Be a failure

So here’s a question, why do we love motion so much? If motion isn’t what moves us forward, if it’s more like wasted time than productive time, how come we spend so much time on it? James Clear (author of Atomic Habits) has one more helpful suggestion here, he says it’s because motion lets us feel productive without risking anything. Action necessarily involves some risk of failure, which is obviously not ideal. Failure is the worst, or at least it seems like the worst. It’s super uncomfortable, awkward, humiliating, and generally terrifying as a prospect. It makes sense that we want to avoid it.
Malcolm Gladwell has some compelling thoughts on this topic. Based on the multitude of interviews he’s conducted with entrepreneurs and successful people, he discovered that a disproportionate ratio of them are dyslexic. Research backs this up, for some reason around 35% of company founders suffer from dyslexia compared to about 15% of the broader American population. Dyslexia is thought to be a great hindrance, what about a learning disability could push people to succeed? Gladwell suggests that the main reason for this implausible statistic is the fact that those who suffer from dyslexia have become so acquainted with failure. Take school for example, grade school provides an endless arena for dyslexic children to fail from early childhood. Reading, writing, test-taking, all of it is perfectly primed to flunk a dyslexic child. So while the rest of us were earning kudos and awards for our normal learning styles, those with dyslexia were learning a much more valuable lesson, how to fail again and again and again. People with dyslexia often demonstrate proficiency with verbal communication (because writing is very difficult), comfort with delegation (because they’ve had to rely on people for help), and other very helpful characteristics of an entrepreneur in a free market society. These characteristics are grown out of a response to failure and weakness. They’re more than a natural or genetic lean, these are learned out of necessity.
Gladwell is not the only one to theorize on the value of failure, Winston Churchill stated that “success is going from failure to failure without losing your enthusiasm.” C.S. Lewis said “failures, repeated failures, are finger posts on the road to achievement. One fails forward toward success.” Theodore Roosevelt, perhaps most famously, said “far better is it to dare mighty things, to win glorious triumphs, even though checkered by failure… than to rank with those poor spirits who neither enjoy nor suffer much, because they live in a gray twilight that knows not victory nor defeat.”
Failure seems scary, but maybe it’s time for a new perspective. Failure is actually your friend. Failure means that you’re taking risks, that you’re in the game, that you’re learning. So let’s embrace failure, let’s get comfortable with it. No more playing it safe with endless motion, we’re here to act. Be a failure, and find success.

Stop Aspiring

Aspirational material is everywhere. We see headlines like ‘7 steps to shredded abs’ or ‘how I made this much $$$ working from home’ or any other exciting material promising to help you be or have something different. Aspirational material is addictive, probably because we pretty much all aspire to things. Who doesn’t want more money or a better body or a more fulfilling job? Seems pretty natural that we’d be interested in engaging with the manuals.

Simon Sinek is his Start with Why: How Great Leaders Inspire Everyone to Take Action makes the point that all of this aspirational jargon is a type of manipulation. Here’s a helpful quote:

Though positive in nature, aspirational messages are most effective with those who lack discipline or have a nagging fear or insecurity that they don’t have the ability to achieve their dreams on their own.

By ‘effective,’ Sinek means for the company or person who creates the content, it’s not effective for the individual. Companies use aspirational messaging to sell us things, and it works. You buy a gym membership because you aspire to be healthier, and if it’s a nice gym for a great deal it’s easy to justify. An entire gym membership business model is built on these aspirations. They sell innumerable memberships, far more than the gym could actually accommodate, because they know people won’t show up. They know people aspire to be healthier making a membership an easy sell, but they also know people only aspire, they don’t want to put in the work to execute on a goal.

When we feel stuck in some part of our lives, when there’s something we would love to change about ourselves or our circumstances, we often think the problem is a lack of knowledge or motivation. If it’s knowledge, we think that either we need more knowledge or someone else needs more knowledge (probably both) in order to make progress or affect change. If it’s motivation, we think we need some sort of special inspiration in order to get us moving. Neither of those beliefs is helpful. How many aspirational blog posts do you think you’ll need to read before you’re sufficiently knowledgable and motivated to make those pounds fall off or start that passion project? If you’re anything like me, you’ve definitely put your time in with this aspirational stuff, but those hours probably haven’t paid really well. It’s fun, but it never does what we hope it will. Aspirational material is not all bad, you can find some really helpful tips and tricks buried in there, and maybe even a little motivation now and again, but it’s important to understand what that stuff can and cannot do for you. Aspirations and aspirational material can’t change you.

So here’s a little trick I picked up: stop aspiring. That doesn’t mean we shouldn’t set goals and make plans, in fact, goals and plans are the opposite of aspiration. An aspiration is foggy, vague, mostly unhelpful. It’s more like a wish than anything else. And it’s really easy to spend hours and hours thinking about our wishes. A goal is objective, something you can act on, something you can make a plan to achieve. If you want to do or be something different an aspiration won’t take you very far, but a plan of action could.

Are you track-record investing?

Track record investing is the third and last detrimental investment trap I’ll discuss here. Like stock picking and market timing track record investing is as it sounds, using track records or past history to determine whether or not a money manager or specific fund is a good investment.

Track record investing is tricky because we evaluate track records all the time, they’re a normal part of our lives. I use Apple computers instead of windows computer for a few reasons, not least among them is the track record of Apple devices to outlast their windows counterparts. I buy specific products on Amazon only after reading far too many reviews to determine the track record of said product. Track records are not bad, they’re actually super helpful. But, when it comes to investing, it’s dangerous to rely on the same mechanism we use to evaluate Amazon products to decide whether or not a money manager or mutual fund is a good investment. Here are a few reasons why:

The number one disclaimer in the world of investing is “past performance is not indicative of future results.” Why is that phrase posted everywhere? Well, first, because it’s the law. But more importantly, it’s because we so badly want to use track records to determine which mutual funds to invest in, and it doesn’t work. Like we learned about stock picking, people can’t consistently predict the market. If a mutual fund manager does well one year it does not indicate that the manager has figured something out, it means he or she got lucky. People can make guesses about the future, and they do, but no one knows the future, and the market will move based on things that will happen in the future.

A fun example of this past performance issue is Morningstar’s famous five star rating system. Morningstar has long rated funds year after year with one to five star ratings, and it’s a big deal to earn the coveted five stars. However, since 2010 Morningstar has stated that the cost of a fund is a better predictor of its future success than Morningstar’s star rating, essentially admitting that the rating system is useless for evaluating future performance. Track records cannot help when it comes to choosing specific investments.

Another issue with this past performance stuff has to do with the data consumers actually see. Investment companies are notorious for practicing something called selection bias. Selection bias means that if a mutual fund does really poorly, the investment company will kill it and expunge its data from their records so that it has no effect on the overall statistics consumers see. Unfortunately those dead mutual funds often have a drastic effect on returns for real people. The worst 200 funds that were killed between 1923 and 2016 averaged a cumulative return total of -81%. Not only does past performance have nothing to do with future results, but the data consumers see only muddies the water.

So should we shun all data when it comes to investing? Definitely not. It’s important to make a distinction between past performance data, which relates to specific funds or managers or even whole firms, and long term market data, which teaches us about how investing works and where returns come from. I use historical market data all the time, not as if those are returns my firm has achieved since the 1920’s, but to help people understand what to expect from the market, and to show them why diversification is so important. So just remember, past performance really isn’t indicative of future results. Look for an advisor who understands the academics of investing, not one who shovels you past performance data.

Be Wary of Investing Apps

Investing today is easier than it’s ever been. One hundred years ago investing options were limited, there were no mutual funds, no ETFs, it was basically banks and single stocks. And even those few options were expensive and difficult to obtain. For most people, investing wasn’t a viable option. Today we’re drowning in all the investment options. It’s become so easy, so normal, you can download an app and own thousands of equities within minutes. The ease is good, and it’s good that more people are able to own equities (equities are the best passive wealth building tool in history) but there are also good and bad ways to own equities, and the ease seems to more often promote the bad ways.

Active investing is essentially gambling, even for professionals. We know the stock market moves relative to news and emotion, neither of which is consistently predictable. We also know that the current price of a stock is the best indication of its current value, stocks aren’t ever ‘on sale’ or ‘overpriced.’ So when an active investor buys or sells a stock share it’s just a bet, a bet that a specific company will either increase in value (in which case you’d buy) or decrease in value (in which case you’d sell). Successfully buying and selling stocks is tough, and no one can consistently do it well enough to beat the market over time, not even professionals. Research shows that the outcome of this active investing style is overwhelmingly negative. That’s part of the reason why we’ve seen a seismic shift toward more passive investment strategies over the last 20 years.

However, we’ve also seen the growth of in-app investing. I’m all for cool apps, and investing apps are among the coolest, but there’s an inherent problem in using an app as an envoy for your retirement. The fact that they are so easy to use is a temptation to actively use them. The fact that they look so nice gives the illusion that we’re doing something responsible with our money. Some offer worthless, even contradictory, commentary on market predictions. Some even promote super risky options (puts and calls) accompanied by incomplete (at best) information concerning the risk involved, and even how they work. Essentially, these apps promote a sort of sophisticated gambling, which is really fun, and really bad for your return probabilities. Apps that have claimed to stand for passive investing seem to be slowly moving toward an active style as well or at least offering it.

It’s probably best to treat investing apps like gambling apps since that’s effectively what they are. Don’t be duped by the bells and whistles, they offer an adrenaline rush and a lot of downsides. Most of us wouldn’t take our retirement fund over to the roulette table and put it all on red (talk about a rush!), so don’t dump your life savings into an app.

Pay attention to asset classes, not returns

When people think about deciding between investment advisors, or mutual funds, or even stocks, the temptation is to look at past performance. That’s the default. And it seems basic, you’re looking for returns, what else would you look at? What else could you even look at?

The problem is the past performance we see is short term. You’ll see three to five year histories on your account statements, Morningstar defaults at a ten year history (if the fund has been around that long), and the news rarely talks about anything further back than the last year. Those are relatively short periods of time, especially when we’re talking about market returns. Instead of comparing past performance in advisors and mutual funds over the past ten years, we should be looking at long-term historical returns of asset classes.

An asset class is a group of similar securities that tend to move together. The main general asset classes are equities (stocks), fixed income (bonds), and cash. Each of these, but especially the equities group, can be broken down further. In equities, we see large vs small, value vs growth, U.S. vs international. For an example, a very popular asset class is U.S. Large Growth, which is basically the S&P 500. We have returns data on these asset classes all the way back to the early 20th century. That information can tell us much more than the past ten years. We can see which asset classes tend to outperform others, we can see how the different asset classes correlate to each other, and we can know what returns and risk a fund or portfolio can expect over long periods of time. A ten-year history of returns is almost irrelevant. Over ten years any asset class could outperform any other, but we don’t know when or which. So to look backward at the performance of a fund is not only unhelpful, it’s more often hurtful. A good ten-year history on a fund, or even an asset class, deceives us into thinking the performance will continue in the future. The short-term history the only information we know to use, and besides that, it seems to make sense. But that’s the opposite of a good investing strategy. Instead, let’s analyze the asset class data going back as far as it goes, understand where returns come from, and diversify our portfolio’s in a way that’s consistent with the data. Then we let the market perform and deliver results. Our balanced diversified portfolio won’t always be the big winner year by year, but over the long haul, it will outperform anyone trying to predict market movements based on ten-year histories, or any other material information.