1) My 401(k) was automatically rolled over, what does this mean? 2) Tax ramifications of selling gifted property? 3) Better to contribute to Roth IRA for 2018 or 2019? 4) Not getting ripped off: http://jackrabuck.com/2019/03/11/protect-yourself-at-all-times/ 5) Buying house even though I’m moving next year? 6) How much can I afford to buy in SF? 7) Cost of setting up 401(k)?
It almost doesn’t matter what he was talking about, because it is true of almost every area of life.
One of my favorite posts from this past week was “In Defense of Complexity” from Phil Huber’s fantastic blog, bpsandpieces. In it, he pushes back on the first level definitions of simple and complex, his most powerful point being that what we see as simple, somebody from a prior generation may have seen as hopelessly complex.
Phil’s post is a great microcosm of the Ouroboros that is the investing world.
Yes, to a first approximation a simple investment style seems obviously better than the complicated ones that pervade our world. It is very easy to take a look at something with many pieces, look backward at which pieces didn’t prove as useful over some time period, and proclaim that by removing them, we can have addition by subtraction. This was captured wonderfully by Brian Portnoy in an article, “Diversification Means Always Having to Say You’re Sorry.“
Phil’s piece very eloquently points out that things that seem simple may not be so. For instance, let us assume that you’ve decided you want to be a “passive index investor”. You’ve read about it in the NYT or Reddit and it sounds good. It’s simple. Not so fast. Even if you are just allocating to stocks, you’ll immediately be hit with the question of how to divide your assets among your own country and the rest of the world. I’ve written at length about this before. Can it possibility be a simple decision if people vary so greatly in their allocation just because they live in a different country?
Chess has seen a resurgence in popular culture (and those spikes you see in the graph are the championship every two years). Don’t believe me? Just listen to a hip hop station – about every third song seems to have a reference. Why? I think it is because chess is the ultimate metaphor for levels. Anybody who has played understands that if your opponent calculates a sequences of moves just one level further than you do and you play that sequence, you may end up lost and never find your way out.
Remembering that everything has levels is an extremely useful framework for thinking about life. Looking to eat healthy? Sure, you may get good results with a simple rule about eating more “whole” foods, or only foods that were available ten thousand years ago. But what underlies those diets? Is it the macronutrient mix that you’ll end up consuming if you do? What about figuring out how many calories you burn and ensuring you consume fewer than that?
Levels from the Bottom to the Top
In almost all areas we can learn best from which levels to pay attention to by looking at the first level and the highest level (which may change over time!). The first level for eating healthy means looking at the least healthy people in society. In America, we have a huge proportion of the population that is morbidly obese. What are they doing wrong? It’s pretty obvious they are eating too much. Calories in is greater than calories out (or it has stabilized at a very high number). We should pay attention to this. Regardless of whether they change the composition of their diet, if they don’t reduce the calories they take in (and perhaps one would cause the other), they are not going to be healthier. We should take note – calories in vs. out is very likely to be an extremely important factor in eating healthy.
We can crosscheck this with the other end of the spectrum. Elite athletes like Michael Phelps, Chad Johnson, and NBA players in general are well known for having crazy diets that include outrageous amounts of calories, fast food, candy, you name it.
You don’t have to go particularly far to find an expert who can explain that if you are burning 8,000 calories a day and 2,000 of the calories you eat are McDonalds, there doesn’t seem to be much of an adverse effect. This, of course, reinforces our finding from level one that calories in vs. calories out is a major factor.
But, we can also look at the things the high performance end of the spectrum is doing and tease out what they deem important. NBA players who can afford it (probably most of them now) usually have a chef/nutritionist that makes sure they are eating a diet that covers the bases of nutrients, both macro and micro. Fighters have experts in hydration that ensure they get the water and salt out of and into their system in the best way possible (although the research is clearly pointing to dehydration as never being safe – as long as there are incentives to dehydrate for weigh-ins, people will need to know how to rehydrate most effectively). Marathon runners carefully time and plan their meals before a race so that their energy stores are at an optimal level but their bodies are not oversatiated. These factors are probably all important.
Levels to Learn From
We do need to be careful, however, as elite athletes have an incentive to try things that may not be beneficial, but are unlikely to be harmful. A good example of this is the much derided “TB12 Method“. Other than being a marketing gimmick, it seems like this is pretty much par for the course for high end athletic diets and training – including the pliability aspect, which is touted here as being the secret ingredient, but has been a focus for elite athletes and trainers for many years. Add to that a bunch of dubious but probably harmless ingredients, and you’ve got a recipe for a ‘guru’ book.
However, they will occasionally find something groundbreaking and useful, which is why it can be especially good to see what is picking up traction among the best of the best. Most elite athletes fifty years ago thought weight training was counterproductive for their sport – that was the conventional wisdom from basketball to boxing to badminton. Today almost all elite athletes put up numbers in the weight room that would staple an average joe to the floor.
When you see a movement like that – a sustained shift in conventional wisdom beginning with the people with the most to lose (and gain), that is how you can identify a point of real value and leverage, and potentially benefit from being early to the game.
1) 40-50% Down Payment on Mortgage?
2) Where to invest for rock-solid safety?
3) 529 for Grandkid?
4) About to graduate with $550K debt. Plan?
5) Where to put $90K for a year or two?
6) Different Asset Allocation Strategies for Multiple Accounts?
At the start of boxing matches and UFC fights, the referee tells the combatants to protect themselves at all times.
The myth behind the saying is that long ago, at an Olympic boxing event, they used to run them tournament style, with three fights going at once in the same arena, with the rings close to each other. The favorite to win the whole thing was winning his match, the bell rung, and he put down his hands to claim victory and move on to the next round. But the bell that rang was for a ring next to his — his round hadn’t ended, and his opponent seized the opportunity and knocked him out just as his hands went down.
Ever since, fighters have been warned at the beginning of every fight to protect themselves at all times.
Not only is this good advice for the ring, it’s good advice for life.
And this isn’t just about scams — many people stop defending themselves because it means they’d have to ask somebody to clarify themselves, and that can be uncomfortable. This is often as simple as being asked to take on a daunting assignment at work. The person asking you to do it may not have any idea how much time it will take you, or be aware of a similar result you could produce with 20% of the effort, but because it risks your reputation (perhaps coming off as lazy) and their reputation (not knowing the time or options involved), many people just take the punch.
This concept applies far and wide and on many issues, you have more incentive than anybody else to make sure you are protected. Mechanic says you need some expensive work on your old car? It’s very normal to get a second opinion on that, but it carries the implication that you don’t trust your mechanic entirely. Many people put down their guard at the slightest threat of making somebody else uncomfortable, despite the great discomfort it is likely to cause them down the line.
How can we combat this? Two ways.
Be honest about who you trust and who you think is excellent at what they do. They need both of those things to let you put your guard down. These types of people are invaluable, but most people rush to put people into this category and do it far too soon. But, when you have an accountant or a hair stylist or a personal trainer who you know will give you what you need and you can trust them to have your best interests at heart, you should value them immensely. They are the friend who you can ask a question to and get an honest answer. They’ll tell you if those jeans make you look a little too chonk.
The real benefit of those people is mostly overlooked, though. They are experts at what they do, and they are well calibrated (a word of caution here, most people, including ‘experts’, are not well calibrated, and that’s a requirement for trusting somebody’s judgment). When they tell you something that is surprising, you should ask for more detail and ask how certain they are.
I work with a bunch of highly competent people. We all work in the same field, but all have different specialties and experience. I’m known to frequently ask “are you sure?” or “is that right?” when somebody tells me a surprising fact. Why? I want to know if they are pretty sure they are right or absolutely damn sure and I’d be wasting my time double checking. It will often prompt them to explain the major exceptions.
In most areas of life you will not have these people, and that leads to the second thing you must learn how to do. You must learn how to figure out the right questions to ask.
A lot of people give up right away on the task of finding the right questions, because ultimately it means you’ll have to ask them, either of yourself or of somebody else — it’s hard to say which is worse!
It is easier now than ever to find the right questions to ask about anything, but that’s a double-edged sword. It’s also easier than ever to find the wrong thing that sounds just right.
The task is hard, and some people who put in the work will seem to be able to find the answer to everything (we all know that person), and it’s because they’ve developed a talent for finding the right questions to ask.
The right way to find the questions to ask is often domain specific, though there are common threads. If someone tells me about something medical or health/fitness related, I’m going to see if I can find anything on PubMed that agrees with it. Of course with that you have to learn that a study done on rats might not apply to humans, and a study using untrained college students might not apply to elite athletes. You are looking for both confirmation or disconfirmation and reasons why that might not apply to the scenario you’re looking for.
The main thing to look for is somebody who is considered an expert by many others — learn what they think. But more importantly, learn where they get their information. Find their primary sources. You can often find the root of a disagreement among experts in the source.
When you understand where the experts disagree, that’s where you can start to make your decisions. Why? If the experts disagree, there isn’t a lot of use in spending your time trying to parse those areas yourself — you’ll have years of catching up to do. Instead, find one expert or school of thought whose reasoning you can follow, understand where other people disagree, and make your decision.
A word of caution here — there are clear distinctions between the value of different experts. The value of somebody considered to be an expert by somebody I trust to have the ability to identify an expert is worth more to me than somebody with a million twitter followers.
Finally, remember that we are all susceptible to the Gell-Mann effect. It is far easier to trust a person in an area we are unfamiliar with. If we hear something surprising we should see if other people disagree with that. If they do, we should want to know why.
The podcast itself was pretty good, Joe does an above-average job of moderating and being nonpartisan, Alex does a decent job of pushing back and making good points, and Michael was just okay, clearly taking a clinician’s point of view, but occasionally being wrong on facts.
Toward the end, Michael accusing Alex of only portraying one side of the facts in his book, to which Alex says he makes it clear up front that’s what he’s doing, and that he thinks marijuana gets nothing but the good aspects discussed, so he’s giving airtime to the downsides and counterarguments. It reminded me a lot of this recent post on SSC.
This is a pattern I see again and again.
Popular consensus believes 100% X, and absolutely 0% Y.
A few iconoclasts say that X is definitely right and important, but maybe we should also think about Y sometimes.
The popular consensus reacts “How can you think that it’s 100% Y, and that X is completely irrelevant? That’s so extremist!”
But I can see why this happens. Imagine the US currently devotes 100% of its defense budget to countering Russia. Some analyst determines that although Russia deserves 90% of resources, the Pentagon should also use 10% to counter China. Since no one person can shift very much of the defense budget, this analyst might spend all her time arguing we need to counter China more, trying to convince everyone that China is really very dangerous; if she succeeds, maybe the budget will shift to 99-to-1 and she’ll have done the best she can. But if she really spends all her time talking about China, this might look to other people like she’s an extremist – that crazy single-issue China person – “Why are you spending all your time talking about China? Don’t you realize Russia is important too?” Still, she’s taking the right strategy, and it’s hard to figure out what she could do better.
I thought pretty favorably of Alex throughout, and saw him as the China analyst in the latter example, although I think he was clearly trapped in the exact same circular logic as Michael (though a separate iteration) from the first quote, above.
They both see the popular consensus as being wrong and harmful and mention “Y”, but then they each join the consensus in turn and think that the other is wrong for highlighting nuance when the story might be more complicated.
I recall from my undergraduate days a study about an experiment where they asked participants to take turns poking each other with exactly the same force. Instead of going back and forth like pillsbury doughboys, this poking quickly escalating to shoving, because we perceive force used against us as stronger than force we are using.
In this same way, people very often think they are justified in showing just their side of an argument, but are very dismayed when somebody who disagrees with them fails to meet an outrageous (in comparison) standard of impartiality.
Smart people love to nitpick, they just do, but the smartest people know when to allow for generalities and when to point out an exception. A problem that seems to be getting worse is the Big Bang Theoryization of discourse, named of course after the show that is a portrayal of what dumb people think smart people are like. The normal mode of discussion has transformed into a bunch of ridiculous nitpicking of exceptions, but that’s not the shame of it, the shame of it is that people think this is a good thing.
People see an article or a headline and the first thing they are trained to think is, what’s my hot take? Can I possibly start my response with “actually”?
They act like that nitpick proves the original point wrong, but when pressed, retreat to claiming that they were just pointing out an exception. The best comments come when someone points out an exception and says they think it is undervalued or not considered, or in fact takes the opposite position and does not intend to retreat back to the safety of just pointing out nits.
1) Financial things to do for new daughter? 2) What counts for a budget when building an emergency fund? 3) How to fix incorrect Roth contributions? 4) I have excess income, what should I do with it? 5) Balance between saving and spending? 6) Option for savings account? 7) Have $50K to invest, where to invest it?
1) Should I buy a car with all cash? 2) Roth 401(k) vs Traditional 401(k) 3) Pay down student loans? 4) Reducing commissions when moving account to Vanguard? 5) Withheld too much on my paychecks, what have I lost? 6) Roth IRA any advantage over brokerage account? 7) Converting non-deductible Traditional IRA to Roth taxes? 8) Liquidate inherited portfolio? 9) How do I get around my terrible investing habits?