When To Fight


The United States is leaving Afghanistan soon and the locals will no doubt revert to the dark ages they experienced before the US took an interest in them. They had a chance after the Russians left, but they squandered it. There is an interesting movie about it. It might have a few of the facts straight. Charlie Wilson’s War

What was the lesson?

They missed a chance to do something that might have worked. They got involved later when things had become a threat to them. They did not put their maximum interest into dealing with what they found. While initially having modest success, they did not finish. They left after spending enormous amounts of money and many lives.

The lesson is simple. One many parents pass on to their children.

Don’t fight if you don’t need to. If you do need to fight, win.

Good advice for the children. Even better for the governments of the world.


I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com

Change is Changing


I think it is fair to say the past 18 months have imposed more change than any period since 9/11. Perhaps more than any since the first half of the 1970s.

We dislike change. Change forces us to rethink old patterns and ideas. We are faced with uncertainty. Uncertainty is uncomfortable.

People value predictability highly and when it is challenged, most become disoriented.

This time is different

In times past, changes in our approach to society and values has been limited to changes in how we saw other people in the world, how we addressed resources, how we saw each other.

This time though we have been faced with a virus that is easy to catch,. We don’t really know how lethal it is because we don’t know how the death reporting system works. We do know it affects older people badly.

We have accepted the unproven word of “experts” and politicians. We have disrupted normal commerce and social interaction as a result.

Governments have become comfortable with using power instead of debating to find the best approach. Fair enough in an emergency but there is not a lot of evidence that shows the going back to sharing and debating ideas is imminent.

Some branches of the civil service have come to enjoy public notice and power.

The chaos of thought has given purchase to people wo have different motivation for society than was common a few decades ago.

Some of our associates in other countries are now seen to be malevolent.

Media of all kinds has become untrustworthy.

 

Society is different now

I have met no one recently who is comfortable with the trajectory of society and culture.

What should we do now so we are well positioned five years from now? No one knows but there are ways to address the problem.

Think through

How should we invest?

Rethink how markets work and how they generate prices. Those prices may be quite wide. People set prices in the market based on their thinking and emotions. Uncertainty will magnify volatility.

Understand that a stock represents a fraction of ownership in a business. If you invest in businesses instead of stocks, you must come to understand how much a business is worth. The simple answer is it is worth what it will earn. Learn the idea of present value of free cash flow.

How will our context change?

  • Will familiar laws regarding property remain?
  • Will tax rates become confiscatory?
  • Will government become involved in businesses?
  • Will religion be protected and respected?
  • Will interest rates be forced higher because of deficits in government finances?
  • Will higher education have any practical value?
  • Will public education improve?
  • Will mRNA vaccines become common and thus reduce many other problems?
  • Will AI solve many problems?
  • Will businesses move production back from China?
  • Will some regions do badly while others thrive?

If you are like me, you have no clue how any of those will play out.

What we can believe in

People solve problems as they clarify them and can choose options.

There is a risk in deciding what must happen and committing to the answer. Good when you are right. But it is the pioneer problem. Many of then ended up dead.

Better to begin systemic solutions.

  1. Build flexibility.
  2. Pay attention to changes.
  3. Defend. Manage taxes. Guarantee interest rates you pay.
  4. Governments change. Anticipate the possible differences.
  5. Be patient.
  6. Involve others. No one can keep up to everything. Share research and possibilities.

The takeaway

People solve problems as they move along. The mistake is to try to solve an entire problem in one event. few problems are amenable to that approach. Evolve your answers. They will be better.

Think about problems that will undoubtedly solve with evolved answers. Climate change is one. The process will be find the defence. find the alternative that works in the intermediate term. Wait for technology to develop and provide a permanent solution. Viruses are another. We are just now developing tools that may provide a way to deal with any virus.

Good health is good health. Take better care of yourself. Life is more enjoyable.

Be curious. Things may not be coming along they way we expected five years ago, but they will be interesting.

Enjoy the ride and what you can learn.

Opportunities exist.

 


I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com

BiC Doesn’t Build Bridges


Marcel Bich created a business in 1945 at Clichy, France. He recognized the need for inexpensive, disposable products. His choices included ballpoint pens, lighters, and razors.

His approach recognized that not every person, every product, and every situation required both high quality and durability. Sufficient quality to use for a time would be quite enough. And it worked. The market cap of the company today exceeds $2.5 billion.

Where the idea breaks down

Some people have become accustomed to the idea of disposable. Some people act as if everything is disposable. Price dominates their decision. There are losses in that approach. They have to rebuy, and cannot tell when the device will fail.

Advantage too. You don’t have to think.

The idea of buying or building something that will last seems quaint. That would require thinking, ongoing maintenance, and repair. A very experienced businessman told me nearly 50 years ago that if you buy good equipment, keep it lubricated and repair the worn moving parts, it will last forever. That was the attitude of people pre-1970. It had to do with frugal and a value set that has become obsolete

Where we can see it

Surfside Florida is suffering through a catastrophic collapse of a 40-year old building. We don’t yet know the cause. It could be design error, maintenance deficiencies, or perhaps environmental factors that were not addressed well. Seaside buildings suffer from salt air and hurricanes.

It doesn’t stop with things.

How many divorces are there? Why? Relationship design error? Poor maintenance?

What it means

There is nothing fundamentally wrong with the idea of inexpensive, disposable products. Many applications do not require durability or operating perfection to accomplish their task. I use an electric drill about five times a year. I don’t need a high end product because durability and precision are not part of my use matrix. A cabinet maker has other needs and does not own what I own.

People should acquire things that provide the solution to their particular problem. Many don’t define their solution details well enough, if at all, and they end up with poor results.

Consider when people expect a disposable product to work as well and last as well as the higher quality item. Superficially, they may be similar but the end will come sooner. Sometimes catastrophically like in Surfside. Sometimes fashionable items can be non-durable because they go out of style. There was a time when a sofa was made to last forever. You can still get ones built to that standard but their price is three times more.

Finding a match

People have lost the ability to understand their particular purpose and to know enough about products to get something that matches. It is true in everything from razors, to cars, to life partners, to high rise buildings, to bridges and highways. Price has become the value indicator. By itself, price is a foolish metric to assess value. Even if the price was 75% off retail, would you buy and use a factory-second parachute?

If you want something to both do the job and last, you must notice two facts.

  1. You won’t get it cheap
  2. It will require maintenance.

The takeaway.

You can pay a known amount now for all the functionality you need, or you can pay an unknown price in the future because you paid less now and it fails for want of durability.

Notice an adult fact of life. Cheap is expensive.

If you don’t assess your requirements in advance , you cannot possibly know if a given product will suit you.

Understand fit before price. If two products address the same problem and one is cheaper, it is because some quality available in the higher priced one is missing from the cheaper one. You cannot get more than you pay for. Sometimes you pay for some aspect or feature you don’t need. That’s not wise either. It isn’t easy.

Money is not the only way to pay. Consider time lost, or defective output. Emotion when looking at failed relationships.


I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com

Finding Business Opportunities


American 3-star general and former National Security Advisor, H.R. McMaster offers insight into engaging in warfare with the United States.

“There are two ways to fight the United States military. Asymmetrically and stupidly.”

To fight asymmetrically is to avoid your opponent’s strengths and target weaknesses, or at least lesser strengths.

It is the same for businesses. 

Suppose you want to become a multi-millionaire. You could create a business to compete head to head with Amazon and expect to become a multi-millionaire, but only if you began the exercise as a multi-billionaire. Likely not even then.

To fight a capable competitor in ways they are strong is foolish. 

No one and no business is uniformly strong. Look for the niche that is up to now unseen, or too small to be of interest.

Like Toby Lutke. He set up Shopify and has earned several billion dollars for his trouble.  It looks a little like Amazon, but avoids their strengths. Shopify is more decentralized and is more of an assistant online retailer. Online retail is an important part of our lives, but is far from idiot proof.

Invest in a helper

In theory, everyone could do online retail but a helper shortens the time and provides some order. That was an early strength with EBay. It didn’t deal with wide scale sales though.

As an investment approach, investing in the helpers is not so spectacular, but it is more predictable.

In the Gold Rush of the mid 1800s, few prospectors and miners made money. Most lost their stake. But, the food and hardware providers, the saloons, and the assayers made money. In the early 1980s a smart stock market manager told me there is some money, but not a lot, to be made by investing in mutual funds. His recommendation was to invest in the companies that managed mutual funds.

In the 1920s there were more than 100 companies involved in “radio” the newest next big thing. Of those, RCA was the only survivor and it was 1954 before its stock achieved its 1920s price level. You cannot reliably predict the winners in new markets.

Smart investors avoid the hype and look for the businesses that can support all of the entrants in the new, next big thing.

Find the helpers

The key, as is always true in capitalism, is to find the helpers. Some help people and they can become big businesses. Microsoft, Amazon, Apple, Google, and Netflix all became large by helping individuals do what they wanted to do. Sell to retail is a very complex business model. It can be smart to avoid that part of the world.

The top tier of business selling to people is clear only in retrospect. What happened to Woolworths, K-Mart, Blockbuster, and A&P? Who would have picked Walmart in 1965?

The helpers of the helpers are a bit easier. Intel and TSMC help any entrant in the semiconductor or computer business. who supplies cash registers to Walmart. Who supplies tires to GM, Ford, Chrysler, Toyota and the others? They can get along even if some of their customers struggle.

A question that will clarify the idea.

Would you rather be in the electric car business or be a battery maker?

For bonus marks, Would you rather be in the battery building business or the battery-management, software business?

The Takeaway

When you are investing look for asymmetries.

You can make a return buying the market leader and you can likely lose your money buying someone who thinks they can compete with them.

Look for niches. What is the per unit margin on a Ferrari versus that on a Ford Escape?

Large general purpose businesses like Ford, need a significant market share to get along. Ferrari could sell a few hundred units a year and be profitable.

Some niche businesses are the early entries in new industries. You will do great if you find one of those. The horse and carriage was the big personal transportation business at one time. Cars were a niche.


I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com

Chaos Is The Normal Condition


Chaotic systems have the characteristic that output is not necessarily proportional to inputs. Tiny variations in input can have immense changes in output, The idea of a butterfly flapping its wings in Texas and causing a hurricane in Jamaica. Similarly a huge change in input might have no effect on output. Or the butterfly wing flap might prevent a typhoon in Bangladesh.

We know how it works in general but lack the tools to assess the effects before they occur.

Chaos is everywhere

Markets are chaotic, relationships are chaotic, businesses are chaotic, and society is super-chaotic. There are too many variables operating in ways we cannot see or understand.

I can tell you from experience computer programs work that way too. Sometimes a tiny change will do what you thought it would do, but there are secondary effects elsewhere in the program. Rather like harmonics and overtones in music. You get more out than you expect and not always welcome.

When Twitter and Facebook tweak the metrics in their algorithms for “hate speech” they really don’t know how it will affect the outcomes.  If you have enough variables that can interact the result will be random, or at least appear to be.

I would be surprised to find Twitter or Facebook know how their algorithms work.

People and Relationships

Understand relationships and how they form. There are so many possible connections with even a few variables we have difficulty assessing the results.  For example if you have 10 people in an office, a single person could have 9 relationships. Likely all a little different.  Altogether though here are 45 possible pairs. There are 120 ways to create a 3-person committee, and 252 ways to create a 5-person task force.

The numbers grow astronomically as the group becomes larger. With a group of 100, there are more than 75 million ways to create a 5-person task force. And even that number is not big enough to account for how people are different day to day or situation to situation. If you created the 75 million groups, would they all reach the same conclusion given identical input?

More people, more social friction

I recall this question from a seminar on organizational psychology. It is overstated but makes a point about the confusion of large numbers.

If it takes 4 carpenters 10 weeks to build a house, how long would it take 8 carpenters? You would like to think 5 weeks, wouldn’t you?

Answer at least 20 weeks. There is a price to pay as the number of potential relationships increase.

Other situations

I wonder what the right number of members of parliament would be? There is likely some number where the only thing that gets done is argument.

Polygamy must be chaotic.

Are the dynamics of families with many children different than those with few?

A crowd behaves differently than any individual within it would behave.

There is a right number of people for any task. Too few may not work. Too many will not work.

With telecommuting people are beginning to see how work-relationships work and what is missing when there is only an electronic interface.

Casual meetings have value. You just don’t know what it will be beforehand.

The takeaway

Do not take for granted that the relationships of people, instructions, or facts, will produce a unique outcome.

Understand a little about combinatorics. We are not intuitive about it. That’s the theory of lotteries. How many ways are there to select 7 numbers out of 50. More than 100 million.

There are many ways to connect things. Even small numbers of people create an enormous number of possibilities for choosing a smaller group. As the number of possible connections grows, unforeseeable combinations can create problems.

Expect the unexpected.

There are 435 members of the house of representatives in the United States. How many unique 10 person committees could you create. More than 60 quintillion. A quintillion is 1,000,000,000,000,000,000. Oddly enough, I thought there were more than that now.

You can never be certain of a particular outcome when people are involved. You cannot be sure of the same outcome the second time. Complexity grows with numbers. Learn to manage without certainty. Decision making with incomplete information is necessary.


I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com

Options Provide Control


When you have choices, you get better answers to meaningful problems. The future is unknown and the cost to get absolute control is near infinite. Options provide a way to get control without spending as much as a purchase would require.

Suppose you might need some asset in the future. Maybe it is the land beside your factory, or the movie rights to a book, or a lease allowing oil exploration. In all cases, you could just buy the property, but most do not. After all, you might not be able to use it and will have tied up scarce capital to no advantage.

The question is an important one

How can I control something I might need in the future without tying up too much capital? Most businesses own assets because they use them not because they want to own them necessarily. Ownership is a degree of control, but expensive. Leasing is fine but for shorter periods than forever. Those work when you know you must use the asset.

When you don’t know you will need to use it or not, many people use an option.

Some options

An option is a contract that provides the right to choose for a fee. They may be simple or complex. In the book case, a producer may acquire the right to choose to turn the book into a movie script and produce a movie from there. The option provides control while studying feasibility. It costs much less than a purchase where the control element is complete, but if the movie seems infeasible, what do you do with the rights? Options are about inexpensive, usually time limited control of an asset that may have use.

In the stock market you can purchase options. A call option gives you the right to buy a security at a fixed price for a period of time. The premium you pay may be lost if the call expires before the security rises enough to validate the price you paid. A put option gives you the right to force someone to buy a security from you at a given price for a given time. Again you may lose your premium should the security’s market price move against you.

Some managers write options on their portfolio as an additional source of revenue. Usually funds that are more interested in income than capital appreciation.

Speculators often use call options as a way to participate in a stocks movement without paying the price to buy it.

Options look simple but are subtly complex. Be vary cautious until you understand them. Recall Buffett. “Risk is what happens when you don’t know what you are doing.”

Insurance is a form of option

Take life insurance. There is a small probability that a healthy person might die in the coming year. Their family might need a very large capital sum to replace their expected earnings. If they don’t have the money at hand, they will suffer. Like the movie producer, not knowing if the need is there, the person acquires an option on money to be delivered on the happening of some event. Death.

Other forms of insurance operate on the same sense of optionality.

The premium or fee for the option is tiny compared to the capital controlled. It’s tiny because the probability of the event is tiny.

Life insurance contracts come in many forms. The form of contract deals with many things. How long will the option exist. Term insurance is like this. The premium to cover a long time is higher than for a short time. The premium for all of life is higher still. But that form of insurance comes with a different option. Should you decide to discontinue the option, some forms of coverage will allow you to receive a refund of part of the money you paid. Some forms are rigid, others flexible.

You can usually find a budget sensitive plan that addresses your particular needs.

The takeaway

Options are a way to control access to some asset without owning it

Options are usually more affordable than purchasing the asset.

Options are a useful way for people to influence what happens in the future.


I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com

Treat Important Decisions More Formally


You cannot pay attention to everything, but you should pay attention to decisions that are fundamental to enjoying your future life. The reason is many of them will turn out wrong or at least ineffective.

If you keep track of decisions. maybe in a diary or something similar, recording the purposes of the decisions and the reasoning and details that support it, when it goes wrong you may be able to see the factor that made it inadequate for your purpose. Most the time you’ll find the method was wrong. Often it was too cheap. Cheap is expensive and price is a poor metric to assess expected value. Once in a while, you will find the idea behind the decision was wrong for you or for the times. Impulse purchases and other similar decisions land here.

That’s a lot of trouble. Why would I do that?

There are two reasons.

  1. Most of the troubles you find in your life today are the result of inadequate decision you made some time in the past. Quite often “did nothing” is the decision you did poorly. You decide to do nothing and it is a valid decision, sometimes. By the same token, most of what works in your life is the result of good decisions.
  2. Analyzing decisions and comparing the intent to the outcome is what education is about. We call it experience, and it is reputedly the best teacher.

Education is expensive.

It is especially expensive if you finish the course and fail to learn the material.

Most of us learn by compare and contrast. This is what I decided. This is the tactic or method I chose. These are the resources I applied This what I expected. Each should have a why part for context. For tactics usually a why not list.

The final step is what happened? By comparing the time expected, the resources consumed versus expected, the outcome versus expectation, you can assess what was right and what was wrong with the first decision.

Thus armed , you can continue it, cancel it, or amend it. You will do so with more actionable information than you had in the beginning. If you did not record the beginning decision, you will just know it didn’t work and that is not good enough for addressing future similar decisions.

Good results evolve from decisions that change.

The takeaway.

Almost no decision is ideal from the beginning.

It is a mistake to stick with a failing method.

It is a mistake to not discover what changed and why.

All experience is expensive.

Decision making is like golf. You get better at it if you practice and analyze the results.


I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com

Some Thoughts On Markets


I have noticed that successful stock market investors share one characteristic. They do not believe in the correctness of the “Efficient Market” and consequently do not rely on “Modern Portfolio Theory.” The majority of them do not have portfolios in the conventional sense of the word. More a collection of businesses.

While Buffett, Munger, Klarman, Li lu, and others have had success with that approach, few investors have the skills and patience necessary to make it work. Others, like James Simon, and all of the high volume trading programs, have relied on the market’s inefficiencies to make their money. Again few have been successful. The reality seems to be the market is neither predictably efficient, nor predictably inefficient.

So, how should the rest of us think about our investing strategies?

For at least the last 25 years, I have had little faith in the stock market statistical theories. There is considerable effort and a few Nobel prizes involved in their development, but they are inherently unsatisfying. I am a fairly causal observer of the market as a whole, but even I have noticed the market is inefficient in the short term. That makes sense because while it is theoretically possible that all of the information is in the price, we don’t all get the information at the same time, nor do we understand it in the same way. People take time to sort things out within their own paradigm.

In statistics an implicit assumption is that the observations are “independent and identically distributed.” Identically distributed means the probability of one observation is the same as another and independent means they don’t influence each other. I would assign a very low probability to the idea of i.i.d. being true in the stock market.

The next apparent approach is from mathematician Benoit Mandelbrot. The father of fractals and a contributor to chaos theory. If you look in this blog over the past few days you will see some of his thoughts. I think the best we can do with his ideas is notice them. Application is well beyond the ability of almost everyone.

They distill to Mandelbrot’s five rules:

  1. “The market is risky”  (riskier than it appears.)
  2. “Trouble runs in streaks.” (Violates the i.i.d. principle)
  3. “Markets have a personality.” (Violates the i.i.d. principle)
  4. “Markets mislead” (The thinking we use to understand them is incomplete at a minimum)
  5. “Market time is relative” (We see time as linear while Mandelbrot sees it as more complex)

For me this is an example of where the words are perfectly reasonable, but their implications are opaque. You will be forced to spend some time and effort to come to grips with them or you could merely set them aside with a vague awareness.

Rules 1 and 2 are pretty familiar. “The trend is your friend” is the everyday thought for Rule 2 and “The trend is your friend until it isn’t”  satisfies Rule 1

Rule 3 is familiar too. Sometimes it is enthusiastic, even euphoric and other times pessimistic bordering on depressed. The market is made up of the decisions people make.

Rule 4 is true but not because markets set out to mislead. It has to do with how we observe the market. People generally cannot accept information that is outside their experience or knowledge.  Anything new is first attached to what we already know. If the observation tool is biased or inadequate we reach wrong conclusions

Rule 5 is the difficult one. Mandelbrot decided that sometimes time is compressed and other times it is dilated. The market could make sense in a linear time way if you adjusted for the differences, but then you wouldn’t have reality. Complicated idea.

It’s on us

The basic problem is one with which we are vaguely aware. Mandelbrot describes the problem like this, “The brain highlights what it imagines as patterns; it disregards contradictory information. Human nature yearns to see order and hierarchy in the world. It will invent it where it cannot find it.”

As always, “We have seen the enemy, and it is us.” Walt Kelly

Take a look at Mandelbrot’s book The (Mis)Behaviour of Markets. You likely will not fully understand it, I know I did not, but you will get a new perspective. A new perspective is where your next creative idea will come from.


I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com

Unreasonable Expectations Harm


Most of us have an idea that the world is at its foundation, rational or at least reasonable. When you step back to the 50,000 foot view it comes obvious that is not quite the way it is.

One of the forms of thought is the idea of an efficient market. In essence, the market is probabilistic and susceptible to being analyzed with statistical methods. While that is easy enough and seems to work most of the time, there are still events that don’t fit the model. The crash in 1987 is one such. If the market is more or less a normal distribution, a little narrow and a little to the right of center, then the probability of that event is impossible. Something like a 23 sigma event. Sounds not so bad, but if the model works, if the market had been open every day since the creation of the universe, such an event would be near impossible. If you had a billion such universes, finding the one event like it would still be improbable.

Markets are chaotic at least some of the time.

Benoit Mandelbrot has suggested markets are chaotic. Chaos theory is a “the branch of mathematics that deals with complex systems whose behavior is highly sensitive to slight changes in conditions, so that small alterations can give rise to strikingly great consequences.” {Google} Most of what we see in the world every day is more chaotic than we would like.

If the stock market is chaotic and there is evidence to suggest it. then we should have expectations that are are consistent with that rather than based in closed statistical possibilities.

“If you are going to use probability to model a financial market, then you had better use the right kind of probability. Real markets are wild. Their price fluctuations can be hair-raising-far greater and more damaging than the mild variations of orthodox finance. That means that individual stocks and currencies are riskier than normally assumed. It means that stock portfolios are being put together incorrectly; far from managing risk, they may be magnifying it. It means that some trading strategies are misguided, and options mispriced. Anywhere the bell-curve assumption enters the financial calculations, an error can come out.” Mandelbrot

Mandelbrot offers another thought, “In a networked world, mayhem in one market spreads instantaneously to all others—and we have only the vaguest of notions how this happens, or how to regulate it So limited is our knowledge that we resort, not to science, but to shamans.” It has not always been so. When information took weeks to percolate into consciousness, the results were less impactful. People had a little time to think about it.

When Lincoln was assassinated, it took a couple of weeks for the word to spread to everyone. Today, it would be fully disseminated in minutes. The ability to act before thought causes turbulence in the markets.

Should we build chaos into our thinking?

Mandelbrot again: “In finance, I believe the conventional models and their more recent ‘fixes’ violate the Hippocratic Oath to ‘do no harm.’ They are not merely wrong; they are dangerously wrong. People think that risk means that if you invest $10, you may get back $11 if you’re lucky, perhaps $10.30, but somewhere close to $10. In fact, if you look at the actual data of trading, not for every price, but for the important prices on the market, large price changes are observed often enough to matter a lot. If one does not take account of the possibility of a price going up very suddenly, or going down very suddenly, one takes a risk that is higher than anyone wants”

It is clear. In misunderstanding the market, one takes a risk that is higher than anyone wants.

If you expect the market to be more predictable than it is, you can be badly harmed. That possibility should inform some of your thinking. It tends not apply to individual stocks, although they will all be dragged down in the whirlpool. It relates more to the markets taken as a whole.

A secondary factor that comes out of it, is that diversity won’t help much. In times of chaos all sectors are correlated. “…. mayhem in one market spreads instantaneously to all others”

Tiny factors leading to “strikingly great consequences.” is not a place you can play safely unless you are alert and curious. No doubt there are opportunities too, but only students of the market will notice them.

Anticipation derives from noticing what is going on, and is better than a hasty response in times of emotional turmoil.

Be prepared. At least know the possibility of ultra-volatility exists.


I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com

Models Are Not Facts


I have been fascinated by how frequently people believe models. Models are not facts. Models are a projection of what would happen if certain variables continued to behave as they do now, into the future.

Given change, not too far into the future although they won’t tell you that.

Problems with models.

Most models are simplistic. Some have only a few factors, others more. I know of none with 100 variables. I know of no real world situation with as few as 100 variables and even if there were one such, I doubt the weighting of them, and their relative importance, is known with certainty.

Some modelers are dishonest. They select the data to prove some idea they have. Modeling and statistics are closely related here. You can make a model say anything you want. You just have to choose the parts carefully, then build the interactions as you want. Voila! Proof.

In nature there are thousands of factors and millions of people. Have you noticed that some people are not very affected by mosquitoes? They have type A blood. People with type O are affected, often badly. Should that have an affect on transmission of Malaria. I suppose it should, but I don’t know. If it does, it seems likely that people in malaria affected areas would have evolved to where more have type A. Or maybe there are 3,000 different kinds of mosquitos. {Google} Do they all have the same aversion to type A?

We, and therefore our models, are no better than the data we know, choose, and how it interacts.

Any model presented for public influence should have warning labels. Like drug advertising. Six seconds of what it does, and 24 seconds of how it can harm you.

Why build models?

If models can’t be right why do them at all? Seems a good question? Many are immensely expensive to build and operate. Like weather forecasting programs.

The answer is simple. Models provide insight. Insight is not a proof, it is just another way to see what could be happening. The idea is to find something actionable from a combination of facts and interactions.

Retirement planning

Retirement spending depends on the capital that supports it. That number relies on savings, investment income, taxation, rate of withdrawal, and expected inflation.

To forecast what happens, people build a model forecasting over a long time. For a 40-year-old about 50 years should work, but medical science being what it is maybe 60 years. Running out of money is a problem. A big problem.

Pick the variables:

  1. Desired spending
  2. Adjust for inflation
  3. Expected investment yield
  4. Expected tax.
  5. Solve for savings

Pretty straightforward. If you are familiar with spreadsheets, you could build it in a few minutes.

But what about the details?

  1. Could you change your spending if required?
  2. How big a margin for error do you need? Amount or percentage of the whole?
  3. Your tax rate before retirement is likely higher than after.
  4. Would tax sensitive investments like RRSPs be better?
  5. Inflation is not a constant
  6. Investment yield is highly variable over short period but no so much over long periods.
  7. For some investments, the yield varies with inflation
  8. How did you decide how much spending must be supported from investments? You will have other income. Employer pensions. Tied to inflation or not? Government plans. Part time work or business
  9. Where do savings come from? From income, or will there be inheritances or downsizing of houses, or sale of vacation properties.
  10. Will savings increase with inflation?
  11. Will savings change with other factors? Children leave home, mortgage paid off. When?
  12. Will spending stay at the same level or after retirement, will it reduce as you age? When would that start?
  13. What about potential risks like long term care, assistive health appliances or therapies, drugs.
  14. If only one of you remains, can the survivor manage the investments or should they become simpler?
  15. Does simplifying shrink yield

Suddenly we have more than 20 variables and some issues around deciding when to apply the changes.

What the model will show

If you made it more complex and allowed changes from the initial one, you will spend much longer building it, but your win is you will understand the problem better.

By permitting change, the model becomes more dynamic. There will be different answers depending on what you assume, when, and by what degree you permit change. You can experiment and see where there is likely to be a serious problem.

One that nearly no one notices is the loss because someone died just before their pensions start. Commuted value might be worth well less than the future income was.

The most common problem is fluctuations in the stock market. They don’t matter a lot during accumulation. Those average out. But when withdrawals have begun, a sharp drop in the market means you are drawing a bigger share than intended from the capital. You could amend the model to draw a percentage instead of a fixed amount. More variables.

If you build a model and tinker with it for many hours, keeping track of what happened, you will find there is much you are guessing at and cannot control.

You don’t have to know everything in the beginning just keep track and adjust as times change. The model will give you insight into what to be alert for as well. Anticipation and having options is key to success.

Some thoughts about forecasting

“There are two kinds of forecasters. Those who don’t know and those who don’t know they don’t know.” John K. Galbraith

“Wall Street spends too much time making predictions about unpredictable things” Martin Whitman

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

“Recessions are easy to predict, except for the timing, location, cause, magnitude, and duration.” Morgan Housel

“Forecasting is like trying to turn lead into gold” Philip Fisher

“Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the models. Beware of geeks bearing formulas.” Warren Buffett

The takeaway

You get the idea. Models and forecasting cannot be relied upon to forecast the future, but they will help you understand your situation.

Once there, you can assess responses and ideally get an idea how previously unseen approaches would work.


I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com

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