baseline and present the solution as addressing that.
  2. Put life insurance in context. It is not completely about what it is and does, but rather it is about what having it allows the client to do because he has it.  If you owe millions in taxes on death, holding liquid assets against that risk is futile. It can prevent the necessary capitalization of your business. Being without a way to get liquidity in the estate has other risks. Losses on sale being the biggest.  Who thinks “Estate Sale” means anything other than expect a bargain.

Insurance is a solution not a problem. Be sure to maintain the approach. It is the problem that has the cost. From then on it is only a question of finding the least costly way to deal with it.

Life insurance is the most efficient way to create liquidity in an estate.  What’s that worth?

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

 

 

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Strategic Rules


There are two ways to set up the rule making playing field.

  1. Everything not specifically prohibited is permitted, and
  2. Everything not specifically permitted is prohibited

Most people, if asked, would assume that the strategy of rule makers must be strategy 1.

Those people would be wrong

For rule makers, strategy one is difficult. There is no clear line between prohibited and not. Context must be frequently reviewed and conflicts are common. How long to respond to some new condition requiring prohibition is a challenge? What should happen when conditions contradict?

There are frequent examples. How high can you build your fence? Can you build a fence high enough to block your neighbours windows? Must you mow your lawn? 

Times have changed.

At one time common sense and empathy were part of the solution and rule making was a cure for people being unreasonable. Today it is easier to make a horde of rules and enforce them as convenient.

Convenience usually lacks objectivity. People can have the rules interpreted to suit themselves if they know the right people or have enough money or influence. Convenience is corruptible. Common sense and empathy not so much.

Will they change back?

I doubt it. The process of prohibiting everything except …, is much easier. It gives both politicians and bureaucrats the ability to do favours. Favours are how you get elected and stay in your job.

Benefiting self is powerful motivation.

Life is complex

Not everyone wants unlimited choice, but most people don’t want tight rules either. The reality of life as expressed by Spencer Johnson is, “A change imposed is a change opposed.” It leads to every imposition is opposed, even reasonable ones. 

For parents, governments, employers and teachers, the opposition can be minimized with fewer rules. Parents and teachers have long known that children have the time, energy and ability to oppose far longer than you can impose. So have fewer rules, but assertively care about the ones you keep.

Grant people some autonomy and guide them to new places.

When you choose the wrong strategic way

Rules lead to sometimes silly results when viewed through the common sense lens. Consider the Columbiana Ohio situation. Backyard gardens are nor specifically permitted so therefore, they are prohibited.

If your city outlawed gardens, would you be less than impressed? Maybe they have already done so.

Know what the rules mean as much as what they say.  Pay attention to how you rule children and employees and even yourself.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

 

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We Are Never Finished


Getting there

It is a mistake to decide we have accomplished what we set out to do. The world does not work like that.  The future will be different enough that we must adjust from time to time.

The man who is cocksure that he has arrived is ready for the return journey.  B.C. Forbes

Having arrived is only visible from the present looking back at the past. The future may have other ideas.

Moving On

One of the steps that matters in planning and achieving our goals is to always have new goals. Human minds are very good at problem solving and moving on to a new objective. We must not let our brains go into neutral with the idea that we have done everything we must.

Motivation

We achieve things when we are motivated to do so. The goal is often daunting and people give up or put in only token effort. That won’t work.

When we look at high achievers, we find they have another method. They look at the process of achieving the goal as their personal purpose.

“The journey is the reward” Steve Jobs

Finding and overcoming obstacles becomes the kick. Edison did it, too. Ford did it. Sam Walton did it.

Brains that face no problems atrophy.

Attitude

Some people assume that their achievements are forever. That is not possible because the solutions are related to a given situation. Context.

Context changes and the people change. It is not reasonably likely that a solution developed in a different context will continue to work in the new one.

Context matters no matter who you are or what you have done so far. A fine example of different context relates to Col. Tom Parker – Elvis Presley’s manager. His context changed dramatically in August 1977, but his old attitude made it hard for him to retrench. He had few allies.

“Why should I be nice on the way up, I’m not coming back down.”     Col. Tom Parker

Be polite and aware of your surroundings. You never know what can change or what help you may need.

Hold on to curiousity.

Stay in the problem finding and answer seeking mode as long as possible. Study the environment for new variables and solutions. Be curious. Curiousity is the way to stay in touch with context. And it’s fun.

Curiosity is the cure for boredom.  There is no cure for curiousity.     Dorthy Parker

Application

Retirement planning matters and it is easy to assume everything is done. Could be true today, but that says little about tomorrow.

An estate distribution planning is closely connected to retirement income planning. Try to deal with them together. A review at least every two years is important. Perhaps more often as you get older. Things can change quickly after retirement and the ability to change the income/spending equation becomes challenging.

The sooner it is started the better.

Always include regular review in your plan. The process of record, review, revise. The 3Rs will do the best with what you have to work with.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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The Future Is Unknowable


On October 19, 1987, the stock market fell 29%.

Dramatic evidence of risk. 

Investment risk means variability. How wide is the track that returns follow over time.

People often see the October 1987 number and assume it has some meaning. It did for those who participated but, it is not the kind of change that people should think of as investment risk. It must be something else.

Investment theorists have physics envy

There is a tendency among many financial practitioners to make believe physics and its rules are parallel to similar rules that cover finance. The finance rules have become based on probabilities not deterministic laws. A bit like quantum mechanics.

The efficient market hypothesis

Some economists and other practitioners believe the market is “efficient.” All relevant information is already priced in. Changes in price are fluctuations around this efficient value and they are random.

Standard deviation (sigma) is a statistical measure of variance. In a true normal distribution, about 68% of the observations will lie within one sigma. 99% within 3 sigma. A 6-sigma event is about one in a million.

Impossible events like October 1987 make it likely that the statistical rules in finance fall short

The October 1987 event is not possible really. It is about a 21 sigma event. The probability of its occurrence is about 1 in 10 to the fiftieth power. A one after 49 zeroes behind the decimal. A smallish number.

If the stock market had been open ever day since the beginning of the universe, this event would still be about a one in 10 to the 38th probability. Equally impossible. If there were a trillion trillion universe just like ours, each with a stock exchange open for as long as ours, it would still be extremely unlikely to have occurred.

High sigma events abound.

If stock market returns were truly a normal distribution, a six sigma result would occur about once every 4,000,000 years. The stock market is not normally distributed.   Instead of 68% of the daily results within one sigma, there are nearly 90% within one sigma. It is very steep distribution with lumpy tails. Its 6-sigma events occur about once every 800 years, theoretically.

In whatever distribution describes the market, a 6-sigma event is unusual.

There have been several events with sigma values higher than 10. It is not always down either. 13 October 2008 was a plus sigma just under 12.

It is not only the stock market.

When the Swiss unpegged the Franc from the Euro, the result was an event registering 58-sigma.  After the Brexit, vote the pound suffered a 15 sigma drop.

The reasonable conclusion

There are some events or facts that are not priced into market results. If an event that is supposed to happen once in 800 years happens every few months or many times in a short period like the autumn of 2008, you should be less tolerant of statistical artifacts.

The future is about possibilities not so much about probabilities. You cannot predict with certainty. As the folks at Long Term Capital Management discovered, impossible events happen.

Don’t rely on numbers alone. 

You can prepare

Diversity in your portfolio will help. That will give you some capacity to deal with a fall and simultaneously reduce your exposure.  Hold some cash. 

Attitude matters. If you can accept the idea that there will be large fluctuations in value, you can prepare to buy when the drop occurs. Keep your purpose connected to your thinking about the markets.

Common sense tells us that there is no tactic that includes all possibilities. Be vigilant.

There are more things in heaven and earth, Horatio,
Than are dreamt of in your philosophy.

Hamlet – Act I, scene 5.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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Have Bureaucracies Changed? 


I read an interesting piece recently. I found it so because it violated one of my many half-baked ideas – business methods can apply to government. Seems I am wrong to make that assertion.

The piece is “Why Businessmen Fail at Government

More interesting still is it was written by Ludwig von Mises in 1944.

von Mises makes some useful points.

  1. “Government efficiency and industrial efficiency are entirely different things.” I will admit I had never considered efficiency the way he does. Maybe engineering is a poor basis for understanding efficiency. The ratio of outputs and inputs has a hidden assumption. That the output solves the problem. The outputs of a government often relate to ideas or principles or culture, while they seldom do for a business.
  2. “Its achievements cannot be valued in terms of money.” What is the right sentence for a murderer? Not easy for a profit-loss system.
  3. “Speed alone is not a measure of intellectual work.” Issuing a license to carry out some activity, say a pipeline, is not susceptible to the same reasoning as designing a faster way to produce paint. A doctor is not necessarily better because he works faster. Skate technician, Hal Flaro had a sign in his shop that explains the point, “Speed is not a good substitute for quality.”
  4. Some government activities must not fail. In business, a defective part goes on the scrap heap and costs per unit sold rise slightly. That is more complicated if the activity is one that is not easily reversible or affordable if it can be changed. Governments make more irreversible decisions than do businesses. The resulting processes seem odd to business people.

Have things changed?

I think that while von Mises makes sound points, the 70+ intervening years may have changed the playing field somewhat. It is not inconceivable that the government bureaucracy plays by different rules now. There may be some room to consider efficiency as a reasonable place to focus administrative effort.

  1. Technology is immensely different. The recording of information is very expensive using old ideas. That results in misapplied skills and resources. For example, nurses are highly trained and well paid. How does it make sense to have them spend a third of their time, or more, doing clerical tasks?
  2. The bureaucracies were once the servants of the people. In many ways their inertia made it difficult for the politicians of the moment to change things easily. The bureaucracy was the real “sober second thought” department.
  3. Today, bureaucracies seem not to have the servant of the people mentality. Many are peopled with ideologues and promote an agenda. Some have lost touch with the surrounding world. Others are obsolete. Time has lost meaning.
  4. Bureaucracies seem to exist for the benefit of the people within. The work they do is sometimes less customer-centric than the people would prefer. In Ontario a recent case of a system test registering liens on property left a citizen with a spurious lien on her car. It took nine months and a lawyer to clear it.  90 minutes might have been fair. Totally unreasonable and yet it happened. 

Businesses should notice.

Each has bureaucracies within. Businesses call them staff functions. Engineering, human resources, accounting and legal follow the same pattern as government bureaucracies. You can assess their effectiveness, but you cannot measure it directly. Bureaucracies in business are becoming less customer-centric too. United Airlines being the most visible recent example.

It is difficult to deal with departments that value their work more than the meaning of their work. Just because an employee has followed the rules perfectly, does not mean they have done the right thing. Customer service is the important aspect and is often treated as a nuisance.

Businesses and governments both are failing when they hide behind process and rules. Outcomes matter.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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