Charlie Munger is an American businessman, investor, and philanthropist who is best known for his long-term partnership with Warren Buffett. Having just reached his 99th birthday he is perhaps even an example that the true fountain of youth is prudent financial decisions.

Famous for his dry wit and cutting insights he has spoken about a technique which can best be described as — ‘the power of not making stupid decisions.’ This technique involves considering the opposite of what you are wanting to achieve. Effectively reverse engineering the right decision.

It’s a surprisingly good tactic. We as humans were programmed to survive, which lends itself to us finding it easier to identify risks. Effectively using loss aversion to your advantage.

With that in mind, with a bit of a tongue-in-cheek post, here are 10 ways in different areas of your life you can go out and ruin your life!

10 Ways to Ruin your Finances 💷

1️⃣ Constantly change as much as possible. 🏃‍♂️

Portfolios need to be regularly switched from asset classes and fund managers otherwise they go stale. Tune into finance journalists and take guidance from ‘best buy lists’ at all times.

2️⃣ Act on market news. 🚨

If you get in quick you can profit on this news before anyone else realises.

3️⃣ Listen carefully to people with no money. 💰

They often have good advice on why things are worse than expected.

4️⃣ Start tomorrow. 🕰

You will be able to save more tomorrow, when you are feeling better.

5️⃣ Read LOTS of book — then do nothing. 📖

Trust me, book number 43 is going to be a game-changer.

6️⃣ Favour complex investments that are difficult to understand. 🤔

Your friend with no money will be really impressed when you tell them about the 300% ROI you were promised.

7️⃣ View getting any professional advice as an unnecessary cost, not an investment. 👩‍⚖️

File your own complex tax affairs. In legal matters, represent yourself at all times. Build you own financial plans, look to critically evaluate all your own decisions and be your own financial adviser

8️⃣ Always live for right now!

You could die at any time and due to that, all your money needs to be spent immediately.

9️⃣ Equate volatility with risk

Have all your money in cash so it is available at all times. It’s safer that way. Better yet, keep it under your mattress. View all who invest as gamblers.

🔟 Take no accountability

You weren’t taught about finances when you were young. You can’t possibly learn now. It’s too late.

10 Ways to Ruin your Business Life 📊

1️⃣ Try help the biggest market possible 📈

The wider you spread your net, the better chance you have of success.

2️⃣ Stop improving 🧗‍♂️

Your competition is way behind. You have plenty of time.

3️⃣ Ignore secular trends ⏳

Everything will remain the same going forward, there is no need to adapt.

4️⃣ Fail once, then quit ❌

You gave it your best shot. It’s clear you are not cut out for it.

5️⃣ Tolerate bad performance 🙈

This will not spread to other areas and it will figure itself out.

6️⃣ Avoid difficult decisions 👀

Try to forget things that feel hard and make sure you procrastinate in other areas.

7️⃣ Remain busy on unimportant things👩‍💻

All time spent is equal. As long as you are turning up, you are doing well.

8️⃣ Focus on revenue and ignore profit 🤑

Revenue is a bigger number and it’s more fun to concentrate on the bigger number.

9️⃣ Stop doing what works well

You need to try new things with no track record and ignore your main revenue sources.

🔟 Think you can go it alone in all areas 🏝

You are an island, you do not need any help to develop.

10 Ways to Ruin your Relationships 🫶

1️⃣ Don’t talk when something is wrong 🗣

It’s their job to figure it out. They should understand this.

2️⃣ Never give any ground ✋

They will admire you resilience.

3️⃣ Be vague about your problems 🤷‍♂️

If they can’t figure them out, maybe they’re not the right person.

4️⃣ Be quick to criticise their behaviour 😤

How else will they learn?

5️⃣ Never provide support 😏

You’re not in this to carry passengers.

6️⃣ Choose a partner who has different values in as many areas as possible 💸

This will not create unmanageable tension on things going forward.

7️⃣ Think mainly about yourself 🤨

It is quicker and easier to do this.

8️⃣ Don’t tell the truth 🫥

They will love the mystery this creates around your character.

9️⃣ Ideally have nothing in common 👥

This will make it easier to have more time to yourself.

🔟 Hold a negative outlook on life

They will find your endless pessimism endearing.

10 Ways to Ruin your Mental Health 😨

1️⃣ Compare yourself to everyone 🙇‍♂️

You are the best in every area. This will not make you feel inadequate.

2️⃣ Believe that life is fair ⚖️

Life always makes sense and owes you an easy ride. When that doesn’t happen — take it personally.

3️⃣ Think everyone else is looking at you 🫣

They have little else on and have been waiting for your next move. Make sure it counts.

4️⃣ Expect perfection from the outset 💯

If it’s not brilliant when you start, then it’s a waste of time. Everyone else managed perfection, so why can’t you?

5️⃣ Interpret failure as a personal failing 😑

Everything you do that doesn’t go to plan was a direct consequence on your own actions. You cannot learn from this and be better.

6️⃣ Give up on things easily 🫳

It will make you feel better once you accept it was too hard.

7️⃣ Complain loudly and often 🔈

It’s good to reinforce your views and people will warm to you world view.

8️⃣ Define success specifically through things you can’t control 🎛

This will make your journey more fun and varied.

9️⃣ Be unforgiving to personal failures 😵

You are the only person who has ever made a mistake. This makes you a bad person and incompetent. Nothing will ever change that.

🔟 Eat badly, don’t exercise and take no breaks 🍔

Your mind is a fortress and these things don’t matter.

My first proper job was customer service for the worst hotel chain in the UK. A call centre.

For me, it was the epitome of where hopes and dreams went to die.

Nothing quite a shocking for an 18-year-old then doing a 10 hour shift and speaking to over 200+ frustrated people. The constant cutting tone and indignation about the poor quality of, I kid you not, rooms which once sold at £11 per night.

There were points in the day across the malaise of the incoming calls, complaints and of course occasions bookings the Team Leaders would bark:

“30 calls waiting guys…. Can we speed it up?”

“That toilet break was over 4 minutes, would you mind watching your time next time?”

“For god sake guys!!?? Did someone cut off a furious lady trying to book in for Blackpool?!”

The job itself was never taken as my first step into a career in hospitality. It was taken as it was commutable, paid I believe £6.50 per hour at the time which cleared minimum wage by a whole £1 per hour for the time. (Don’t worry dear reader, it was £7.50 for evening shifts.)

And frankly, at 18 years old and having only worked serving tables prior. What I offered to a prospective employer was somewhere in-between a human paperweight and doing my best not to get in the way.

It was never intended to be the origin story for the next mogul hotelier. Painting a picture of an extremely baby-faced version of myself scheming in the corner while booking in £35 dinner, bed and breakfasts and manically saying to myself “soon….. all this will be mine.”

No, I was doing it just to make ends meet to pursue my other passion.

Around the age of 15/16 I’d started to get really into music. Beatles, Bob Dylan, The Stones and all of that. This was somewhat of a surprise, even to myself, as academically I’d always been very business and economics focused. Music though had never been anything I’d been interested in at school. Part of this may have been because at 13 we’d be introduced to music lessons as -

“Sit down kids and why don’t we have a listen to some Bach?” 👴🎼

Over a period of a few weeks around my 16th birthday I had started creating something which sat somewhere between atonal, and a bag of cats. But….there was enough there to keep me interested to learn more. At the time, I was all the cliché versions of teenage dreams. It makes me cringe thinking about how seriously I took it.

The truth is though, I loved creating. Something about the strange focus when hours dissolve over a keyboard, a guitar or at the time, an 8 track recorder. Combined with the typical idealised version of what it must be like to make music for a living, I was hooked and desperate to ‘have a go’ at pursuing it. Whatever that meant.

This did however create some very pressing problems for me:

1. Where I lived was not so much ‘the centre of musical activity’ but more Narnia’s commuter hub.
2. I wasn’t very good at music at the time.
3. I knew absolutely no-one in the music industry and had no real clue how to go about getting into it.

This led to a carefully and strategically thought out of plan which started and ended with “go Manchester… there be music.”

This began a near decade long-journey. From working days at a job that I despised, to evenings to rehearse at nights for various incarnations of bands. Managing personalities, creative projects and yes, as I found out, the very true-to-life stereotype of inconsistent drummers.

All this played against the backdrop of Manchester’s Northern Quarter and Ancoats. While now it is viewed as ‘one of the coolest neighbourhoods’ in Europe. It was at the time, much more Joy Division and for Ancoats, a whole lot more stabby.

One of bands I was in eventually settled in a rehearsal room in the basement of ‘Sunshine Studios.’ Now owned by Boohoo’s Billionaire owners. It was down the steps to dark and very dingy rehearsal room in the centre of Manchester’s Northern Quarter and at the time, produced bands and artists who saw reasonable success. Bands like The Ting Tings, HURTS, Wu Lyf (bet you never heard of them) and Bipolar Sunshine rehearsed either next door or down the hall.

Looking back at spending 5 of the what for most the ‘most fun of your life’ working in a call centre, to then spend evenings in a dark rehearsal room on music which 99% of the time went nowhere probably wouldn’t appeal to many. It was pretty brutal looking back, getting back at 10pm-11am at night after work and rehearsals wasn’t unusual. Then to do it all again the following day. But at the time, I was passionate, naive, young and dedicated to seeing how far it could go.

One of Steve Job’s most famous speeches he recounted how he dropped out of college and only as a consequence of this he stumbled across a class in calligraphy to learn beautiful and subtle typography.

All of this was entirely pointless, until through a mixture of opportunity and timing, it wasn’t. Jobs puts it perfectly in saying:

“You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something — your gut, destiny, life, karma, whatever. Because believing the dots will connect down the road will give you the confidence to follow your heart, even when it leads you off the well-worn path and that will make all the difference in your life.”

Life for us all is like that. Things that are formative, but in ways that we can’t recognise at the time. While we are still breathing, any outcome is only the previous chapter. Like the ancient Chinese proverb, ‘maybe so, maybe not, we’ll see.’

Success is fleeting for most, but the uniqueness of our experiences and even failures is how we create real life alchemy. It is this appreciation for the frankly bizarre combination of events, which can open doors in ways you could never envisage at the time. Jack Butler sums this up in this video called ‘stop being average — world class market creation’.

He combines his core skills of Graphic Designer, frames that through the lens of philosophy and packages it through motion design.

For me it’s one of the best videos I could give to anyone in their 20’s wanting to succeed. The skill is being able to layer the circles of different outlooks and disciplines in a way that creates a specific brand/identity/etc. It’s exactly the same broad concept that Naval draws upon here when he talks about ’specific knowledge.’

I can only reflect now that taking and sticking to that job for 5 long years was probably one of the best decisions I made. Certainly not for the experience, that was dreadful. It did however give me some pretty brutal lessons of the sharp end of the world of work and my young, often egotistic and certainly stupid teenage version of myself needed this.

Many years later when I would reflect on the whole experience, I look back and conclude:

• Had I left that terrible job early and hopped around. I don’t think I would have been able to part fund the project which eventually led to going full time as a musician. The ultimate lesson in the importance of persistence and delayed gratification.
• Had I not against all logic, talent at the time and reason. Decided to ‘give it a go.’ Would I have found myself here or been able to turn my hand to content creation, this channel that I’m grateful you follow. Something that had big implications for my future career.
• Would I love my job as much if I hadn’t had the earlier experience to contrast it to?
• Had I gone immediately into the more business-focused route as I’d initially planned. Would I have had the same perspective?

These are things that we can only speculate on. Life is a series of paths, constantly unfolding.

Looking forward into 2023 and embarking on new projects at work which combine content creation, client education, marketing and systemising our processes. It’s clear looking backwards that without the earlier experiences, there is no way I would have had the skill set to do this.

Life is an endless array of possibility. It is unpredictable and that should be embraced. Be it the market dips, the change at work, the life event on a rainy Tuesday which throws everything in up in the air.

Perhaps it’s just a mindset, but I do believe there is always scope to take comfort whatever your position, as long as you adapt and iterate. There is always the chance the dots will connect looking backwards.

As Jobs says — “Because believing the dots will connect down the road will give the confidence to follow your heart, even when it leads you off the well-worn path and that will make all the difference in your life.”

— — — —

Next time I’ll be building on this sadly, true-to-life story with — “You don’t know what you want.”

2022 by all measures has been tough for investors.

Stock markets are down, and global bond markets seeing potentially their worst performance in history.

Inflation ravages the pockets of all of us. Let’s be honest, few are getting a 10% annual wage increase as part of their contract.

In the markets, as is painfully common. We are seeing the great REAL wealth transfer.

One that occurs every 4 or 5 years. What is this? — It’s not a statement on millennials inheriting the family property as they get older. This one is far more common.

It’s the one Warren Buffet warned about:

“The stock market is a device for transferring money from the impatient to the patient.”

Or, as JP Morgan is attributed to saying:

“In a bear market, stocks return to their rightful owners”

The madness of investors

Real financial assets, the ones well diversified and built upon owning the great businesses of the world, are simply a belief that humans will continue to adapt, innovate and improve.

All of history shows us that despite how bad things may seem, it is foolish to place a bet against this. When the stock market falls, it feels like things are becoming ‘riskier.’ This is not the case.

A market which falls in price increases in value.

Wary investors seem eager to run away from what all of history shows us will be a great opportunity in hindsight, at precisely when future returns for global stocks are more attractive than they have been for years.

Those who feel things are bad right now will freely acknowledge “I think it will take 2–3 years for things to get better.”

Leaving cash on the sidelines and not joining the dots for a market which has dropped 20% from all-time highs means that if things return to the previous all-time high in 2 years, that would be an 11.8% return per year from the current values.

They wait for things to feel better before going back in. Re-joining at the longer forward march instead of taking advantage of the declines. The definition of buying high.

There is only one solution

Discipline and a patient view are not particularly appealing.

It is contrarian to the news cycle and perhaps human nature.

Equity markets cannot be consistently forecasted, much less timed. The only way to be certain of capturing the full permanent returns of equities is to remain fully invested during their temporary declines.

Every successful investor acts continuously to the plan; failed investors react to the current events of the economy and the markets.

Don’t lose sight of the long-term and give back your future returns to those who understand this.

I’m not sure if you’ve noticed this as well, but right now sentiment is a little bleak. As I write this, The Bank of England is predicting a recession by August. Energy bills are skyrocketing and most social media feeds are somewhere between predicting chaos and armageddon.

Surely, even the most steadfast of views, the most optimistic, must be feeling a little bit doubtful?

I started a little experiment to see how much of my waking hours were made up by some form of ‘news consumption.’ Here were my stats:

⏰20 minutes — morning while trying to wake up drinking a coffee 🥱
⏰15 minutes — lunch 🍴typically I’d either be flicking through the news on my phone while eating or have the news on in the background depending on where I’m working
⏰25 minutes — at least through various points across the day, whether it’s going to meetings and getting radio updates in between music. Or, on public transport trying to be productive but not immune to the barrage of notifications and ‘urgent’ news events.

That takes me up to a nice, round and highly generalised hour a day which I think, intentionally done or not, is probably about accurate. Reframed, that is 6.25% of normal waking hours devoted entirely to taking in current events. Over 15 whole days of the year to the ritual.

How unusual am I?

Ask yourself, if you totalled the cumulation of notifications, doom scrolling, time in between meetings, waking up in the morning or relaxing at night with it on in the background. Are you that different?

The problem with this is, well…..:

(Source — Guardian)

I am not suggesting we embark on the new dark ages and hide from our reality. I am just asking the question…

How much is too much?

The challenge with life is that simple heuristics don’t explain a complex world. All the below can be true at the same time depending on your mindset and where you look. To borrow from ‘Our World in Data:”

I believe the next 6 months to a year are going to be tough on all normal metrics. It’s not for me to predict the trajectory of Russia’s actions or other events entirely outside of our control. However, I think it’s safe to be mindful that when October rolls around and energy prices spike, perhaps Russia threaten or cut off gas to Europe. The news will inevitably be a bit bleak.

The pragmatism of optimism

We must be stoic to the reality that you do not exist as an economic forecast. We can only control our own individual situations and do what we can for others. We cannot influence global events and we shouldn’t pretend we can try. We can however control our mindset when faced with this. It is important to recognise that human history is, after all, a story of overcoming impossible odds. If you want to see the odds of you existing, follow this link.

On a wider scale, we don’t have to look back far to see evidence of overcoming odds most would predict would cause catastrophe. Like perhaps, when we put pulled the entire global economy off the rails for a few months as we did in March 2020. History really is, one damn thing after another.

I have no doubt that the next 30/40 years are going to be littered with crises and events which feel like the end of the world.

I also believe that people are incredibly resilient and resourceful if they are required to be. After all, our times of greatest challenges often spur our greatest innovations. Invention and development of radar, computers and penicillin all were innovations born out of conflict.

Good financial management cannot stop life from being challenging but health and wealth are the 2 elements that nobody can ‘opt out’ of. So it is reasoned to think about making sure each element is as good as it can be.

What separates those who are financially successful from the failed investors — is their ability to stay in their seats when things get scary. The market has always ‘climbed a wall of worry.’

It may be controversial, it may be counter-cultural, but the big picture is things really are better than they have ever been.

Stick to the plan. Stay in your seat.

To your financial future

(Source — Our World in Data)

In 1825 the American Railroad Revolution was about to change the modern economy. New Jersey legislature awarded a charter to Colonel John Stevens to build a railroad between the Delaware and Raritan rivers. That year Colonel Stevens operated the first locomotive in America a 16-foot “Steam Waggon” which travelled around a circular rail track in Hoboken at 12 miles per hour. Over the next 10 years, this developed into passenger and freight services and the railroad quickly started to spread.

At the time, railroad technology competed with the existing modes of transportation such as wagons, stagecoaches, steamboats, and canals. These were hardly ideal for a country as vast as the United States. Wagons were slow and expensive, stagecoaches were uncomfortable, steamboats were dangerous and limited in scope, and canals froze over in winter. At the time the railroad was not the obvious next step for the future of transportation. In fact, initially, railroads were widely regarded as having only limited commercial applications. The new technology had its issues, sparks would be thrown off by belching engines which would set fire to buildings and fields as it passed. At speeds of around 20 to 30 miles an hour, there were seen to be “fatal to wagons, roads as well as to human life.” It was, however, a new and emergent technology which would lay the foundation for the modern economy and the future of the United States.

At the start, nearly all the railroad organised as corporations were funded by private investors. By 1850, railroad building had become more ambitious. Milage expanded from 9,021 in 1850 to 30,626 in 1860. By the late 1850s, railroads had become the dominant form of transportation in the United States and slowly, across the developed world. This was a technological revolution. In today’s modern society with the ability to order items via a click on your phone. The concept that a train would change the world seems laughable but in the 1800s, the ability to move goods, supplies and people in that way was a true game changer for the economy.

Imagine you had been gifted the foresight as an investor in 1830 to invest in this emerging industry. One that would change the world.

From 1831 had you invested 1 dollar in the US railroad, the average investor would be down to 60 cents in 1860.

Despite, the fact that before the event you had backed a technology that would change the world. You would have still lost money.

This, believe it or not. Is common.

Despite the internet being omnipresent in our lives today. Had you invested in the NASDAQ at the peak of the dot-com bubble in 2000, you would have seen a 78% decline. Although the internet in the following decades changed the world.

In the so-called ‘’tronics boom’’ of 1960–61, stocks of electronics companies making products like transistors and optical scanners soared. It was called the ‘tronics boom’ because stock offerings often included some garbled version of the word ‘’electronics’’ in their titles. Though backed by the promise of a new future and with the allure of new technology, by 1962 the majority of these stocks had lost 90% of their value.

The continuing case of crypto

I have always been a crypto sceptic, in its current form. I genuinely can’t see a good use case for it beyond money laundering, Ponzi schemes and speculation. I do however acknowledge that it could end up spurring on a new technology that we simply can’t see yet. Similar to how it would have been near impossible in the early days of the internet when you had to turn off your home landline to get online. To understand the real impact apps, social networking and Amazon.

The problem I have and will continue to have with cryptocurrency is that it appears to claim that a de-centralised system is somewhat a development for contract law. Smart contracts claim to be able to handle complex transactions. However, proponents of this seem to miss the reason why it is so useful to pay for larger items by credit card, use the banking system when purchasing a house, or do any financial transaction with a regulated entity. Is that there are stringent controls in place to protect against fraud and misrepresentation. Beyond straight currency swaps, most transactions in the economy require a ‘trust-based system’ where a 3rd party is intentionally in the middle so that both can be held accountable for the deal. Without this, the whole system collapses.

Perhaps I am blinded by many of my own biases. Even if I am wrong, like the railroads of the 1850s or the dot-com companies of the late 1990s. It may be true that technology could change the world, but it may not make a good investment.

Financial history is littered with stories of investments being bid up on the promise of a new world-changing technology which is detached from how much the investment earns or produces at the moment. The lessons here are clear. As part of human nature every so often investments associated with new technologies get caught in a speculative bubble, and it appears that the sky is the limit. But in each case, the laws of financial gravity prevail. Benjamin Graham, the co-author of ‘’Security Analysis,’’ the 1934 bible of value investing, long ago put his finger on the most dangerous words in an investor’s vocabulary: ‘’This time is different.’’

The investment criteria

The simplest way we can avoid financial disaster is to avoid permanent capital loss. This is losing all your money, which I talk about in this video. There are few worse outcomes in investing than returning to zero. Thankfully, we can avoid this almost altogether by setting personal investment criteria.

This criterion should be something that doesn’t change depending on moods, feelings or circumstances. It is simply what you are willing to ‘die on the hill’ for as far as your convictions. Something that despite how the world turns out, is based upon the evidence across hundreds of years of market progress gives you and your family the best possible chance of achieving financial security.

It will be up to you to decide what yours are and why, but here are mine and my reasons:

• It must be well diversified

Because we have to be humble to the fact we don’t know the future.

• It must be capable of delivering a higher income (ideally and)/or a higher capital value for the future

Because over time, this will outweigh short-term movement.

• It must be a low or reasonable cost

Because otherwise, the costs can outweigh the returns

• It must avoid punitive taxes

As above.

• It must avoid speculation or unnecessary risk

Because I acknowledge that fooling myself is the easiest thing to do.

Yours is yours to consider, just remember:

“When you stand for nothing, you fall for everything.”

Market efficiency is one of the core components of many people’s approach to investing. Although it is often misunderstood and this can lead to some dismissing it entirely.

The concept of market efficiency is mainly cited from Eugene Fama’s seminal paper in 1970, “Efficient Capital Markets: a Review of Theory and Empirical Work,” Fama defined the market to be “informationally efficient.” What that means is, in essence, prices in each moment incorporate all available information about future values.

How this occurs is a natural byproduct of a competitive market. As traders can enter a market relatively easily and at a low cost with institutional investors having access to leverage easily. Mispricings could be extremely beneficial to traders to exploit as they simply could arbitrage them.

An arbitrage simply is a description of buying a security in one market and simultaneously selling it in another market at a higher price, thereby enabling investors to profit in a risk-free manner.

Due to this, the extremely high degree of competition in financial markets from traders and algorithms means these mispricings are typically traded out of existence. If all pricing comes back to supply and demand. Then the price would be expected to correct if it was sufficiently out of kilter with the consensus, bringing it back into equilibrium or an ‘efficient’ price based on knowable information.

Whether you believe the market is efficient or not. It is irrefutable that developed markets certainly behave as if they are efficient. In an efficient market, prices would be extremely difficult to predict and as a consequence, most active managers would underperform after costs. This is exactly what occurs. The evidence is overwhelming that active managers, although incredibly well funded, in the majority struggle to beat their respective benchmarks.

Despite this, it remains one of the most contentious areas in finance. Whether this is human pushback to a concept that feels ‘unnatural.’ Or, the various anecdotes which appear to dismiss market efficiency. Such as Robert Shiller’s ‘Irrational Exuberance’ of the 2000’s tech bubble and the existence of the ‘Santa rally’ (the fact that markets tend to perform well before the end of the year). It seems illogical that both a market can be efficient and seemingly irrational.

There are however some key misconceptions about market efficiency which can help enhance our understanding of this.

MISCONCEPTION 1 — An efficient market is one of ‘perfect pricing’

There is no such thing as a ‘perfect price’ of security. An efficient market is subject to corrections as new information becomes available. An example of this would be the COVID crash of March 2020. It is not that the market was ‘wrong’ prior to the extent of the COVID crisis. It is that as new information became available to market participants in a way which was significant enough that the market began to price this effectively.

A security’s pricing is one of consensus and this does not have a direct relationship to ‘perfect hindsight-driven pricing.’ It is absolutely possible for prices to change as new information and a new consensus develops. The question is more for the investor — are we certain enough of our position to go against the consensus of the market in a way which we can exploit? This is best summed up by a response from Richard Roll, an academic financial economist to Robert Shiller in response to market inefficiencies:

”I have personally tried to invest money, my client’s money and my own, in every single anomaly and predictive device that academics have dreamed up. … I have attempted to exploit the so-called year-end anomalies and a whole variety of strategies supposedly documented by 23 years of academic research. And I have yet to make a nickel on any of these supposed market inefficiencies … a true market inefficiency ought to be an exploitable opportunity. If there’s nothing investors can exploit in a systematic way, time in and time out, then it’s very hard to say that information is not being properly incorporated into stock prices.”

While the spoils are most certainly there for the contrarians, when right. The vast majority of market participants find themselves ‘bleeding at the side of the road’ while trying to outguess the market. Market pricing is based on one of the most complex and adaptive systems we know. Those who go against that on the basis of single narratives, often embroiled in various biases, can find themselves in deep trouble. Even if you are right, you also have to be right for sufficiently long enough for the collective consensus to come into line:

“The market can remain irrational for longer than you can remain solvent.”

MISCONCEPTION 2 — Human biases cannot exist in an efficient market

An efficient market is just one which reflects available information. It is just that, information. An interpretation of the information being ‘right’ is a human and subjective view. Therefore it is fully within the concept of market efficiency for Gamestop pricing to exist. As far as, investors exhibit a preference for a certain security separated from its fundamentals.

MISCONCEPTION 3 — A market is ‘fully efficient’ or ‘not at all’

Andrew Lo cited the concept of ‘Adaptive Markets.’ These are ones where efficiency develops as the maturity of markets does. In effect, how efficient a market becomes is a dimmer switch, not an ‘on’ or ‘off.’ Lo cites similarities to Darwin’s theory on evolution stating that markets themselves go through phases of development where they become more efficient the more mature the market is.

The academics are still debating this, but this framework could provide a guide to understanding how liquidity can impact the development of markets. It could provide a bridge between the very data-driven elements of asset pricing and the stages less developed markets progress through to arrive at efficiency.

What can investors take from this?

This comes down to what I believe is my conclusion on the views toward market efficiency. Much of the confusion about “efficiency” is down to ignorance of this definition. Market efficiency does not claim that pricing is perfect. It is just an explanation that pricing reflects available information and available information can be deeply flawed and inaccurate in hindsight.

What should be considered a more relevant question for the investor is if investors can perform better than the consensus? Are our individual biases and blindspots less risky than the consensus?

Whether like in physics we are yet to find a truly unifying theory of general relativity and quantum mechanics. In finance, we are yet to find a theory which spans the mathematical pricing of market efficiency and behavioural economics. If you would like to learn more about this then there is no better place to start than the debate between the 2 biggest names in Academic and Behaviouralist Finance, Eugene Fama and Richard Thaler which you can watch below:

Are markets efficient?

The behaviourists may be entirely right that market efficiency is, in many ways, a flawed model but they themselves fail to provide any other legitimate alternative. It is after all, far easier to be reductive than conclusive.

I would argue that like in physics, without a robust unifying theory, it does not matter how devout a follower you are of quantum mechanics. If you decide to walk off the top of a 100 ft high building, you will still feel the full weight of gravity as you fall. To the same extent, it does not matter how much you believe in market inefficiencies if this belief will likely lead to sub-optimal investor behaviour.

Until we can find a better theory which creates a better framework for pricing than the 5-factor model and until there are more conclusive alternatives which can describe our reality. For now, investors would be better served keeping both feet placed firmly on the ground.

I’ve been a professional Financial Planner for years and there are 10 simple things which I believe everyone should know before managing their own finances, that schools don’t teach you:

1) You don’t need a reason to save

This may seem obvious but understanding can have a profound impact on your future. Saving is often considered with a specific goal or purpose in mind. The bigger house, the new car or the next holiday. Saving for a goal makes sense in a predictable world, but our world isn’t predictable.

The ability to understand that in life putting a bit of money aside, even if you don’t have a specific purpose can make all the difference. It will be the contrast between ‘getting by’ and ‘collapsing’ through stressful times.

Is ‘saving’ boring? Yes, it is! Although if you can reframe your saving as being the start of a journey which will eventually lead to your independence and freedom with your time in life, it suddenly becomes much more interesting.

2. You are your most valuable asset

This statement has 2 broad meanings:

• The first is that you need to invest in yourself, your skills and your health as much as possible as you are likely the biggest wealth creator of all.
• The second is that you need to ensure you protect yourself against ‘nasty surprises.’ This in simple terms, means insuring yourself and your ability to earn in an appropriate way. None of us can predict in advance which hand we are going to get dealt in life. Yet we happily rush to insure our pets, our cars, our homes and our mobile phones but avoid protecting the most valuable asset at our disposal which is our ‘human capital.’

The sad fact here is many people realise how hugely financially valuable they are after the event. At the point where they can no longer get cover.

3. There is ‘good debt’ and ‘bad debt’

Debt that is taken out for an asset which is going to grow in value over time is considered ‘good debt’ as it creates a rising capital value over time while the debt accompanying is expected to reduce. The most common one tends to be buying your home. While it is worth saying, it is possible to go bankrupt on ‘good debt’ if it’s not managed right. Understanding that not all debt is created equal is a core component to becoming financially successful.

‘Bad debt’ is generally unsecured debt that has no real purpose apart from allowing you to purchase whatever it is at the outset. The problem with bad debt is that it starts small but compounds. Let’s be clear, this is dead money. You gain nothing from it, you are making a bank richer at your expense. Most importantly with bad debt, you are putting yourself in a position where your time has gone from working for you to against you:

To BUILD WEALTH time works for you and to DESTROY WEALTH time works against you.

4. The difference between savings and investing

Sometimes these 2 get conflated but they are very different you should be coming at both with a very different mindset.

• Saving is something you are doing for a specific goal normally over a shorter period of time. So generally around 3–5 years. Building an emergency fund is also a completely legitimate reason to save however it remains about being intentional on short-term needs.
• Investing is for your future consumption. So you are putting the money to work normally for at least 5 years and ideally multi-decade. The ups and downs along the way are part of the deal going in however you are willing to accept this as this is all about your future consumption.

You should be going in with an understanding that these are 2 different things and mentally approaching them in a different way. You need to get your saving in order so you are financially in the position to invest. Investing is what will make you wealthy.

5. Starting early is better than finishing strong

This is about understanding the magic of how compounding works. Below,

In the below example each individual here experiences the exact same 6.5% annual investment return funds after fees & charges. The only difference is when and how often they save:

• Person 1 invests £10,000 per year beginning at age 25 and ending at age 35, they stop. They have invested for 10 years and £100,000 total.
• Person 2 invests the same £10,000 but begins where Person 1 left off at age 35. They begin investing at age 35 and continue the annual £10,000 investment all the way until they retire at age 65. Person 2 has invested for 30 years and £300,000 total.

Person 1 ends up with £950,588

Person 2 ends up with £919,892

So despite they being £200,000 more put in by person 2. The time they started and the impact of compounding meant they finished behind.

This is the magic of compounding.

6. Cash is not always king

One of the biggest mistakes I see is people holding a large amount of money in cash as it’s ‘safe’. For over a decade it’s been very difficult to beat inflation with any cash savings and in 2022, this problem has hugely intensified.

Over the average 30 year retirement for a couple, we would expect cash holdings to cut the purchasing power of their savings in half.

Holding cash over the long term is the simplest way to end up running out of money. Cash can be king in the short but a pauper in the long term.

7. Investing isn’t gambling when it’s done right

Investing has a ‘risk scale’ from the extreme end of near gambling on crypto, day trading and putting all your investments into a single company.

This is wildly different from a highly diversified mix of the great companies in the world. Or a multi-asset approach. This is simply a way to tap into the forward march of human progression. Partaking in the things we buy and sell from each other every day.

Long-term and well-diversified investing is not gambling. It is understanding and accepting what risk truly means.

8. Don’t neglect life admin

In the UK there are 2 big documents that if you have any sort of assets or a family that depends on you that you need to be thinking about.

1) A Will — this basically is how your instruct your estate to be distributed if you die. If you don’t in the UK, it will fall under the rules of intestacy.

2) Powers of Attorney — This means that should you be incapacitated your designated attorney can keep things moving instead of being locked out of all your accounts. You can have a power of attorney for financial decisions or health and wellbeing decisions.

9. Risk is generally misunderstood

The difference between a successful investor or a finance professional and someone who’s just learning. Is that experienced investors don’t associate risk as just volatility. Volatility is how much investment goes up and down. This is a completely natural byproduct of a functioning market. Instead of seeing risks as the ups and downs, you should try to see risks coming in different types which are:

• The risk of inflation eroding your buying power
• The risk of losing all your investments/capital that’s a permanent loss risk.
• Then volatility which is the ups and downs.

Once you have a more nuanced approach you can understand how to set up your finances so you manage each of these flavours of risk.

10. Money can’t buy you happiness but it can give you choice

Money is not the most important thing in life and in fact being too money-driven or money for money’s sake can be destructive. Although we must remember — it is a good thing to try and be financially secure and I think is something we all can try to achieve. Not because anyone has to have a certain type of consumerist-fed lifestyle. It is more because being financially secure can give you choice. Money is a tool to help you achieve your goal. Not the goal itself. The goal can be as individual as life is.

A financially strong position can lead to a life of more choice which can have a huge impact on how you shape your life. To quote Brian Portnoy:

“True wealth is the ability to underwrite a meaningful life”

“The ease of online dealing makes many people act as if investing positively scored, but the arithmetic of compounding dictates that it is negatively scored. Success in investing consists mainly of avoiding big mistakes.” — Guy Thomas

If you’ve been following the markets at all or perhaps some of fin-twit (financial twitter). You may have noticed that there have been a lot of blow-ups in certain areas of the market. Stocks that have been lockdown favourites like Zoom or Peloton have both scored near 80% declines. The crypto universe saw Luna crash to a near-worthless value for most holders. Who would have thought that speculative financial trash with no clear use case could end up being such an unreliable investment?

“The first rule of compounding: Never interrupt it unnecessarily.”- Charlie Munger

Compounding is the greatest force for any investor. The ability for a steady return to turn near exponential over a very long period of time. The more you look closely at the great investors such as Warren Buffet, the more you see that their success has been built more upon risk management and consistency than any single deal or individual decision.

Building wealth over the long term relies upon your ability to avoid devastating mistakes. In that regard, wealth building is negatively scored. You can compound perfectly over 30 years, to see that good work be destroyed overnight on 1 wrong speculative bet. After all, trying to achieve 10% growth in the face of a permanent capital loss is a great equaliser. Whether you previously managed multi-billions or this is your first investment. 0 is still 0. Therefore removing the spectre of total capital loss has to be our utmost priority.

We have to avoid the very human fears of missing out on the next big thing and maintain a long term mindset. This can be incredibly difficult when it seems, thanks to social media, many others are becoming near millionaires overnight by speculating. Building real wealth over the long term by definition means never being part of the headline-grabbing investment for that year. Reduced down to its simplest parts, a well-diversified portfolio is a mixture of companies and assets spread across the world.

“The key to investing is having a well-calibrated sense of your future regret.” — Daniel Kahneman

We have to understand that what we are rewarded for with investing is taking a level of risk. The world will change, and things will perennially become more uncertain. However, at its heart, a well-diversified portfolio is just owning a very small amount of all the things we interact with every day. Part of the company who produced the phone we are scrolling through, the items we bought this week for our shopping or the streaming service we watch before we go to bed. While the future can never be guaranteed, all of history has shown us a well-diversified portfolio has always recovered from any temporary decline. Why wouldn’t it? Even an index of companies by its own nature is ‘self-cleansing.’ The General Motors of this world go from current stars to yesterday’s winners, however, they are replaced as the larger holding by IBM, IBM fades from glory to be replaced by Microsoft, and this repeats again with Apple/Google/Amazon… the list goes on across thousands of companies which can be held in a single portfolio. All the while you remain relatively oblivious to these changes that are happening as part of the dynamics of a functioning market. This is why real diversification remains one of the only ‘free lunches’ in investing.

It can be worth considering introspection before making these more speculative investments. Especially if it is money that you would not be fully comfortable to see lose entirely. Whether it’s the new hot technology or the allure of the charismatic and outperforming fund managers who ‘seem to have it all figured out.’ We have to adjust our perspective.

To keep the focus on our own score.

“No problem can be solved from the same level of consciousness that created it.” — Albert Einstein

The media is again awash with news of impending doom and gloom in the financial system. Inflation, costs of living, supply chain issues, Brexit, the list goes on. In times like this, the desire to act can sometimes feel overwhelming. The sense that others and the wider market know something you don’t. As we can see below, the last 6 months for the markets have been quite chaotic.

The first thing is to acknowledge that in the history of the markets. This is the norm, not the exception. Credit from the below image to ‘The Irrelevant Investor’ highlights the extension of JP Morgan’s Guide to the Markets data showing the recent declines in the S&P 500 are around the average historical intra-year decline.

No one knows if market performance is going to get better or worse. Although if there is one prevailing skill for the successful investor it is that of perspective. We can use this to provide context to our decisions. It allows us to zoom out even further and look at the real return from US equities (returns after adjusting for inflation) all the way back to 1849.

The markets are cyclical in their nature but history being our guide, it is worth bearing in mind that any periods of discomfort have been well worth experiencing. With long term after-inflation returns of US equities over the below period being 6.2%. It is only when we adjust our perspective that we can see the true nature of the upward trend. In order or frame these movements we must remember:

1) An investment portfolio is only the fuel for a financial plan

The purpose of any investment is to act as fuel for your own financial plan. Your financial plan is how you align your money to the life you want to lead. It is all too common to buy into narratives of how to adjust your investments to catch the latest economic movements or market trends. In an efficient market, anything that suppresses temporary volatility must at the same time suppress permanent returns. Suppressing temporary volatility is therefore an irrational long-term investment objective. The only logical way to invest is in a manner which aligns with the life you want to lead, not based upon the whims of sentiment, or to avoid this volatility.

2) Discipline and long-term perspective is CRUCIAL to our financial success

There is always a reason to divest but there is no viable strategy to try and time markets. Therefore we have to focus on what we can control. Not allow ourselves to become lost in the malaise of what we cannot. Coming out of the market for anything else apart from short-term spending requires us to have a perfectly timed strategy to get back in, in addition to the issue of trading costs. With market movements being volatile, the very last thing we want to try and do is try our hand as traders.

For those reasons for the well-diversified, investing in real assets has always, in hindsight, been buying opportunity. Although at the time, it will likely have felt equally painful as this may now.

3) The media is not your friend

“The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.” — Howard Marks

It is almost countercultural to not religiously follow current events. Our phones becoming more extensions of our limbs than tools we use to communicate. The problem is when you accept the constant bombardment of negative events it may lead you to risk your financial future and your long-term plan.

In times like this, we must remember who we want our decisions to serve. We must stay true to our financial future based on the logic that all previous periods of discomfort have been followed by an unrelenting forward march. That the well-diversified equity investor is only investing in real companies that buy and sell things to real people every day. In times of volatility, being able to control your perspective is a skill, a virtue, but most importantly, a choice.

“We do some things for family reasons…If it’s not consistent, well, life isn’t always consistent.” — Jack Bogle

The late Jack Bogle is probably considered the father of modern-day index investing. An approach that aims for broad diversification and reducing costs. The multi-trillion-dollar asset management company has been built on these principles. The company he founded ‘Vanguard’ is now one of the biggest asset managers in the world and was shaped by a man whose entire life has been built upon wanting to deliver this approach to investors. Jack himself previously eulogised how this approach gives investors the best chance of a good return.

You would fairly think Jack himself runs his own money in a similar fashion. The truth is though, Jack doesn’t always follow these rules with all his money. When discussing investing in the actively managed (and very expensive by Bogle’s own yardstick) fund run by his own son, he said. “…If it’s not consistent, well, life isn’t always consistent.”

Should we consider Jack as being just a hypocrite? Another well-known name who asks you to do what they say, not what they do? Or, does Jack fully believe everything he spent his career building, however, there is more at play in financial decisions than just what is optimal? There is perhaps more insight from the fact that with big life decisions. There has never been a clear rule book. As Morgan Housel says of big financial decisions:

“All financial decisions are made not on a spreadsheet but at the dinner table.”

If we consider how many of our life decisions are made for the best return or the most amount of money. When it comes to family or big life choices, rarely choices are made with money first. With the cost of raising, a child in the UK being around £160,000* until 18, raising kids would not pass the first test for being financially optimal.

My non-optimal portfolio

I do not believe that buying individual stocks selection is the right way to build wealth. Not only have I made videos on this but I also would not advise my clients to invest a significant amount of their wealth in a single company. The evidence is overwhelming that trying to pick the right stocks consistently is stacking the odds heavily against you:

• In 2015 of FTSE 100 the largest 100 companies in the UK by market capitalisation. Only 49 of those companies have been there since 1999. This means that over half have either failed, reduced in value or not kept up with their peers to the extent that would retain them in the index.
• Of the original S&P 500 (500 largest companies in the US) only 94 companies remain in the index. So less than 1/5 of the largest companies in the US have remained so.

With all that factual information you may be surprised to know. I do own single stocks.** Am I just a huge hypocrite? No, I don’t believe that is the case as I don’t do this because I believe it is more likely to be a good investment. I own a small level of single stocks which are proportional to my main portfolio. A core portfolio doing the bulk of the work and a satellite portfolio for a few of these things.

I go in understanding that all the evidence shows it is generally a waste of my time. I also enjoy understanding company structures and what may or may not be well priced on the balance sheet. Simply put, I know what is optimal but I do get some enjoyment from managing it in this way and due to that, I proportion appropriately without taking all intrigue and experience out of the situation.

The best plan is the one you can stick to

Part of real financial planning is bridging the gap between what is financially and personally optimal. With managing your finances the best plan is the one that you can stick to. Therefore a perfectly crafted plan must be able to be realistically followed in concept and reality, otherwise, it becomes an expensive doorstop.

Whether this is for you is — a larger emergency fund than is financially optimal, paying off your mortgage because of the ‘weight it lifts’ or having a small amount of your portfolio allocated to something a bit more fun!

The skill is creating that balance so you can live for now, make some compromises but maintain a long-term view. Money is one of the most personal things in the world. So being able to open up to how you feel about money, what is important to you, is part of good planning. Would these conversations around money be somewhat easier if there was less of a stigma around some ‘hidden perfect financial answer’ that everyone else is adhering to? The truth is, like living the perfect life, the perfect financial decisions are an illusion. It is better to look for an end result that is suitable and reasonable rather than pretend all of life’s decisions around money are made based on perfect rationality.

How a Financial Planner can help is clarifying your long-term goals while bearing in mind what is financially optimal. It is about the balance of these two often warring elements to make sure you stay on track for your long-term goals. While maintaining a good life in the process. It is about finding the balance between what is and has always been more ‘personal’ than ‘finance’.

* Source — Child Action Poverty
** This is a personal story and should not be seen as a recommendation to follow a similar approach.