Why Blockheads Make Better Investors

November 21, 2012

The following is a guest post from Neal Frankle, a Certified Financial Planner™ based out of Los Angeles and the brains behind Wealth Pilgrim. One of Neal’s recent posts was his detailed CIT Bank review. Neal is one of the very few personal finance bloggers who doesn’t find Control Your Cash offensive, or at least manages to keep his disgust quiet. Plus, he knows money better than all of us combined. And despite his line of work, he can write as clearly and inspirationally as anyone. Take it away, Neal: 

 

Intelligence is great but it can also be a problem sometimes. And when it comes to investing, it can be a downright catastrophe. In fact, I’ve come to the conclusion that blockheads are much better investors. This is especially true when it comes to those people who are investing so they have enough money to retire.

Am I saying you should drop a tab of acid and trip out before making investment decisions? Not really. I’m suggesting that you are best served by deciding on an investment strategy and sticking with it. This is very hard to do – especially for smart folks. Why?

Bright people have good experiences in life using their intelligence. They understand that they’ll do better if they use their brain power before making a move. That’s OK. But the problem is that they think they can use the same tools (their smarts) and have a similar happy result with their stash. Wrong.

What happens is that people who are smart often “override” their investment strategy for one reason or another and usually find their wallets a little bit lighter as a result. Bad tone.

“Are you smart? Well, are you….punk?”

You might think this is a problem for others and it’s something you don’t have to worry about. But I suggest you reconsider. Have you ever told yourself:

“Everyone is buying this stock. I better jump on it while I have the chance!”(Remember Facebook?)
“Janice told me to sell she sold her stock. She’s really smart. She’s a dentist. I better sell too.”
“I just saw that the economy gained 100,000 jobs last month. Things are really turning around. Time to dive in with both feet!”
“Romney is going to get elected. As soon as that happens, the market is going to tank. I better sell while I still can.”

When I was learning how to become a financial advisor, I was warned against making these mistakes but I fell into these traps with my own money anyway. It rarely turned out well. That’s because these moves aren’t based on strategy. They are based on speculation and that’s the point.

Investing is a long-term deal – not speculation. If you want to achieve long-term success, you can’t speculate based on how you interpret current events. Sure you might connect with the ball once in a while. But you’ll strike out far more often and it will cost you big time pain.

Don’t Confuse Intelligence and Speculation

People call me up all the time and tell me they want to make some move based on how they think the future will unfold. No matter if I feel it makes sense or not, I always remind them that they are speculating and that speculation is risky. As long as they are willing to take that risk, I am fine with it.

Intelligence can help you make the best tax decisions. Intelligence can help you make the best estate planning decisions. Your smarts can even help you fix your broken toilet. That’s because these issues deal with (relatively) fixed rules on how the world works. But the investment world doesn’t operate under the same conditions. Investments deal with the future which is unknown and unknowable. And all the intelligence in the world can’t change this.

How You Should Use Your Genius Brain Power

As I said, the best way to put your cleverness to work is to find the right strategy and then let the strategy make the call on which investments to make.

When it comes to deciding how to invest money I’m a blockhead. I have defined my objectives and found the strategy that I believe achieves those goals best. I am willing to be wrong and I don’t tweak my system or override it depending on how the wind blows that day. That’s why I’m a blockhead. I let the strategy work. I do what it tells me to do.

My suggestion for you is to make sure you have the right investment strategy and stick to it. Expect imperfection. There will be times when the approach you use will lose money. That goes with the territory. But this is a far better method than relying on intuition, speculation, or worse yet, “intelligence”.

Filed Under: Guest Posts

Guest Post – The University in the Desert

August 10, 2012

If you own any of these books, you’re in the 99.9%.

 

It’s as rare as a Venezuelan gold medal – a guest post that meets all our guidelines. Today we welcome W from Off-Road Finance, a regular contributor to the Carnival of Wealth and one of the few personal finance bloggers who has anything interesting to say. No further introduction needed:

I’m lost and have gone to look for myself. If I should get back before I return, please ask me to wait.
– note on a university message board

Somewhere along the way we change from relatively useless and undifferentiated kids into adults. We become someone. If you happen to be around a person you’re not likely to offend, do a little experiment: ask them to describe who they are. Chances are you’ll get a list of descriptions: for example, I’m a husband, engineer, trader, Christian, musician, blogger, cook and rock climber. From that list you could get a reasonable picture of how I spend my hours in a week.

But let me suggest something: you know almost nothing about me, as a person, by reading that list. There’s too much there. Am I a mad rock climber who trades and takes the occasional engineering gig to keep myself in rock shoes and gas for my Wrangler? No. I’m kind of a half-assed climber. You could turn my description around, make any given element primary, and generate a bunch of different “people” who would bear little resemblance to one another or me. Let me suggest a much better question than who you are:

What mind do you bring to the problem? This is one of those deep Zen questions. When faced with an arbitrary problem, do you use the mind of a rock climber? That of a musician? Clearly they have different approaches to problems, and not just those that fall in their respective fields. You’d expect differences in approach on everything from risk to creativity.

Different minds. This gets around the problem of multiple descriptors and closes in on who someone really is. Some minds are better at some things than others. The rock climbing mind is fine for hang gliding too. It might not be so good for knitting. I’d bet that the best knitters do not have rock climber minds. That’s not just a figure of speech – I’d wager meaningful money on it. Why?

Because the mind I bring to almost every problem by default is the mind of a gambler. In this, I am unusual. Millions of Americans gamble in some fashion. But essentially none of them have the mind of a gambler, any more than most Porsche owners are GT2 drivers. For the bulk of people gambling is a diversion, a form of entertainment, or an addiction; but it isn’t their way of thinking. I’d guess only a few hundred, perhaps a few thousand, Americans are of the gambling mind. I’ll call these people pro gamblers. That doesn’t mean they make their living by gambling necessarily. (Many, including me, don’t.) Rather, it means they’re mentally equipped to do so. There’s a wide gulf between the pros and those punters at the slot machines in Vegas casinos.

For starters, the pros are interested in the few games at which it’s possible to profit via skill. That means poker, sports betting, and some forms of blackjack. There are also a few good but nearly dead games that crop up – gin, backgammon, dominoes etc. Just as notable is what’s not on the list: slots, craps, roulette, baccarat, any table game other than blackjack, and of course keno (the game with the worst odds in the casino). The pros have all put substantial effort into learning to play at least one of the “good” games. While doing so, the pros develop the gambling mindset. It’s easy to recognize when I meet another pro, but hard to describe. Some of the characteristics:

  • a keen sense of the dollar value and odds associated with various gambling decisions
  • a tendency to view most decisions outside the gambling realm as gambling decisions
  • relative indifference to money
  • intelligence & fast mental math (not that gambling makes you intelligent – rather, stupid people will inevitably fail)
  • a desire to achieve a very high level of skill at their chosen game(s)
  • a strong individualist streak
  • an innate suspicion that others don’t have your best interests at heart. This translates, in most cases, to near-immunity to scams and cons
  • a fierce competitive streak
  • what I’ll call “exploitative empathy” – the ability to get inside other people’s heads, understand whether their position is weak or strong, and use that information
  • contempt for stupidity
  • a weird mix of targeted mental productivity and laziness – it’s a hard way to make an easy living
  • a dry, sarcastic, deadpan sense of humor.

I learned the gambling mindset around the poker table, first in college and then in Las Vegas. A couple of times a year I fly back to Vegas, now with my wife in tow. It’s one of those salmon-returning-to-the-spawning-grounds sort of things.* Spend a little time sitting at the table with the scumbags shooting the breeze about sports, and then taking their money. Plus, the drinks are free. Ahh, that’s the life 🙂

The most recent of these trips was last month. I usually go on the 4th of July week, plus another random long weekend. At the risk of tooting my own horn, the gambling mindset is one of, if not the best, for operating in the financial world. It’s not great for everything – I’ll give an example – but when it comes to making money I don’t think anything comes close. Those first two bullets equate to a better understanding of risk and reward than any other mindset I can think of.

Apparently I’m not the only one who thinks this, because for the last decade major financial institutions have quietly recruited pro gamblers for their top trading desks. Of course that’s not the sort of thing the institutions want to tell Congress or regulators about, but then the SEC wouldn’t know a gambler if they saw one. (The SEC has the bureaucrat mind, in spades).

There’s a cost that goes with the gambler mindset. It’s hard on personal relationships, especially romantic ones. Who wants to date or marry a suspicious, exploitatively empathic person who views your relationship as a gamble? Apparently at least one person, because I’m still happily married.

I do have to tone down my gambler tendencies when dealing with people I like. So now I’m going to make an odd recommendation. The CYC principals said they didn’t mind if I wrote for a tiny audience, so now I’m going to speak to .1% of the people reading this. If you recognize a bit of yourself in my description of the gambling mindset, are young, and haven’t decided what to do with your life, take a reasonable fraction of your net worth and fly to Vegas. Enroll in that great university in the desert. Learn to beat one of the “good” games above (I suggest poker for starters.)

For 99.9% of the population, this would be a retard move. For the other .1%, it’s the only smart move. Not that you should stay a gambler. Just learn the mindset, and leave when the time seems right. You’ll be way ahead of the game for life. Meanwhile, the former money of a bunch of crappy Bellagio 20-40 and 40-80 players will be flying the wife and me to Hawai’i next month. There are tangible benefits to this gambling thing.

 

*Ed. note: W does not return to Vegas to lay eggs and then die.

Filed Under: Guest Posts Tagged With: , ,

Guest Post: Area Woman Shares Her Action Plan

July 6, 2012

 

Pay no attention to the watermark centered on her neck

 

Today, we’ve decided to let Anne Smith write a guest post. Anne runs MyBoyfriendAndIHaveAdvancedDegreesAndFiveFigureDebt.com, a personal finance site that chronicles “one fashionista’s struggle to stay sane (and stay caffeinated) in a tough economy.” Also, the site’s logo uses $ in place of “S” and ¢ in place of “c” because its author is unbelievably clever. She adds that she’s trying to “make cents” of her life, which is a joke we didn’t get but are applying our collective brainpower to the deciphering of. Take it away, Anne:

Hi there!!!! I’m so grateful that the folks at Control Your Cash let me write a guest post for them! I’m an easily excitable woman – with the maturity of an adolescent girl, even though I’m in my 20s and have a job – so that explains the exclamation points! This week I’m going to talk about personal finance with you! So fun!

I should probably mention off the bat that I have $45,398.39 in student loans. I majored in philosophy and can’t find a job in my chosen field. It’s so unfair! I sent résumés out and everything! So I’m thinking of doing the only logical thing and going to grad school. That way I’ll have even more initials after my name, even more debt to my name, and even more indignation 2 years from now when I still can’t find a job but will be that much closer to death. Sure, I could get a job doing something blue-collar, and maybe even make decent money at it, but why would I do that when instead I can complain about how unfair life is and why society owes me a living? After all, the average college graduate earns a million dollars more in her life than someone who dropped out of high school. Never mind that most people finish high school, but if I compare myself to the people who have not even a modicum of education it’ll make me feel better about myself. And that’s what personal finance blogging is all about. Also, that bit about the million dollars is received wisdom. Right up there with “You lose 60% of your body heat through your head” and “You should drink 8 glasses of water a day”, not to mention “Doing the speed limit is more fuel-efficient than exceeding it.” I either heard these axioms in conversation with fellow idiots, or read about them in O, The Oprah Magazine. Either way, they’re undeniably true.

Oh yeah, my boyfriend (soon to be hubby LOL!) He’s already in grad school, working on his master’s in library science after earning an undergraduate degree in social work. His student loan balance is at $52,498.12 right now. Can you believe Congress wants to increase our rate? So unfair! Because if it were 3.4% we could have paid our balances off this week, never mind that I’m 5 years out of school and have so far barely paid a nickel. Anyhoo, back to my boyfriend. His fixed-gear bike got stolen, so I have to drive him to his soccer game in my 1999 Taurus. Which, by the way, I recently had to spend $1100 on new brake drums, rotors and calipers for. I could have gotten away with a $125 brake pad replacement when I first heard squeaking a few months ago, but…well, let’s just say I was working on getting it fixed and it just kind of crept up on me. LOL!

Did I mention that we’re getting married? I’m so excited! Josh and I spent the last 4 weekends visiting wedding planners and looking for the PERFECT locale for our wedding. We’re going to hold it at the same hotel ballroom where Elizabeth Taylor and one of her husbands, I think #4, got hitched. Isn’t that exciting? Of course, that’s in LA and we live in San Diego, so the whole wedding party (my family, Josh’s family, my bridesmaids, and his groomsmen) is going to have to stay at the hotel. My parents have offered to chip in $5000, which is nice of them but it’s really nothing when we estimate the cost is going to be upwards of $30,000. What a racket, right? Maybe I should have become a wedding planner LOL! It’s expensive, but it’s a once-in-a-lifetime magical moment and I want it to be perfect. I said “once-in-a-lifetime” because no one in the history of the world has ever gotten divorced, therefore I won’t. Also, I’m technically an adult so maybe I shouldn’t be relying on my parents for anything financial but what do you want from me, this is the 21st century and me and all my blogging friends are in a state of suspended adolescence.

Anyhow, gotta go. Because…we need to put a deposit down for our honeymoon! We’re going to Tahiti!!!! Sooooo excited! We had to take out a loan for the trip, but fortunately Josh’s dad co-signed for it otherwise we’d have to honeymoon in, like, Laguna Niguel or something. Um, I don’t think so. TTYL!

Today’s guest post was from Anne Smith. Check out her monthly debt updates and list of expensive places she can’t afford to visit yet wants to at MyBlogIsIndistinguishableFromAlmostEveryOtherPersonalFinanceBlog.com. You’ll also find commiserating comments from all her dopey friends, telling her how smart and brave she is for making one awful financial decision after another. No wait, we got the URL wrong. It’s actually MyBoyfriendAndIHaveAdvancedDegreesAndFiveFigureDebt.com. Sorry about that.

Filed Under: Bad Examples, Guest Posts Tagged With: , , , , ,
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