moneyFYI
Financial Freedom Is Merely Organized Common Sense
The Important Part Of Investing
People invest every day. Some is money, some is time, and some is attention.
Since we do so much of it, it is smart to know the the basics. Success flows to those who do it best. The essence of it is very simple.
It’s about allocating capital
Allocating capital is the executiove part of management.
You may recall that economics deals with the allocation of scarce resources. You may have noticed that all of money, time, and attention are limited resources. It follows that if you use them better you will get better results.
So what’s the best allocation? Easy enough. The allocation that gets you the most of what you are trying to get with the smallest allocation of the resource. That leaves some of that resource for doing other things. Warren Buffett makes money allocation decisions when he decides he likes Coke better than Pepsi or Apple more than Motorola. He is looking for the better of the choices. Better makes more capital to invest.
Most of us can do this too. Maybe not as well, but mostly because money is not the only resource we must allocate.
Allocating money requires time
How much of your limited time resource do you wish to allocate to the money allocation decisions. Warren Buffett spends his time reading and thinking and deciding. He does not spend his time driving the kids to swiming lessons, working as an engineer, or mowing the lawn so your results may vary.
Allocating time, too becomes deciding on optimal outcomes for the minimal investment.
Allocating time and money requires attention
You have only so much money and so much time, but in our world the scarce resource is becoming attention. How many brain cycles do we have available and how do we allocate them? Is paying attention easier now or harder?
Harder likely. The interruptions matter. When your brain is interrupted it cannot pick up where it left off. It must reconstruct that state before it can continue. Sometimes it can but not always. Think about “In the zone.” A lot of what we do is barely conscious and the hidden part may not reappear. You cannot stop and start at will with loss of efficiency.
Finding ways to ration attention is important. Depending on what you wish to accomplish, you may need to close the door to keep the distractions at bay. Be careful of what you buy. Possesssions need attention and maintenance.Turn off the phone. Choose who you interact with.
Eventually we discover most of our allocations are poorly chosen.
Everything is choosing with the idea of getting more for less. We are mostly wrong. Choosing is not easy for many because it requires choosing both yes and no. Yes to what we want and no to all other possible choices. We don’t usually like the no idea. It worries us. Maybe we will miss out.
The immediate goal is to choose what we choose based on the idea of efficiency. Getting more of what we want with less of our scarce resource. We will not achieve perfection but we can be less wrong.
The key is knowing how we choose no
Take resources from what doesn’t work so well and move it toward what does. Hire someone to mow the lawn and go fishing. Maybe reading to your children is a better choice for your time than watching TV news.
Learn how to ignore the attention grabbing nature of our surroundings. Decide what values have been under-attended.
I help people understand and manage risk and other financial issues. To help them achieve and exceed their goals, I use tax efficiencies and design advantages. The result: more security, more efficient income, larger and more liquid estates. Please be in touch if I can help you. don@moneyfyi.com 705-927-4770
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Can Smaller Government Work?
Small government is the stated wish of many conservatives, but it is not the action they take once in power. For a politician small government is boring. It would remain that way even while it worked. Perhaps especially when it worked.
Small government is an ancient relic
In the United States the final small government ended with the presidential election of 1928. Calvin Coolidge was the president from 1923 when Warren Harding died until 20 January 1929 when Herbert Hoover took office.
Coolidge expressed several thoughts that show his mindset:
- There is no dignity quite so impressive, and no independence quite so important, as living within your means
- There is a limit to the taxing power of the state beyond which increased rates produce decreased revenues.
- When you see ten problems rolling down the road, if you don’t do anything, nine of them will roll into a ditch before they get to you
- Perhaps one of the most important accomplishments of my administration has been minding my own business
The idea of a government living within its means and minding its own business seem foreign to us. Activist governments are the norm in most of the world’s democracies. How did we come to the idea that governments can and should “do things for us.” Certainly their track record is spotty. When they do things that are byond the means of any person or even group of persons, they provide value. When they tinker with society to provide an advantage to some group that cannot make it without help, there may be value. Without Canadian content rules I wonder if the country’s popular music would have flourished. When they redress wrongs or cause the a more even playing field for unique resources, do they add value? Sometimes. I doubt much of Canada would enjoy electricity if the operator relied on the revenue from remote locations. Same for high speed internet. I could be convinced these are worthy.
The problems arise when the work is done
Nature abhors a vacuum and governments abhor solved problems. Once solved, what is the government for? Certainly some maintenance, but there is no glory in keeping the roads repaired and the grass in the parks trimmed. Ambitious people need bigger purpose than that. So let’s micromanage some problem that just barely meets the criteria of problem. Regulation of business opening hours, liquor sales, minimum wage, and a thousand more become the fodder for the problem solving machine. The trick is to get to them before they roll into Coolidge’s ditch.
Two years ago I wrote about the European Union’s regulation regarding toast. There has been a darkest toast rule since April 2018. My thought at the time was that all of the real problems must be solved or why would anyone devote resources to this level of trivia. There two reasons:
- The effort is visible and the reasoning is presentable. Acrylamide is a potential risk to health. The evidence is thin, but an elected official can never be criticized for being ccareful.
- It was a”problem” that could be solved.
Other problems
Many other problems are less solvable and an elected official is best to avoid them. In poltics there is no glory in maintaining existing things that work and there is even less in attacking real, unsolved problems and failing. Good try won’t get you re-elected.
So we have an incentive trap. Solve trivial problems or go home. Most elected officials don’t want to go home and practice law in small town Ontario or British Columbia so they opt for appearing to be accomplishing things.
As resources of time, money, and attention are taken from real problems they grow more intractable. Drinking water in First Nations territories is an example. Always talked about, seldom acted upon. Why? It is an unattractive problem. It does not translate into votes. Or at least too few of them. And its hard to fix.
Pipelines. If you want the economy to grow, energy is crucial. If you don’t or don’t care, then you can hold them up.
Taxation. There is no such thing as fair taxation so long as governments waste money that is not theirs. All taxes minimize the money available to the people to spend as they see fit. Money that would be spent on things that add value to the economy or provide capital for businesses or charities. Government spending adds little in those areas because the overhead to supply it to the marketplace is so high.
Perfection is an illusion
The better solution is simplicity. Strong action to solve real problems and little attention to the perifery. At a minimum price.
We will not see that happen becasue of the incentive trap to solve visible problems even if they are trivial. Being seen to do something is more important than doing.
Margaret Thatcher had some thoughts:
- It used to be about trying to do something. Now it’s about trying to be someone
- 90% of our worries never happen.
- Do you know that one of the great problems of our age is that we are governed by people who care more about feelings than they do about thoughts and ideas
Simplicity
Smaller governments would be simple. Simple is easier to manage and to understand. Simple should be the goal in every complex operation.
“Simplicity is the unavoidable price we must pay for reliability” – C.A.R. Hoare, computer scientist.
Relaible, inexpensive, simple government is a smart target.
I help people understand and manage risk and other financial issues. To help them achieve and exceed their goals, I use tax efficiencies and design advantages. The result: more security, more efficient income, larger and more liquid estates. Please be in touch if I can help you. don@moneyfyi.com 705-927-4770
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All Models Are Wrong
We use statistics every day. We use them to find errors in processes we can control and to estimate the likely future. In the early years at Rennaisance Technologies, Simons and others used stochastic differential equations in their models of the market. They may still. I haven’t read the rest of the book yet. The Man Who Solved The Market.
Their underlying thesis was articualted by Carl Jung. “In all chaos there is a cosmos, in all disorder a secret order.”
It’s intriguing to believe that if we know enough about what has happened so far and if we can interpret what that means, then we can predict the future.
Is the future predictable?
The problem with that thinking is the future of stochastic series, like Markov chains, are entirely dependent on their current condition. We can come close to knowing what will happen but, we never have complete information about their current condition and so are stuck with a thought from chaos theory.
If we have complete information about the present condition, we can accurately predict the near future. However, approximate knowledge of the present does not necessarily yield an approximate idea of the near future.
Models can be built to more closely approximate the present condition but they are never complete and the weighting and interactivity of the variables is often poorly understood. So models are always wrong.
Models are always wrong
The thought comes from George E.P. Box, a British staitistician and considered by some as the preeminent statistician of the 20th century. His fields of study included experimental design, and quality control. He was also interested in time series analysis which includes model building.
He co-wrote a book in 2008, Time Series Analysis, and created a website anomaly.io that analyses data to show breakouts from what is expected. It integrates with Salesforce data to permit managers to respond promptly to developing events. Breakouts are a key element in stock market models too.
Box understands models and their limits.
All models are wrong, but
George Box’s complete thought on models is “Essentially all models are wrong, but some are useful.” He also asked how wrong would they need to be before they were of no use.
That leads us to consider what establishes a model as useful:
- How wrong must they be in order to be not useful? Consider false positives and false negatives.
- Is the level of wrongness the same for all models? Medical outcomes might have a higher standard than projections about how a group of humans would behave in a given circumstance.
- Can they include newly discovered data? Some don’t. Just continue the way they were built.
- Can they discover and help understand how the data interacts leading to exploration of previously unknown relationships? Data is nice by itself but as the model evolves, new relationships should appear. That leads to looking for data previously missed or not thought important. Think about the CERN experiments to find a missing piece of the standard atomic model.
- Is their predictive ability measurable? If you can’t be sure of what they are producing against the final outcome, they will not help much
- Do they use outcomes from one step as input for the next? Iteration is the key to building better models. New data, new relationships, new weighting of the factors, make for a better but never complete model.
The essence is good models provide insight into complex, often chaotic, situations.
Financial models
The most lucrative are the ones that can predict the future of the stock market. They need not predict the long future, just the near term will be enough. As an example, if you had the ability to predict 1 minute of the future, what would you do with the ability? Maybe go to Las Vegas and bet on the pass/no pass line at craps, or play roulette, or Blackjack. The long future would still be unknown but a very fine return could be had for short term situations. Until they tossed you from the casino.
In long financial plans like retirement, you cannot know enough to be right, but you can pay attention to the way statistical information tends towards the mean. Eventually all the short term noise dissipates and the yield approaches what the assets actually earn. (The new value produced by the underlying businesses creates what they are worth) Models in this form are quite simplistic compared to ones analyzing the near future possibilities.
The key variable in these is the noise averages out. Only simple relationships remain. The spread between yield and inflation for example.
The further assumption is the people governing the model, you, will not do things that make the converge to average assumption fail. Panic selling and portfolio concentration being two of the possible problems.
Thinking in models
If you use a model for insight into a problem rather than as an answer, they are useful. Perhaps they can show that given current assumptions about lifestyle, yield, inflation, and tax, you do not save enough to provide for retirement. Early warning means better response. Maybe your estate will be too illiquid. Maybe you should be spending more now to take advatage of your money while children are younger. Maybe you could pass money to your heirs sooner.
You can test the efficacy of financial tools like life insurance, annuities, and deferred icnome plans.
Properly used models contribute value. Models help you undertsnad what all that data means, and meaning is what planning is about.
I help people understand and manage risk and other financial issues. To help them achieve and exceed their goals, I use tax efficiencies and design advantages. The result: more security, more efficient income, larger and more liquid estates. Please be in touch if I can help you. don@moneyfyi.com 705-927-4770
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What We Can Know About The Future
Taxes will rise.
A government spending deficit is the other side of deferred taxes. Spend today, pay tomorrow. Not so different from how it works with you and I. The only question is how will the government get the money to pay.
The least hissing idea
Tax tactics are like plucking feathers from a goose. The idea is to get the most feathers with the least hissing.
Given profligate spending and deficits in the past there is not so much tax room as they would like. Some remains and would elicit only a little hissing.
Estate taxes come to mind. So do taxes on the internet. No doubt taxes on cigarettes, alcohol, newly legal drugs, and gasoline can help, but with some hissing. Income taxes cannot be much higher without damaging the economy. Sales taxes might have a little room.
I recall an old joke about a member of parliament, in a question, saying, “What I am about to say will tax your memory.” At which point the Minister of Finance leapt to his feet and said, “I wish I had thought of that.”
I suppose they have already taxed my patience to the fullest.
Spending cuts are possible too
These always create hissing because inside government people must go as programs shrink. Don’t expect much here. Growth in spending might be less but even that is difficult. Some programs like healthcare have demographic cost drivers in addition to inflation.
Some cost adjustments will come from innovation. Telecommuting reduces space and confines salaries. Maybe outsource entire departments. Technology will permit as yet unimplemented efficiencies.
Inflation is a good way for them
Never overlook their capability in this area. If inflation could be 5%, the principal owed would halve in value about every 14 years. So long as thyem lock up low interest rates for a long time they could win with this technique. It’s a zero sum game though. What they win someone else, the bond owners, loses. Be cautious of the possibility.
How we help
Stop asking governments for nonessential spending. Governments are incapable of spending discipline so don’t encourage them.
It will take at least a couple of decades to pay for what’s done so far and that assumes robust growth. Now is not the time for envy. Anyone who can help the economy grow is welcome. Besides the estate taxes might help us.
Include more contributing immigrants. Welcome them. Unless out birth rate goes up, they are the future.
Find a way to restrict governments
The essence of planning is a pattern Observe – Anticipate – Organize – Act.
Observe – Governments for more than at least 40 years have demonstrated little ability to discipline themselves. Possible exception when Jim Flaherty was finance minister in Canada. P.J. O’Rourke has summed it up in is usual masterful style.
“Giving money and power to government is like giving whiskey and car keys to teenage boys.”
Anticipate – We could have the wit to see the meaning of their behaviour. They might not change enough. We must start paying more attention to personal tax efficiencies.
Organize and Act depend on your personal situation. Get help in assessing it if you need it. Start with managing investments better and using deferred income plans better. Beware of non-deductible interest and income splitting.
Start now. Even if they do nothing the exercise is a profitable one.
While not so true today, the thought is still worthy.
“The avoidance of taxes is the only intellectual pursuit that still carries any reward.”
John Maynard Keynes
Be smart about it.
I help people understand and manage risk and other financial issues. To help them achieve and exceed their goals, I use tax efficiencies and design advantages. The result: more security, more efficient income, larger and more liquid estates. Please be in touch if I can help you. don@moneyfyi.com 705-927-4770
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How Do You Identify Hobgoblins?
Ross Mckittrick made an interesting point in the Financial Post today.
“AGAIN IN THE END WE ARE RECOGNIZING THAT WE’RE BETTER OFF GOING FOR GROWTH.”
The reference is to the industrial reolution, the Covid response, and the approach to climate change.
Covid and Climate Change are disssimilar
Some are making the point the world can act decisively to minimize a threat and the approach to Covid shows it would work for climate change too. There is little similarity between the two but when making false arguments, that is not to be noticed.
Covid not a systemic thing. It will be controlled by vaccines and treatment protocols. Many will be harmed before that happens but it will come under control and our experience with it will be useful when the next one comes along.
And it will.
Climate change and the industrial revolution
Ross makes the point that the people knew about pollution and its affects by 1800 but chose industrialization anyway. They suffered through smog, soot, health and other problems for a long time but eventually the problems were overcome by technology.
In economically advanced countries today, the air and water are in very good shape.
People’s ingenuity solves problems. Eventually. The problem with the climate change problem is the need for speed to fix it. Assuming it can be fixed at all, suppose like the air and water quality issues of the industrial revolution it takes a century or more.
Would the solution be less valuable?
Not likely. The only risk to employing evolving technology instead of destroying the economy we know, is the possibility of a tipping point. Some point beyond which no recovery is possible.
Is there such a point? Quite likely. Venus after all is the poster child for adverse climate. Its atmosphere is 96% carbon dioxide. Little chance of that here. We would be all gone long before. At concentrations in air beyond 10% people begin to have convulsions, followed by coma and death. I wonder how Venus got to 96%.
Nonetheless a tipping point is possible and using our current lifestyle as the model, there should be objective research as to where it is and how it may occur.
Emphasize growth in the Covid restart
Growth provides resources to address our well-being. I think it is safe to say that ecological purity is a luxury good. Eventually India and China will find they can afford it and they will move towards it. Other countries will benefit form the investment in the technology and will achieve the goal more quickly.
People will put up with hardship to provide for a better future. They won’t put up with hardship to solve a problem where the solution perpetuates the hardship.
Always bet on human ingenuity and growth as a reservoir for the wealth needed to change.
Other things we have learned
Politicans advance their own agenda at every opportunity. “Never let a good crisis go to waste.” The tendency to exploit a crisis is natural for them. Without crises there would be little need for government beyond a basic system of laws, courts and objective enforcement, sanctity of national borders, an innocuous way to raise the minimal money they need, and provision for national defense.
All their other actions are to speed things up. Development of culture occurs regardless of government action. Just more slowly and in more appropriate ways. Justice is an illusion that they attach to while fair and polite are doable in the marketplace of human activity.
Governments want more power.
Power is antithetical to freedom and democracy. Large governments are not people friendly.
Politicians seize power when possible. Our prime minister attempt to seize the ability to tax and spend without parliamentary oversight (while a minoirty government) through the end of 2021 is an example. The inane gun control legislation another. Use the crisis to divert attention and enshrine a position while people are looking elsewhere.
Governments are showing their true colours. I suspect there are insightful chimpanzees commenting on how their evolution experiment has turned out less well than expected.
Overview:
Trust the people to get it right. Trust the people to develop the resources needed to achieve just and useful goals. Trust the people to be persistent in so doing.
Impatience is not a virtue in matters that take a long time to develop. You cannot pass legislation to force corn to grow to maturity in 10 days. Complex change has its own pace and all the rules and money int he world won’t alter that.
In the interim notice H.L. Mencken’s thought:
“The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by an endless series of hobgoblins, most of them imaginary.”
Sorting hobgoblins from reality is hard but necessary work. Start by assignning an agenda to each new story and government action. Assess the importance of the action proposed, the time frame, and who benefits. You will find most of the news is not worth your trouble to watch and little of what the government does provides lasting benefit to you and your family.
I help people understand and manage risk and other financial issues. To help them achieve and exceed their goals, I use tax efficiencies and design advantages. The result: more security, more efficient income, larger and more liquid estates. Please be in touch if I can help you. don@moneyfyi.com 705-927-4770
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Understanding Bad Times and Good Outcomes
Behavioural psychology has forever known that people are more strongly affected by bad things than good. It is an evolutionary advantage to be aware of trauma and keep it in mind. Being attacked by a sabre-toothed tiger is traumatic but what we can learn from it helps us survive. Experiencing something good, like a new field of berries, does little to preserve life.
As we developed a division occured and is with us yet. Unlike Post Traumatic Stress Disorder, there is no analog on the good side. Post Joy Euphoria Disorder. We experience good things differently than traumatic ones and once we notice that tendency we can keep things in better perspective.
The current Corona Virus trauma is an example of how things can work out. Many people will be harmed. Some traumatically. Others will find good from it. A chance to connect to their children perhaps.
The idea we are all in the same boat misstates the situation. We are not all in the same boat, but we are all in the same storm. Some will come out of this stronger and more adaptive. Some will be destroyed. Most will be somewhere between.
Part of how we come out will depend on how we view the event. If we focus on what we learned and what that adds to our lives, we should be okay. If we focus on the bad, we will miss the value. Life is always that way. We learn from the bad more than we learn form the good.
You should read this article by Ben Carlson: Why Bad Is Stronger Than Good
It refers to research and makes good points. Fewer than 20% of people who experiences trauma experience PTSD. Some people grow under adversity.
Experience is the best teacher
And as my grandfather pointed out, “for the price it damned well better be.”
The price of the experience is the same whether you grow from it or not, so you might as well grow. Take note of what you have learned. The list may be surprisingly long:
- Mistrust politicians and their motives. They will try to expand their powers when we are focusing elsewhere.
- Most people will help if you need help
- Most people behave co-operatively when they need to
- Most people have clutter and half finished tasks in their homes. They now know they feel better when that goes away.
- Most people are surprised at how quickly children learn things.
- Most people find their job does not have to be the center of their lives.
- Most people learn they were living with too small a financial margin for error and will adjust.
Most people can see how well they would have done had they anticipated the virus and acted as if it would happen imminently. Anticipation like that is not so easy but people now will try a little harder to anticipate the commonplace things the future could deliver. They will be better organized and more content because of that informal planning.
I read a book years ago about the Harvard MBA program. It made the point that the unofficial motto of the school was “Diamonds form under pressure.” Diamonds are just coal that adapted to a different environment.
“Remember diamonds are created under pressure so hold on, it be your time to shine soon.”
― Sope Agbelusi
Make a list of things you know now and wished you knew six months ago. Learning will make you shine.
I help people understand and manage risk and other financial issues. To help them achieve and exceed their goals, I use tax efficiencies and design advantages. The result: more security, more efficient income, larger and more liquid estates. Please be in touch if I can help you. don@moneyfyi.com 705-927-4770
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Changes to Come
Coronavirus is interesting because it forces us to rethink our context. It has forced behaviours with which we have so far been unfamiliar. Like a significant portion of the workforce telecommuting. Like family gatherings by Zoom. We had a birthday party that way. And sang, using the term loosely, Happy Birthday. While people are farther away now, it seems they can be closer too.
Interesting.
It is not riskless
Some people have found they like working from home. Given the absence of interruptions, meetings, driving and parking, performance reviews, and social niceties, maybe the work can be done as well and in less time. Wouldn’t that be nice. Get up and walk to work accross the hall. (My doctor was not impressed by my walking to work each day. 15 yards, both ways.) Maybe you could have a day’s worth of accomplishments by 10 or 11 o’clock. Maybe you could have two full-time jobs.
Or, maybe not. If telecommuting becomes a serious thing, why does the employer need “you” particularly? Would a telecommuter in India, or the Phillipines, or even another state or province work just as well? If work remotely is the only aspect of your job that matters, you are at risk.
A less risky approach
Be excellent at your work. If your skill set is hard to duplicate locally, it will be very difficult to find someone thousands of miles away to do your work. Build your skill portfolio. Include things like team leader, trainer, procedure designer, and more. Creativity is hard to outsource for anything no-graphic. Work at the skills that make the remaining interactions better or easier.
Build a network that matters. It is unlikely the remote telecommuter knows that Joe in sales can arrange the company Christmas party better than anyone else. Knowing co-workers and customers in more than one dimension helps. Telecommuters will likely be highly siloed and specialized. Specialists don’t communicate as easily or as well as the more generally skilled. The world will need more generalists who can act as interpreters between the specialist provider and the less informed user.
You can outsource radiology, possibly even to a computer, but you can’t outsource a root canal or hip replacement. The same rules apply to mechanics, ultrasound techs, and repair people of all kinds. If you must look someone in the eye, or have to touch something to do your job, it will be a while until a ZOOM conference will look after it.
A strong skill portfolio as opposed to one strong skill will be your salvation. Add skills even if they are not at the specialist level. One of the reasons that Apple computers became popular in the beginning is because they offered many fonts. In college Steve Jobs attended a calligraphy course. I doubt he did it because he could see the application in computer architecture, but years later it was something he knew about and he used that obscure knowledge to add value.
Learn a liitle about many things. You’ll be surprised to discover how synergy works in your favour. Moderately deep and wide will outperform narrow and very deep.
I help people understand and manage risk and other financial issues. To help them achieve and exceed their goals, I use tax efficiencies and design advantages. The result: more security, more efficient income, larger and more liquid estates. Please be in touch if I can help you. don@moneyfyi.com 705-927-4770
