Experts Are Often Narrow


Narrow viewing point

If you are a tax expert, everything is a tax problem. If you are a doctor everything has a cause. If you are a lawyer, the rules of court prevail. We all see things from our particular and strongest viewing point.

Experts see things we don’t

But at the same time they focus too much on what they know. No lawyer is willing to say there is a perfect agreement. That assessment would be right, too. The problem is the viewing point sooner or later dominates common sense.

They sometimes don’t see things we do.

An example from my life

I once created a tax structure that was clearly punished by a provision in the act. After careful review with the client, we decided the tax consequences were less than the potential risk to do it in a more conventional way. The structure involved a foreign property that was rented net-net and so generated passive income. The corporation was untaxed in the somewhat unstable foreign jurisdiction and the client wanted to use all of the income to reduce the debt on the property. A tax in excess of 50% would have been payable in Canada if done conventionally.

What the expert saw.

A tax quality control reviewer in the firm was astounded. You can’t do it said he. I claimed, I think you meant we can do it if the penalty is paid.  The penalty tax amounted to $12 annually. A fair price to pay to permit the extinguishment of the personally guaranteed debt in a third of the time

The conversation went to narrowness from there.

The tax act is imperfect. They make the rules and apply them, practitioners fit their plans to them. Tax people often see everything as a tax problem or a tax rule and ignore the other possibilities.

If I had a way to legally print $50 bills, a tax specialist would be likely to explain the tax consequences of doing so. In my view a useless concept, because I could print the money to pay.

Keep the big picture front and center

When organizing your financial affairs beware of rules that may apply only a little to your case. Get the general concept clear and then decide what the price will be to apply the options you have available.  If the price is less than the benefit, carry on.

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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Manage On the Margins


The margins

In planning, most of what matters happens on the margin.  The next event. What is the effect of one more unit of resource?  Like marginal income tax is the tax due on the next dollar of income.

Marginal events tend to be manageable. Average outcomes tend to hide important facts.

There are two factors to consider in most situations. Marginal income and marginal costs. Combining them makes decisions easier.  For example, the marginal revenue from another employee in an accounting firm might be $80,000. But that is not free. The marginal costs are salary, benefits, equipment, space, annual dues, insurance and many more. In many cases these would exceed $65,000. Should you hire another person?

The $15,000 of marginal income looks pleasing, but it is only probabilistic. Maybe the person will be off sick part of the year, or maybe they will not be productive enough, or maybe we cannot recover their hourly charge out rate. Possibly our overhead estimates are wrong.

It could be that some overtime from the existing staff would work better.

At least studying the margin gives us insight.

Even when we are right there is a problem.

If one looks okay, what about two? We should assess the the second person independently.

Why?

There is a condition in economics that matters

Diminishing  returns

“In economicsdiminishing returns is the decrease in the marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, while the amounts of all other factors of production stay constant.”  Wikipedia

That says that as you keep adding resource, the effect of each new unit becomes less. Eventually it might become negative. Think about it in simpler terms than production.

Suppose owning a Porsche 911T makes you happy. Consider the change from zero Porsches to one. Quite a large improvement in satisfaction. Would the increase in satisfaction be as high if you acquire a second one? Probably not. A third fourth and fifth would add even less.  Eventually the cost to look after and house them would exceed the satisfaction added by the nth Porsche.

The minimum effective dose

In medicine, a prescription may do nothing up to a certain level. Then it cures what ails you. If you go far beyond that, it might harm you. Side effects appear. The ideal level is the minimum dose that does the job.

Lowest cost. Lowest risk of harm.

So it is with finance.

What is the minimum effective does of savings, insurance, and management time? Understanding how the idea of diminishing net marginal returns works is meaning and meaning is the key to joining efficient with effective.

Every planner and plan should address that issue.

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 Constitutes Impossible?


I believe nothing is impossible

Finance seems tooii much about packaging. Packaging is about getting money. It has little to do with wealth creation. Making money.

Common sense is not demanding. 

I used to think common sense denied cryptocurrencies like Bitcoin. That denial could not be sillier.

I stand corrected. 

Bitcoin ETFs seem to be in the offing. Making it easier to invest in insanity seems counter productive, but while people buy packages without concern for the contents, I suppose it is inevitable. Packaging rules.

Another option for the packagers

If a bitcoin ETF makes sense, why not bull and bear ETFs. A portfolio of them would be amazing, right?

I fear there are people anticipating their bitcoin portfolio will fund their retirement.

For those who started late.

How about leveraged bitcoin ETFs? What leverage ratio makes the most sense? What is a fair fee structure? Keep in mind changing details doesn’t change the fundamentals.

I know there is more for me to see. I hope as an observer and not as a participant.

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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Strong Feelings Don’t Make Wisdom


Be careful

Within our field of expertise, we can make reasoned judgements about cause and effect, can predict possible future events, can see difficulties and false paths, and can see the errors of others who are not experts.

We can listen to experts talking about their field. Where we go wrong is listening to experts outside their field.

If they outside our field too, we can be mislead.

Celebrity is not expertise

Neil Young is a brilliant musician. I would listen carefully should he wish to explain the nuance of song writing or optional tuning of guitars.

I choose not to listen to his ideas about carbon and its effects on human life. Not because I think he is necessarily wrong, but because he is outside his lane. Climate is not my field and I have no way to sort out what he says.

Similarly, I would not listen to physicist Freeman Dyson talk about songwriting nor Warren Buffet talk about gardening.

The moral of the story. 

Outside our space of expertise, we are all equally stupid. We can neither offer wisdom, nor recognize foolishness. Meaning eludes us.

Do it yourself anything denies this simple observation. If you want to go there be sure you understand the risk and the cost of failure.

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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Risk Is Not Always Obvious


What do we know about risk?

In a classic sense, mathematically calculable, risk is the probability of permanent loss. Suppose you invest $100,000 for a month, and there is a 10% probability of losing $30,000 of it. So the risk price of assuming the investment is $3,000. 10% of $30,000. There are other factors too. They will total 100%. Maybe 40% chance of neither a gain no a loss and a 50% chance of gaining $8,000.

All together, expectation of making 1% in a month, $1,000. Probabilisticly.

No one would do that deal.

The $30,000 loss is huge in their mind and the $8,000 profit is much smaller, even though more probable. We hate losses and even the prospect of them sets us off.

The problem in thinking about it as a unique event.

Super wealthy people, would do this deal all day long. But, they would do it differently.  They would not do just one deal like this, they might do a hundred of them. As long as the deals are independent of each other, their gain is near certain.

That is how life insurance works. A small probability of a huge loss against a high probability of keeping the premiums for oneself.

Use the correct parameters to assess risk.

Take stock market investment volatility. There is no question the market will be volatile. The question is, does that imply some probability of permanent loss? Answer no. There must be a second factor in addition to the volatility. The investor must close their position.

The probability is a joint probability

There must 1) be adverse volatility and 2) the investor must be forced to close the position. If the investor is not forced to close the position by exigent circumstance, then there is no risk of permanent loss. All the investor must do is stay in until the volatility noise goes away.

The creation of circumstances that reduce the probability of a forced sale become important. For real investors, probably most important.

Factors that put investors in vulnerable positions:

  1. Leverage. No super investor uses leverage to spike their yield.
  2. Over concentration. Most investors have a relative limit regarding their portfolio. One I know refuses to put more than 10% of his net worth into any situation, or into any situation connected to the first one.
  3. Inadequate initial study. It is not necessarily wise to stay in an investment that has fallen in value. You must understand its intrinsic value and recognize that the market valuation is not tracking intrinsic value well. If circumstances have changed you should sell. Quit quick saves money when you know facts.
  4. Reliance on incomplete information. It doesn’t matter where the tip comes from. Could be a taxi driver. Could be a golfing buddy. Could be a super-investor. Reliance on others, even expert others, is not smart. Do your homework. Use tips only as a place to start looking.
  5. Ignoring other requirements for the money. You can’t rationally take the rent money to the racetrack or to the stock market.
  6. Overlooking the time dimension. How long will your emotions let you stay in a down position? A few weeks is not enough. Emotions, especially fear, are poor advisors.

Balancing Risk

It has been said by many that the first trick of making money is not losing money. People who make themselves vulnerable to the certain volatility in the stock market are ignoring this advice. It is not the market that imposes the risk of permanent loss, it is the person.

Be smarter than that.

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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Never Overlook A Winning Process


Why go to school?

I suppose the conventional wisdom is to learn things that are important to you in later life. Things like communication skills, writing and reading of course, but art and music too. Things like numeric skills, also a way to communicate. And access to our collective experience as humans. History, geography. Even physics and chemistry fit there.

In short, education helps us understand how our world works, and how to communicate what we know.

The social part matters to.

Be obedient, work together, be on time, and be quiet, all fall out of the industrialization of the mid 1800s. That particular group of skills is important as people move from farm to factory. Less so now.

Something that intrigues me

Education matters and I wonder is there technique training about how to learn?

Decades ago a friend introduced me to the idea of super-learning. Listen to Baroque style music while concentrating on something to be understood and remembered. The idea is the brain has a natural rhythm and it helps to support it with sounds with the same beat pattern. Who knows really, but it does seem to help with some subject matter.

Recently I came on this piece from my alma mater. Reading Aloud Helps Memory. Reading aloud is slower so it won’t work for everything, but as an adjunct to other tools it would be useful. A 5% to 15% increase in efficiency is worth noticing in any environment. As a student, it could be a meaningful difference in marks. An edge is an edge. Take it if there is comparative advantage.

Learning how to learn matters

Technique matters, and as we live in a world where those who can learn and re-learn are the only ones who will survive, it is reasonable that techniques should be also taught.

Learning well coupled with knowing what to learn and people flourish.

Flourishing is good

Once we realize that it is all history or communication, we can see the generality of the programs. Things that now seem useless and disconnected can become meaningful. Meaning is at the heart of education.

By way of example, I received this thought recently from a brother-in-law.

“I’m glad I learned about parallelograms instead of how to do taxes. It will come in very handy this parallelogram season.”

Parallelograms have little effect on taxes, and taxes have not much effect on biology, but they both fit in a more general way.

Whence creativity

Creativity is a valuable addition to our lives, and it too is under-taught. Perhaps it cannot be taught, but needs an environment where it is possible. Again technique.

Creativity often comes from joining disparate things. Maybe, properly discovered and examined, parallelograms are the answer to your tax problems.

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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Expertise Is Not About Knowledge


I have been noticing the Dunning Kruger Effect

On 29 November 2014, this article appeared in MoneyFYI as Expertise Means What? It is only slightly modified here.

Which is better: knowledge or experience? 

I submit neither is complete. You must find both present for expertise.

The road to expertise is not linear. 

To be an expert, you must know a great deal, but experience will teach you there is a great deal you do not know.  Experts frequently comment on how much more there is to learn.

True experts know where to find what they don’t know and they know generally when they should go looking. Experts have “meta-cognition” They know both what they know and what they don’t.

Experts recognize both problems and opportunities even if they do not have a specific answer. Amateurs approach it differently. The assume they know far more than is warranted.

Consider this image:

hazard knowledge

Expert contains humility.  Hazard does not.  Everything is more complicated than you think. A big part of growing up is finding that. Knowing there are things, even many things, you do not know is crucial to expertise.  Being conscious of the space of things to learn is crucial.

Some people never make the connection.

There is more to come

People who think they “know it all” are dangerous.  I tend to be cautious around people who are too positive about their knowledge or beliefs.  One thing I have learned is that I have not yet seen it all.  I expect that there are more surprises to come.

By way of recognition look for:

  • People who have answers before exploring the question fully.
  • People who do not or cannot specify what assumptions are crucial to their “answer”
  • People who do not know the range within which their answer is possible.
  • People who do not know where in the reasonable range their answer presently lies and how it is changing.

An expert planner would probably talk to you about relativity. Things like spread over inflation and share of income devoted to saving.  Spending and inflation. Potential adjustments and the need to keep track and revise occasionally.

A “hazard” planner would likely talk about absolute yield.  Probably the one from recent history.

The advisors place

If we assume you are not an expert, we can also assume that some amount of guidance will help you.  Lawyer, doctor, engineer, accountant or financial advisor.  The trick for the client is to know when they are buying “expertise” and not just someone who has noticed some dramatic but inconsequential fact.

Experience and knowledge are a formidable combination. 

Neither is sufficient on its own.  Young practitioners have better knowledge and weaker understanding of how things interact or can go wrong.  Older practitioners have lots of understanding, but are a little thin on modern techniques and equipment.

To get better results.

Knowledge is less expensive than experience. Remember you need both. The cheapest experience is someone else’s experience. Pay attention to the news, history, biographies and anything else that can give you insight into the real nature of our world and the people in it.

Have you noticed that most successful people read a lot? I doubt it is a coincidence. You might want to pick up the habit.

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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