Future

5 of the best books I read in 2019

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1. Range – David Epstein.

Range is my 2019 winner. It was the best book I read last year, and one of my favorite books related to personal development ever. By range, Epstein refers to a set of broad experiences, inputs, interests, experiments, etc. In a world that values specialization and highlights the ‘10,000-hour rule’ (which says you must dedicate 10,000 hours to something to achieve mastery), Epstein argues that hyper-focus is actually not the path to success, far more often those who have range win. Epstein encourages us to pursue hobbies and interests, to be unafraid of making a change, to never feel behind, and not because life is more fun that way, it’s actually a more effective way to live. I can’t recommend it highly enough, read Range.

2. Atomic Habits – James Clear.

There are few personal development/self-improvement books that I consider must-read, but Atomic Habits is one of them. James Clear notes that winners and losers have the same goals, what sets them apart is their systems (habits). Humans operate by default and we relentlessly fail at improving ourselves because we fail to address our default behaviors. Goals are fine, they help give direction, but only our systems can take us where we want to go. Clear guides us through how habits operate and how to make meaningful and lasting changes by changing our defaults. It’s a fascinating and fun read, and one that has had a profound impact on how I think about behavior and pursue change.

3. Factfulness – Hans Rosling.

Hans Rosling made it his life’s mission to reinform commonly help misconceptions about our world. He penned Factfulness as he battled the cancer which would eventually take his life. Through ten chapters he addresses ten fascinating topics that we routinely misunderstand (world population, poverty, bias, etc.). He emphasizes the fact that the world can sometimes be bad, while still being significantly better than it was before. By offering clarity, thoughtfulness, and objective facts, Rosling helps us to see things they way they are. It’s occasionally mind-bending, which is a good thing, and always enjoyable.

4. Born a Crime – Trevor Noah.

Born a Crime is an autobiography. Trevor Noah takes us through his wild, funny, and unlikely childhood in one of the more engaging books I’ve ever read. It’s at times hilarious (I literally laughed out loud more than once), sentimental (his relationship with his mother is remarkable), thoughtful (interacting with apartheid in South Africa), and ultimately a completely rewarding read.

5. Billion Dollar Whale – Tom Wright.

Billion Dollar Whale consistently made my jaw drop as I read it. The story is absurd, unbelievable, scandalous, incredible, and completely true! It’s about a young Malaysian fancier/businessman (Jho Low) who cons billions of dollars from the Malaysian government in a stream of devious business deals and spends it on some of the most extravagant partying the world has ever seen. The story involves Hollywood actors and actresses, world-leading finance companies, even the president of the United States. Another interesting part of this story (as if it wasn’t interesting enough) is that it hasn’t concluded yet. Jho Low is currently a wanted man hiding out, most believe, in China, but is certainly still active. In fact, his team of lawyers aggressively campaigned to ban Billion Dollar Whale from being sold, and succeeded to keep the book off British bookshelves for a year! Truly, a remarkable read.

Why Do New Year Resolutions Never Work?

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It’s January, the time of year when we aspire to be or accomplish something new. You don’t have to wait for January to decide to improve yourself, but it’s as good a time as any, and definitely the most popular time. We’re two weeks in now, the gyms are packed, we’re paying closer attention to our budgets, our pantries are full of healthier foods, you know how it goes. These are all good things, but unfortunately, studies show that about 80% of New Year’s resolutions fail by mid-February. Maybe your resolution is already floundering.

James Clear, the author of Atomic Habits, says people don’t rise to the level of their goals, they fall to the level of their systems. I think he’s exactly right. We’re good at setting goals and making resolutions, but we’re bad at making lasting changes. And it’s not because we don’t want it enough or because we make disingenuous resolutions, it’s because humans operate by default and we fail to address our default habits. Goals don’t change behavior regardless of how SMART they are or whether or not they qualify as BHAG. We need new systems, new defaults, and new habits, maybe not another resolution.

So how do we change our systems? James Clear talks about becoming 1% better each day by doing something small. It could be one pushup per day if you want to build a workout habit. It could be one call per day if you want to build a networking habit. You mold your identity by consistently doing the things the type of person you aspire to be does. Each time you do something, no matter how small, your new identity is reinforced. If I’m an athletic person, I workout. Weight loss and muscle gains simply follow. If I’m a successful salesperson, I network. Income is simply a result. My default habits would never change by simply thinking about my weight loss goal or even by putting down my income goals on paper (I, like most of us, have tried). Change requires action, no matter how small. A helpful quote I’ve come across (attributed to several different authors including Millar Fuller and Jerry Sternin) summarizes this idea nicely: “It’s easier to act your way into a new way thinking than to think your way into a new way of acting.” Alan Deutschman, in his book Change or Die, says, “It’s obvious that what we believe and what we feel influences how we act. That’s common sense. But the equation works in the other direction as well: How we act influences what we believe and what we feel. That’s one of the most counterintuitive yet powerful principles of modern psychology (p78).” He adds, “You have to do things a new way before you can think in a new way (p79).”

It’s interesting to think about the purpose of all of this. We set goals at the beginning of each year because we want to accomplish things, for sure. But I think the more significant reason we spend all of this time on goals is that we aspire to be better persons. The most basic thing we’re after is a change in our identity. I won’t stray into the mire of philosophical implications here, but I think that’s a clarifying thought. The accomplishment we’re after is a change in identity, not another New Year’s resolution. Our identity changes when our default behaviors and habits change. Act different in order to think different. Start small, start simple, do something laughably easy, and then don’t ever stop.

Year-end investor review

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We made it, another year is in the books and everyone has an opinion on where the market is going. My line of work involves me adamantly advising people not to try to predict markets, but even I have an opinion about what might happen in the future. Thankfully, there’s a difference between having an opinion and making a poor investing decision.

So where are we now? We’re coming off of a historically great period of market returns, especially in the category of U.S. large growth companies (the S&P 500, which happens to be the category we almost exclusively hear about in the news). Since U.S. large growth companies have faired well, so have investors, because the vast majority of investors have the majority of their investments in large U.S. growth companies. That’s great news right now. But it’s also a problem.

Large growth companies are historically one of the poorest performing asset categories in the free market. This holds in performance data going back one hundred years, but it also makes sense a priori. Large growth companies are inherently less risky than small and value companies, they stay in business longer, they seldom go bankrupt (it happens, just not as often), and their prices don’t fluctuate as significantly. Small companies are often younger, less established, and more susceptible to tough markets. Value companies are often distressed and sometimes never recover. These small and value companies default more often and their prices are more volatile, they’re riskier.

You’ve heard the principle, risk equals return. That applies here. It makes sense that as entire asset classes, small companies and value companies outperform large growth companies by a significant margin over time because their additional risk brings additional return. The fact that large growth companies have performed so well over these last ten years is great, but it also means that at some point we’ll see these returns balance out. Now, I would never pretend to know which asset classes will perform better or worse next year, that’s a fool’s errand which we refer to as ‘market timing.’ But I do know that most years will favor a diversified portfolio that leans toward small and value asset classes instead of a heavy weighting towards large growth companies. Next year the most likely circumstance is that you’ll be happy to have left your large growth company portfolio to get into a more diversified situation, which, incidentally, is true at the end of every year.

So the obvious question is how to diversify with a lean towards small and value companies. I’ve covered this before, but total market index funds won’t help you here, because of cap weighting total market funds are invested almost entirely in large growth companies. Index funds have become very popular over the last 20 years and, while they’re certainly an improvement over active funds, they’re inherently flawed. To get into an ideal portfolio takes an advisor committed to the academics of investing utilizing structured funds (a solution to the index fund problem).

Take the opportunity to review your portfolio as we head into the new year. The returns may look great, but that doesn’t mean you’re in a great portfolio.

Don’t worry about long-term plans

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Long term plans are tough, mostly because we don’t know the future. If you’ve got a 20-year long term goal that’s great, but it’s probably not going to happen, at least not the way you planned; who knows what will happen in the next 20 years? It’s not bad to set long goals if only to set you in a direction, but don’t marry those goals, don’t die on their hills, don’t forsake all other paths or options. People achieve success more often by focusing on what’s right in front of them. It’s called short term planning. When an opportunity arises you make a decision, you work hard at the work in front of you, you make plans for things that are actionable and semi-immediate. Success tends to favor those who, instead of working backward from a goal in the future, make a decision based on the currently available options which will give them the best range of options in the future. They actually keep their options open. It’s a different perspective, instead of an early determination to go all out in one direction or after one thing, you can take things as they come. You’ll obviously still work hard and make good decisions when options present themselves, but you don’t have to sell out for a long term goal. Don’t worry about the next 20 years, worry about the week, the day, the hour in front of you, and make the most of it.

What does ‘efficient market’ mean?

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‘Efficient market’ is one of the most important terms to understand when it comes to investing. It’s important because what you think about the efficiency of the market will dictate how you practically invest your money, which will shape your retirement and legacy.
So first, what does it mean? If the market is efficient it means that stock prices react to news and information really fast. For instance, news breaks that a company has committed fraud, and the stock price of that company falls immediately. It also extends to any small bit of news or public sentiment regarding the market or specific companies. Market prices are always moving based on new information and perceptions, and they move almost immediately upon receiving that new information. Those are signs of an efficient market. The speed at which information travels today has only made the market more efficient.
So why does that matter? Well, if the market really is super efficient, it means that picking stocks is futile. Think about it, if the market prices react and update immediately upon receiving new information, the only thing you can do to beat the market is to guess right. Unfortunately market guesses are less like investing and more like gambling. So if the market is efficient, the entire way you’ve previously thought about investing is not only impractical, it’s basically a roll of the dice. Instead of trying to beat the market, an efficient market would suggest you own the whole thing as efficiently as you can. You would diversify and hold stocks instead of research and pick stocks.
There is another important thing to recognize about investing in relation to the efficient market: people do beat the market sometimes, they sometimes pick the right stocks and get better returns than the market as a whole. It’s not often, somewhere around 90% of stock pickers underperform the market every year, but that leaves around 10% who seem to be doing something right. That 10% either figured something out, found some inefficiency in the market, or they got lucky. The thing is, it doesn’t really matter if they’re smart or lucky, and there’s not really any way to empirically test it anyways. Because the market is efficient, if a smart person does find an inefficiency it will close up before long, and if a lucky person gets lucky, they’ll also get unlucky at some point. Either way, by the time you’ve heard about their success, it’s too late. People who have beat the market in the past are much more likely to underperform the market in the future than to beat it again. In fact, they’re more likely to underperform even their contemporaries in the future. Any way you cut it, in an efficient market it simply doesn’t make sense to try to find or profit from market inefficiencies, regardless of whether or not they really exist, or to what extent.
So if the market is efficient, to whatever degree you agree, don’t try to beat it. Instead, own the efficient market as efficiently as possible.