To Win You Need To Know More Than The Odds

By: Don Shaughnessy

People are not intuitive about probability. It would help if they were.

How lotteries work

That is one of the reasons lotteries work.

In Canada, Lotto Max requires you pick 7 numbers from a pool of 49. There are 85,900,584 ways to do that. Google quickly supplies the answer to “49 choose 7” or any other combination. You could experiment.

The odds of winning the lottery are vanishingly small. But each ticket has 3 sets of numbers so 1 in 28,633,528 if you own a ticket. 0.000000034. To seven decimal places the probability of winning without a ticket is the same as with one.

For perspective, if you want to phone a friend in Canada and you know their area code, you are about 3 times more likely to reach them on your first try than win the lottery.

But we still play.

Games are easy

In games there are rules that permit only certain things to happen. You can know “the risk.”

In life, there are no such rules. You cannot know the odds of a new business succeeeding, or of the stock market being up 3% this month. These situations are uncertain. You cannot assign a probability. You can say, in the past such and such happened 10% of the time. That is not a probability because the conditions in the past are not those that will appear in the future.

Uncertainty is fundamentally different from risk.

People usually equate uncertainty with risk, and the financial press and the gurus make it seem like the same thing. It is not and we make weaker decisions when we treat the two ideas as equal.

People think of risk as risk of loss. One dimensional.

Under uncertainty, two conditions must be present. A) the adverse event must occur, and B) you must need the money back that day. If you don’t need the money back, you can wait for the adverse condition to pass and you may have no loss at all.

Unfortunately, the loss on that day will feel real even though you only make it real by selling your position.

The defenses to uncertainty

These are different from the defense to risk. Risk is one dimensional. It happens or it does not. It is usually insurable or avoidable because it is a single thing. Uncertainty is harder.

Defense #1. Understand the idea of uncertainty.

Know the returns in the stock market are unpredictable and can vary widely. If you look every day, you will see down almost as often as up and our emotions don’t deal well with losses of that frequency. Buy stocks for reasons you understand and only sell when the reasons change. The stock market price is just the opinion of all the people participating at that moment. Their reasons for their choice may have no relationship to your reality.

Defense # 2. Support

You might still need someone to talk you in off the ledge if the drop is large enough. Be sure you have someone to protect you.

Defense #3. Hold some cash.

People who are always fully invested have more “risk” than those who hold some cash. Recall the risk of loss depends on two facts. The market is down and you need your money. How often would you need all your money? Not often. Some cash might be enough. If you don’t need it and the market is down, you have buying power.

Liquidity is a valuable defense to uncertainty.

Defense #4. Match your investment to your purpose.

If you are saving to pay for education, or buy a house or a car, the need date will be closer than if it is for retirement. Plus, the need may be 100% of the money. Because the need is near and total, you cannot rely on a recovery in your time frame. That is risk. The future market price is unknown for any given future day. As you come closer to the target date, you cannot rely on the market to deliver the right amount of money. You should be out of the market and into something highly predictable.

A different look

Joachim Klement is a self-described cranky, German, economist. I don’t know if that is true, but he writes interesting articles at Klement on Investing.

A recent one deals with how people assess numbers and words and how that affects their decisions. Not encouraging. You can find it here. Likely Plus Likely Equals Very Likely? Be sure to notice the question mark.

You will find the article helps you understand how you relate to the market rather than worrying about how the market works. Understanding ourselves is crucial to success in investing.


  1. When you understand risk, insurance makes sense.
  2. The market is uncertain and that is risky only if you add the condition that you need the money on a certain day.
  3. Loses hurt. You will sleep better if you don’t look so often. If you don’t need the money, really, what were you going to do about it anyway?
  4. Choose investments that match the need. The need is where the risk lives.
  5. Learn more about yourself.

I help people understand and manage risk and other financial issues. I use tax efficiencies and design advantages to help them achieve and exceed their goals. The result: more security, more efficient income, larger and more liquid estates.

Please be in touch if I can help you. 705-927-4770

You Can’t Make The Complex Simple. You Fool Yourself When You Try

To make the complex simple, you must leave things out. You cannot know if they matter.

Does the past point to the future? We take it as sacred truth because it happened, but the only thing we know for sure is the past comes before the future. It has some meaning, but the mistake is to believe it has absolute meaning in the future.

When you think about it, the example we see and rely upon may have been the least likely thing that could have happened.

How many ways are there?

High school math is an ancient artifact, but some of its ideas remain. One of those is how combinations and permutations work.

Combinations are about how many ways there are to choose a given number of items from a collection. Permutations deal with how many ways there are to organize them once you select. For large sets of items the available results are near infinite.


  1. I know of 10 factors I think are pertinent to my problem.
  2. I am trying to confine the number of things to study so will only pick three to study at once
  3. The order I apply them matters

How many possible datsets will I get to study.

There are 120 ways to select three items from a tray of ten. When order matters, there are six ways to organize the three I chose. So 720 ways altogether.

For a simple problem with 10 factors, relying on just three of them, there can be 720 structures to study. It is little wonder people use rules of thumb, instinct, and guessing to plan.

You cannot treat a single example using the three apparently important factors as defining how the future will work.

If you were thinking of picking five, there are 30,240 ways.

How many factors are there in the stock market?

More than ten for sure. Probably more than ten thousand. The stock market has enough factors that it is chaotic. That’s why people read books like Benoit Mandelbrot’s The (Mis)Behaviour of Markets. The misunderstood reality is conventional analysis tools are incapable of a complete analysis. Where they come up short people make simplifying assumptions and so surprises will lurk. Few of us enjoy surprises when it comes to our money.

Observe rather than see

There is a difference between observing and seeing. We process seeing according to our own rules and that technique may not deal with reality very well. We revert to thinking biases and heuristics. We weigh things in ways more closely matching what we believe than what might be objective. Interestingly, we can see our own portfolio and we can observe a stranger’s portfolio. Observing uses different biases and different experience.

Combining the two would be more representative of reality, albeit still incomplete.

Sherlock Holmes made the point in, A Scandal in Bohemia, “You see but you do not observe.” His thought was followed a few paragraphs later by, “It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts.” We all do it because we do not respect the number of possibilities there are and because we want a quick and simple answer.

In complex situations there are no quick and simple answers.

Decisions in complex environments

Factors that matter:

  1. Avoid all or nothing decisions
  2. Avoid using anecdotes or single examples to support your system.
  3. Write down your reasons for starting.
  4. Analyze outcomes to help perfect those reasons.
  5. Avoid the fall in love with the inventory problem
  6. Seek help.
  7. Be humble. You are almost certainly wrong.

Well-analyzed and tracked decisions tend to be more durable decisions. The work you invest in making them is rewarded by the absence of firefighting as things progress.

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. 705-927-4770

How To Achieve Contentment By Managing Reality Better

Life seldom works out as it should. Everyone has fuzzy goals at 21 which will largely be unmet, but few would believe it. According to psychologist, Albert Ellis, we share three ideas that we think are real. Believing them to be true holds us back. We come to learn they are not real:

  1. I must do well.
  2. You must treat me well.
  3. The world must be easy.

I must do well

We come to realize “well” is comparative and focussing on comparison causes emotional problems. We should always make a conscious decision about what we mean by “well.” Failing to do so leaves us only with comparison to others and that leads to problems.

We do not compare across enough parameters. Bill has more money. Joe is in better shape. Fred has a better job. Mike’s kids behave better, and so on. Comparing yourself to an amalgam of others fails.

It fails not because of defects in facts, but because while all the comparisons are true, they are of little value. Bill has more money but is a heavy drinker and on his 3rd marriage. Joe is in better shape but has no friends. Fred has a better job but works 70 hours a week to keep moving up the ladder. Mike’s kids behave better but Mike is a tyrant. There would be a similar list for females. Oddly enough, not the same list.

Priorities matter and each of us has our own for our own reasons. We do well if we get enough of the things we value.

You must treat me well

There is no must at all in the real world. People treat you in ways that fit their version of themselves. That vision changes regularly and is often circumstantial. Maybe they just have not had their first coffee yet.

You are just furniture to most of them. Their behaviour towards you reflects them better than it reflects you. As a guideline for who to pay attention to try this, “Never accept criticism from a person you would not go to for advice.

I have told my children that outside your family, it is unlikely there are any people who think about you more than 10 minutes a year. Don’t take people too seriously and especially don’t take yourself too seriously.

I think Susan Sontag has said it best,

“I envy paranoids; they actually feel people are paying attention to them.

People are all selfish to some extent and taking time for you requires effort they are seldom willing to use.

The world must be easy

The world is immensely complex and both easy and difficult. The problem we all face is the world is easy for people in some ways and difficult in other ways. No one has it all good or all bad.

We should use that guideline to focus our attention. For business people it is a simple as do more of what you are good at and hire people to do the, hard for you, but necessary things. Key ingredients in succesful people include knowing themselves, and holding the ability to know the difference between the important and the trivial.

They recognize four conditions

  1. Important and good at it
  2. Unimportant and good at it
  3. Unimportant and not so good at it
  4. Important and not so good at it.

They will hire for condition 4 and probably parts of condition 1. You cannot spend much time on trivia and still succeed.There is a large category of the things they don’t know about at all. Some of those are things they believe to be trivial that are in fact important. To deal with it, they must be adaptive. Learn by doing.

A Path

From Shakespeare Hamlet, Act 3, Scene 1. “… to sleep, perchance to dream” Hamlet contemplates death as a solution. A usually faulty solution. All you must do is fit your life to the world a little better. Something alone “To think, perchance to plan.” There is a process.

Find the thing you like to do, find a way for it to make a living for you, find people you care about and who care about you, nurture relationships that work, continue to learn, grow, try new things.

Once you understand the world and your place in it, you have an excellent chance of making a viable plan, executing it, modifying your purposes, and achieving contentment.

Strive for contentment. Happiness is a stretch goal.

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. 705-927-4770

How Careful Would You Be To Avoid A $1,000,000 Mistake?

I have known Jim Bullock casually for many years. He is a very talented and conscientious insurance advisor with more than 20 years of litigation support in respect to denied claims. We can all learn from him. This discussion appeared recently on LinkedIn. It is addressed to lawyers, but I can assure you Jim would prefer to see the application process handled better by insurance advisors.

It is like building a house. It is probably 5%, maybe even 10%, harder to frame it near perfectly, but the rewards come later. Everything fits and is square.

The time you spend doing the applications better may very well save you a year or more of unpleasantness dealing with life insurers, E&O insurers, lawyers, and angry clients.

Take it to heart.

  • Jim Bullock 1st degree connection

    Expert Witness, helping lawyers with cases involving denied life insurance claims.
  • Jim Bullock sent the following message at 3:29 PM

    View Jim’s profileJim Bullock

    Jim Bullock 

    The Magic Question

    Lawyers ask a lot of questions in Discovery to nail down the legal issues they want on the record. If the case involves a denied life insurance claim, there are some insurance questions that should be asked that usually do not get asked, unless an insurance expert has helped the lawyer.

    Claims are often denied because the insurance company has investigated the medical history and found facts that were not disclosed on the application form. Most people will answer a question as best they can.

    Q. How many were in your graduating class?

    A. 65

    In his decision on the Hallet v London Life case, the judge said that the agent should have made it very clear that there were dire consequences if something was not done. I refer to this as a “Dire consequences warning.” Before administering an application form, I explain that every question has to be answered as fully and accurately as possible because an error could void the policy. I also explain that I will give them a copy of the questions and answers and they can think about it more and maybe do some research.

    Q. How many were in your graduating class? If you are wrong there is a $1 million penalty.

    A. I will get back to you on that.

    Most agents administer the application health history questions as a casual quiz and record the answers the same way. No warning about how important the questions and answers are. So one of the Discovery questions should ask about what warnings or explanations he was taught to deliver before completing an application. Almost all will say they had no training and did not give any special warnings. This is the first step in developing the case that the poor answers were because of the agent, not because of any deception by the applicant.

    Step two is to consider some of the questions that almost have to be answered “yes” to which the agent recorded a “no” answer. A question on most applications asks about …”Ever had a symptom, diagnosis, treatment for and disorder of … eyes….throat…” and the answer is almost always “no”, even though the applicant was sitting there wearing eye glasses, prescribed to correct myopia. And many applicants have had their tonsils removed. In such cases you can make an argument that the agent was not paying much attention to answers he was recording.

    And then there is the “Magic question”. It is often answered “yes” by the agent in Discovery and means that he, in effect, told the applicant he did not have to supply much information about his medical history.

    If your firm ever gets a case involving life insurance claims (or disability or critical illness) I would like to see the file before Discovery. The questions I would want to be answered often lead to a prompt settlement once the other side realizes how poorly the agent performed his duties.

    I help business owners, and professionals understand and manage risk and other financial issues. To help them achieve their goals, I use tax efficiencies and design advantages to acquire more efficient income and larger, more liquid estates.

    Please be in touch if I can help you. 705-927-4770

How To Decide If Investment Management Fees Are Worth Your Money

I have believed for a long time that you cannot pay a good teacher too much and you cannot pay a poor teacher too little. I further believe the same holds true for investment managers.

Index Funds

The current wisdom is the market is efficient and no one can beat the market for very long. Therefore the idea of paying someone to do it is foolish.

Most of the time I would agree with you although a fee to someone to help keep you on track and objective about how the market is working is often well spent. We all over-estimate how risk tolerant we are. While the market was down 40% or so in 2008-2009 many sophisticated and apparently risk tolerant people panicked. Sometimes we need someone to talk us in off the ledge.

But that says nothing about investment management fees.

A Comparison.

You should not pay for so-so management because an index fund will get that for you. If you pay a little to keep yourself focussed, it will work. But what of the not so average.

If you invested $1 in the S&P500 index in 1988 and kept it to 2018 you would have $20. Not terrible. Average rate of return is 10.5%. Before fees, and taxes, but those would be more personal. So that is the standard. An average manager should be no better, a weak fund less, although most of them did not survive the 30 year period.

Let’s look for better.

A dollar in Berkshire would have become $100. Clearly there is bit of Alpha when you look at Buffett. Average return 16.6%. A 6% management fee would have made the return average.. There are several managers who have returns in the above average range.

One of them is far off the normal playing field. Renaissance Technologies – Medallion Fund. If you paid a management fee of 51% of assets each year from 1988 to 2018, you would still have beaten the S&P.

The best

A dollar invested in the fund in 1988 and held to 2018, would have become more than $20,000 net of the fees they do charge. I’ll bet you did not think there was a fund that outperformed Buffet 200x. Average return more than 39%! For 30 years!!!!! I don’t know what the sigma is for that but it is a largish one.

Maybe there are investors earning more somewhere, but they are not easily seen. Some funds might outperform for a year or two, but thirty years speaks to a method.

The obvious point

The market is efficient most of the time, but not all of the time. Maybe it is efficient all of the time but there is a lag to adjust. In some way, the Medallion Fund is playing by what is actually there not what is theoretically there.

You will recall, theorists think theory and practice are the same while practitioners think they are not. Sometimes the practitioners break away and just do it.

Are trained finance people the key?

Finance trained people may not be able to see the anomalies. It is interesting to notice the Medallion Fund founder is not a finance guy. He is a mathematician and has no finance centric biases. When I was in the accounting business I preferred to hire bright people without a degree in business or commerce. They started further to the back about finance and financial reporting, but caught up quickly and were more insightful about people and communication issues.

I knew someone in the early 70s who ran a small hedge fund and averaged 20% a quarter for more than four years. He had simple tastes and quit. He too knew next to nothing about “the market.” He could tell you it was Tuesday and raining in New York so KLM would open higher. It was 50-50 he could not tell you what business the symbol KLM was for.

Life is about correlations and patterns and those are not the same for each of us. Huge interactive markets like the stock market are more like quantum physics than Newtonian physics. Chaotic with tendencies, not predictive. Sometimes you get too close.

Two problems for us

  1. History says little about the future. The Medallion Fund could crash and burn like Long Term Capital Management. We don’t know what they do and how they do it so there is no way to judge that. Practically, they are so far off the normal, they cannot be assessed using conventional wisdom.
  2. You cannot judge a startup. No one could look at the Medallion example and pick out the conditions from their 1988 position. We could likely identify the conditions that were present but not necessarily those that were of key importance. Most of what we see mathematicians call necessary but not sufficient. You cannot tell in advance who will win this game.

Where next

There are different ways to succeed.

Buffett is the master of buying businesses with certain key markers. He and Charlie Munger are very strong on the common sense of their model and have made huge sums for themselves and others.

Jim Simons of Reliance started in a different place (mathematician and code breaker) and did well too. He, no doubt, has skills on the technical side, in hiring, and in leading a crowd of very unusual people. I doubt those skills are easily measured.

You will enjoy Nick Maggiulli’s article on the fund. It is worth a look. The Greatest Money-Making Machine of All Time. Watch the linked video in the article.

In general

For now, like shopping for new shoes be sure you get, as a minimum, the value you pay for. It will be easier if you know what it is you are buying and how to assess its value. That’s meaning. If the fees mean you are not keeping pace with something passive, you should look more or just go to passive.

Also decide what is the sufficient yield for you. The yield you need to reach your goal. If you are getting that, maybe the cost to get it is not that important.

Investing is about what it does for you, not so much what the yield is.earn to keep track of what matters.

I help business owners, and professionals understand and manage risk and other financial issues. To help them achieve their goals, I use tax efficiencies and design advantages to acquire more efficient income and larger, more liquid estates.

Please be in touch if I can help you. 705-927-4770

You Need To Know About How Taxes Compound

Governments get the value if you don’t work at fixing it.

Suppose your great grandfather set aside $1,000 for you on the date of your birth and required it remain invested until you become 80. He further invested it so it would grow with compounding interest at 7%. You pay taxes all along the way and let’s assume you do so at 35%.

When you cash in your investment it will be worth $35,150. Over the years you will have paid $18,388 in income taxes.

How much would you have had with no tax?

Hint: It is not $53,538, the total of tax paid and money kept.

It is $224,234. $18,388 in taxes lost costs $189,085 in lost income. Of all the potential income of $223,234 you kept just $34,150. You lost 84.54% because of taxes. Taxes compound just like interest.

In the game of income and income taxes, there are just two players. You and the government. At the end of the game you can compare who has what. If player 1 (You) does not have the money, then player 2 (the government) must have it because there are no other players.

A more realistic example.

You are 40 and one of you and spouse will live to 90. How much security will you have at 90? 50 years from now. Some the money you have now will still be there in your estate. That money was security the day before. remember.

For each $1,000 left tax exposed for 50 years, you will have $9,251 and the government will have $20,206. They will have that even though you sent them only $4,443 in taxes in the 50 years.

An option to consider.

If you have fully used your tax free savings account you could deposit capital into a life insurance policy and earn tax deferred interest within it. If you take the money out at age 90, in the example above, you would receive $29,457 and owe taxes on $28,457. Even if your rate is higher than the customary 35% you would have more. It would have to be 68.5% to breakeven with paying as you go.

Think about it.

Tax management is a fruitful way to spend your time.

John Maynard Keynes “The avoidance of taxes is the only intellectual pursuit that still carries any reward.”

There are ways to minimize your tax loss. You should use them or decide not to for reasons related to your personal situation.

I help business owners, and professionals understand and manage risk and other financial issues. To help them achieve their goals, I use tax efficiencies and design advantages to acquire more efficient income and larger, more liquid estates.

Please be in touch if I can help you. 705-927-4770

Beware! Relying On An Historic Path Is A Trap

Next Thursday is Thanksgiving Day in the United States. In Canada it was a month ago.

Each Thanksgiving, one thought occurs to me.

Turkeys don’t understand Thanksgiving.

Understand the path they are on. They are provided with shelter, water, sufficient food, and protection from predators. Each day someone comes checks the water supply, checks them for injuries, and refills the food tray. They must think they are very important for this human is quite attached to them and provides well.

Then, one day something different happens. They turn into the food for dinner on Thanksgiving.

Why the change?

A turkey can become immune to the possibilities if it relies on its history to estimate the future.

You are not a lot different. Every investment prospectus says, “Past performance is no guarantee of future results.” yet everyone tries to use past results to pick a fund. Chasing yield based on the past is a losing tactic. The problem is path-dependency. If you invest or spend based on history you will be wrong. Think future first not past first.

Hopefully the end game will be less dramatic for you than the turkey, but path-dependency is a an easy way to fall afoul. Pun intended.

Be cautious of outcomes that seem preordained by the historic path. We never know all the variables.

I help business owners, and professionals understand and manage risk and other financial issues. To help them achieve their goals, I use tax efficiencies and design advantages to acquire more efficient income and larger, more liquid estates.

Please be in touch if I can help you. 705-927-4770

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