Your Move – Ramit Sethi

Your Move: The Underdog’s Guide to Building Your Business – by Ramit Sethi
Date read: 9/20/18. Recommendation: 8/10.

Ramit Sethi is one of my favorite humans and writers (I Will Teach You to Be Rich is a gem, if you haven’t read it). He’s someone who gets it. Whether it’s finance, or in this case business, he’s always focused on the things that matter and assigning things their proper weight. In Your Move he offers insight into handpicking customers, being more selective about who you target, and why that’s fundamental to success. He emphasizes authenticity and crafting a message that resonates with your target audience’s hopes, dreams, pain points, and fears. It’s a book that should be able to point you in the right direction whether you’re struggling with your initial idea, defining your audience, or putting yourself and your product out there. There’s actionable insight for each.

See my notes below or Amazon for details and reviews.

My Notes:

A successful business doesn't mean more money. It means more success, peace of mind and time.

Don't give things away for free:
-People value what they pay for
-Huge difference between free reader and paying customer
-Paying customer is far more likely to engage/open/use whatever they've paid for

"Most people reading this will not become millionaires because it involves extremely hard work and insane perseverance." -RS

Invisible risk of doing nothing > risk of starting a business

If you create value, people will be more than happy to pay for it.

Authenticity matters. Listening matters. When you sit down with customers, encourage them to open up by saying "Tell me about that." Or if you're sending emails, ask "What are you struggling with today?"

Make sure you've identified and are talking with your target market.
-If Ramit had talked to people his parent's age when writing his first book, he probably would have heard something about saving for retirement earlier. That message doesn't resonate with someone in their early 20s who wants to know what to do with their money, make it work for them, and buy a round of drinks for their friends.

Be selective and handpick your customers
-Allows you to target wants, needs, hope, fears, desires of that audience with pinpoint accuracy (and create products they want).
-"Students for life" philosophy.
-Regularly encouraging people to unsubscribe from newsletter (those who stick around are highly committed and engaged).

"Your biggest challenge is customer selection. You pick the right customer, you win. You pick the wrong customer, you lose. Focus on helping great people get better." -Marshall Goldsmith

Learn to embrace mistakes, otherwise, you get stuck in analysis paralysis (thinking instead of acting).

"Focus on being decisive and less on trying to make the 'right' decision. You'll never know until you try, and if you're wrong, you can always try again." RS

Beginners focus on the wrong things – worry about minutiae that won't change a thing and ends up exhausting.

Experienced pros have gone through this and know what to pay attention to (and what to ignore).

"Anyone can be 'efficient'–meaning they can do a given task pretty well. But very few can be 'effective,' meaning they select the right things to work on in the first place. Focusing on the right things is a true superpower." RS

Focus on your audience more, your competition less.

"Be different to be better. Don't be different for the sake of being different." RS

When you nail the right audience, price is a mere triviality. People will pay substantial money if you're solving a problem that's important to them AND they believe you can solve it.

Systems mentality: Life is always going to be messy. Successful people don't rely on "motivation or "working harder" to make things happen. They have systems for the big wins and let the inconsequential stuff fall by the wayside.

To sell you need to know four key things about your customers: their hopes, dreams, pain points, and fears.

Get comfortable being uncomfortable. The things that worked from $0 to $100,000 won't always work when you're trying to crack $500,000.

Change the words you use to sell your products and you can drastically increase revenue.
-Focus on the reader and their pains, challenges and frustrations as they relate to your niche.
-Articulate their biggest hopes, dreams, and goals.
-What do they want? What's frustrating? What's going on inside their heads?

Product or service tiers (i.e. intro, intermediate expert) changes the question from if I should buy, to which should I buy?

If you view yourself as their trusted advisor and you have a product that will help them, you should be doing everything in your power to let them know about it.

"Stop and ask yourself: Are your products awesome? Do they really help people? If the answer is 'No,' then you need to make a better product." Graham Cochrane

30% Raise:
-Change the words on your promotional pages (take focus off product, shift towards customers)
-Offer more expensive option (tiered pricing)
-Begin selling sooner and more often

Fooled by Randomness – Nassim Nicholas Taleb

Fooled by Randomness – by Nassim Nicholas Taleb
Date read: 8/28/17. Recommendation 8/10.

Deep dive into the role of luck in the financial markets and life. Taleb emphasizes how we tend to only accept randomness in our failures, never in our successes. He discusses concepts like Monte Carlo math, Russian roulette, the Pólya process, nonlinearity and the human brain, and Buridan's donkey. Our tendency to favor the visible, narrated, and neat models, leads us to being fooled by randomness. He summarizes best by suggesting we are all idiots who are mistake prone, but only a handful of us have the rare privilege of knowing it.

See my notes below or Amazon for details and reviews.


My Notes:

That which came with the help of luck could be taken away by luck (and often rapidly and unexpectedly at that). The flipside, which deserves to be considered as well (in fact it is even more of our concern), is that things that come with little help from luck are more resistant to randomness.

Lucky fools do not bear the slightest suspicion that they may be lucky fools–by definition, they do not know that they belong to such a category. They will act as if they deserved the money. Their strings of successes will inject them with so much serotonin (or some similar substance) that they will even fool themselves about their ability to outperform markets.

Had Nero had to relive his professional life a few million times, very few sample paths would be marred by bad luck– but, owing to his conservatism, very few as well would be affected by extreme good luck.

I thus view people distributed across two polar categories: One one extreme, those who never accept the notion of randomness; on the other, those who are tortured by it.

When I started on Wall Street in the 1980s, trading rooms were populated with people with a "business orientation," that is, generally devoid of any introspection, flat as a pancake, and likely to be fooled by randomness. Their failure rate was extremely high, particularly when financial instruments gained in complexity.

Such a tendency to make and unmake prophets based on the fate of the roulette wheel is symptomatic of our ingrained inability to cope with the complex structure of randomness prevailing in the modern world.

We are not wired in a way to understand probability.

MBAs tend to blow up in financial markets, as they are trained to simplify matters a couple of steps beyond their requirement. (I beg the MBA reader not to take offense; I am myself the unhappy holder of the degree.)

Journalism may be the greatest plague we face today–as the world becomes more and more complicated and our minds are trained for more and more simplification.

I remind myself of Einstein's remark that common sense is nothing but a collection of misconceptions acquired by age eighteen.

Any reading of the history of science would show that almost all the smart things that have been proven by science appeared like lunacies at the time they were first discovered.

Learning from history does not come naturally to us humans, a fact that is so visible in the endless repetitions of identically configured booms and busts in modern markets. By history I refer to the anecdotes, not the historical theorizing...

For me, history is of use merely at the level of my desired sensibility, affecting the way I would wish to think by reference to past events, by being able to better steal ideas of others and leverage them, correct the mental defect that seems to block my ability to learn from others.

In some respects we do not learn from our own history...For example, people fail to learn that their emotional reactions to past experiences (positive or negative) were short lived–yet they continuously retain the bias of thinking that the purchase of an object will bring long-lasting, possibly permanent, happiness or that a setback will cause severe and prolonged distress.

Our minds are not quite designed to understand how the world works, but, rather to get out of trouble rapidly and have progeny.

A mistake is not something to be determined after the fact, but in the light of the information until that point.

It takes a huge investment in introspection to learn that the thirty or more hours spent "studying" the news last month neither had any predictive ability during your activities of that month nor did it impact your current knowledge of the world.

A preference for distilled thinking implies favoring old investors and traders, that is, investors who have been exposed to markets the longest.

Over a short time increment, one observes the variability of the portfolio, not the returns.

Our emotions are not designed to understand the point. The dentist did better when he dealt with monthly statements rather than more frequent ones.

My problem is that I am not rational and I am extremely prone to drown in randomness and to incur emotional torture. I am aware of my need to ruminate on park benches and in cafes away from information, but I can only do so if I am somewhat deprived of it.

At any point in time, the richest traders are often the worst traders. This, I will call the cross-sectional problem: At a given time in the market, the most successful traders are likely to be those that are best fit to the latest cycle.

Recall that someone with only casual knowledge about the problems of randomness would believe that an animal is at the maximum fitness for the conditions of its time. This is not what evolution means; on average, animals will be fit, but not every single one of them, and not at all times.

One vicious attribute is that the longer these animals can go without encountering the rare event, the more vulnerable they will be to it.

Studying the European markets of the 1990s will certainly be of great help to a historian; but what kind of inference can we make now that the structure of the institutions and the markets has changed so much?

There is no point searching for patterns that are available to everyone with a brokerage account; once detected, they would be self-canceling.

Economics: you can disguise charlatanism under the weight of equations, and nobody can catch you since there is no such thing as a controlled experiment.

Nowhere is the problem of induction more relevant than in the world of trading–and nowhere has it been as ignored!

No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion.

Markets (and life) are not simple win/lose types of situations, as the cost of the losses can be markedly different from that of the wins.

The virtue of capitalism is that society can take advantage of people's greed rather than their benevolence, but there is not need to, in addition, extol such greed as a moral (or intellectual) accomplishment.

The survivorship bias implies that the highest performing realization will be the most visible. Why? Because the losers do not show up.

Remember that nobody accepts randomness in his own success, only in his failures.

Medical researchers are rarely statisticians; statisticians are rarely medical researchers. Many medical researchers are not even remotely aware of this data mining bias.

Assume you are standing in 1900 with hundreds of investments to look at. There are stock markets of Argentina, Imperial Russia, the United Kingdom, Unified Germany, and plenty of others to consider. A rational person would have bought not just the emerging country of the United States, but those of Russia and Argentina as well. The rest of the story is well-known; while many of the stock markets like those of the United Kingdom and the United States fared extremely well, the investor in Imperial Russia would have no better than medium-quality wallpaper in his hands. The countries that fared well are not a large segment of the initial cohort; randomness would be expected to allow a few investment classes to fare extremely well. I wonder if those "experts" who make foolish (and self-serving) statements like "markets will always go up in a any twenty-year period" are aware of this problem.

This chapter is about how a small advantage in life can translate into a highly disproportionate payoff, or, more viciously, how no advantage at all, but a very, very small help from randomness, can lead to a bonanza.

Nonlinearities = straw that broke the camel's back, drop that caused the water to spill.

These nonlinear dynamics has a bookstore name, "chaos theory," which is a misnomer because it has nothing to do with chaos. Chaos theory concerns itself primarily with functions in which a small input can lead to a disproportionate response.

Say you played roulette and won. Would this increase your chances of winning again? No. In a Polya process case, it does (probability of winning increases after past wins, and vice versa). Why is this so mathematically hard to work with? Because the notion of independence (i.e., when the next draw does depend on past outcomes) is violated. Independence is a requirement for working with the (known) math of probability.

Our brain is not cut out for nonlinearities. People think that if, say, two variables are casually linked, then a steady input in one variable should always yield a result in the other one...But reality rarely gives us the privilege of a satisfying linear positive progression: You may have to study for a year and learn nothing, then, unless you are disheartened by the empty results and give up, something will come to you in a flash...Most people give up before the rewards.

There are routes to success that are nonrandom, but few, very few people have the mental stamina to follow them.

Buridan's Donkey: Nonlinearity in random outcomes is sometimes used as a tool to break stalemates. *Randomness is not always unwelcome.

You stop when you get a near-satisfactory solution. Otherwise it may take you an eternity to reach the smallest conclusion or perform the smallest act. We are therefore rational, but in a limited way: "boundedly rational." [Herbert Simon] believed that our brains were a large optimizing machine that had built-in rules to stop somewhere.

There are two possible ways for us to reason:
Heuristics: effortless, automatic, associative, rapid, parallel process, opaque (i.e. we are not aware of using it), emotional, concrete, specific, social, and personalized.
Rationality: effortful, controlled, deductive, slow, serial, self-aware, neutral, abstract, sets, asocial, and depersonalized.

1) We do not think when making choices but use heuristics. 2) We make serious probabilistic mistakes in today's world.

Causality can be very complex. It is very difficult to isolate a single cause when there are plenty around. This is called multivriate analysis.

Unless something moves by more than its usual daily percentage change, the event is deemed to be noise. Percentage moves are the size of the headlines. In addition, the interpretation is not linear; a 2% move is not twice as significant as an event as 1%, it is rather like four to ten times. A 7% move can be several billion times more relevant than a 1% move!

My lesson from Soros is to start every meeting at my boutique by convincing everyone that we are a bunch of idiots who know nothing and are mistake-prone, but happen to be endowed with the rare privilege of knowing it.

People confuse science and scientists. Science is great, but individual scientists are dangerous. They are human; they are marred by the biases humans have.

Recall that epic heroes were judged by their actions, not by the results. No matter how sophisticated our choices, how good we are at dominating the odds, randomness will have the last word.

There is nothing wrong and undignified with emotions–we are cut to have them. What is wrong is not following the heroic or, at least, the dignified path. That is what stoicism truly means. It is the attempt by man to get even with probability.

Our attribution of heroism to those who took crazy decisions but were lucky enough to win shows the aberration–we continue to worship those who won battles and despise those who lost, no matter the reason.

Some degree of unpredictability (or lack of knowledge) can be beneficial to our defective species. A slightly random schedule prevents us from optimizing and being exceedingly efficient, particularly in the wrong things.

We know that people of a happy disposition tend to be of the satisficing (blend of satisfying and maximizing) kind, with a set idea of what they want in life and an ability to stop upon gaining satisfaction...They do not tend to experience the internal treadmill effects of constantly trying to improve on their consumption of goods by seeking higher and higher levels of sophistication. In other words, they are neither avaricious nor insatiable. *Optimizers = unhappy and always seeking a better deal.

We favor the visible, the embedded, the personal, the narrated, and the tangible; we scorn the abstract. Everything good (aesthetics, ethics) and wrong (Fooled by Randomness) with us seems to flow from it.

I Will Teach You to Be Rich – Ramit Sethi

I Will Teach You to Be Rich – by Ramit Sethi
Date read: 7/22/17. Recommendation: 9/10.

The most accessible, practical book I've read on personal finance. Sethi dismisses trendy advice, such as cutting back on lattes, and instead emphasizes saving on the big purchases that really matter. And he's hilarious. This book is all about optimizing your strategy, prioritizing what matters most, and making money work for you (instead of obsessing over the minute details). This is a must read for anyone in their 20s or 30s, and should be a required reading for all who can still take advantage of the most valuable asset in investing: time.

See my notes below or Amazon for details and reviews.


My Notes:

When it comes to weight loss, 99.99% of us need to know only two things: Eat less and exercise more. Only elite athletes need to do more. But instead of accepting these simple truths and acting on them, we discuss trans fats, diet pills, and Atkins versus South Beach. *Finance similar in debating minutiae and valuing anecdotal over research.

An abundance of information can lead to decision paralysis.

I also often hear the cry that "credit-card companies and banks are out to profit off us." Yes, they are. So stop complaining and learn how to game the companies instead of letting them game you.

The single most important factor to getting rich is getting started, not being the smartest person in the room.

Just as the diet industry has overwhelmed us with too many choices, personal finance is a confusing mess of overblown hype, myths, outright deception.

Frankly, your goal probably isn't to become a financial expert. It's to live your life and let money serve you. So instead of saying, "How much money do I need to make?" you'll say, "What do I want to do with my life–and how can I use money to do it?"

To be extraordinary, you don't have to be a genius, but you do need to take some different steps than your folks did (like starting to manage your money and investing early).

Spend extravagantly on the things you love, and cut costs mercilessly on the things you don't.

This book isn't about telling you to stop buying lattes. Instead, it's about being able to actually spend more on the things you love by not spending money on all the knucklehead things you don't care about.

Money is just a small part of being rich...If you don't consciously choose what rich means, it's easy to end up mindlessly trying to keep up with your friends.

Chapter 1: Optimize Your Credit Cards
Establishing good credit is the first step in building an infrastructure for getting rich. Our largest purchases are almost always made on credit, and people with good credit save tens of thousands of dollars on these purchase. Credit has a far greater impact on your finances than saving a few dollars a day on a cup of coffee.

It's fine to be frugal, but you should focus on spending time on the things that matter, the big wins.

If you miss even one payment on your credit card:
- Credit can drop more than 100 points
- APR can go up to 30 percent
- Charged a late fee
- Trigger rate increases on other cards

If you miss a credit card payment, you might as well just get a shovel and repeatedly beat yourself in the face.

To improve your credit utilization rate (makes up 30% of your credit score) you have two choices: Stop carry so much debt on your credit cards or increase your total available credit (if you're debt free).

Every year call your credit cards and ask what advantages you're eligible for. Often, they can waive fees, extend credit, and give you private promotions. "Hi there. I just checked my credit and noticed that I have a 750 credit score, which is pretty good. I've been a customer of yours for the last four years, so I'm wondering what special promotions and offers you have for me...I'm thinking of fee waivers and special offers that you use for customer retention."

Although closing an account doesn't technically harm your credit score, it means you then have less available credit...People with zero debt get a free pass. If you have no debt, close as many accounts as you want. It won't affect your credit utilization score.

If you're applying for a major loan (car, home, education) don't close any accounts within six months of filing the loan application. You want as much credit as possible when you apply.

Chapter 3: Get Ready to Invest
Over the twentieth century, the average annual stock-market return was 11 percent, minus 3 percent for inflation, giving us 8 percent.

Of employees age 25 and under:
- Less than one-third participate in a 401(k)
- Less than 4 percent max out their contributions
- Only 16 percent contribute enough to get the full company match (literally free money)

Financial institutions have noticed an interesting phenomenon: When people enter their forties, they suddenly realize that they should have been saving money all along. As a result, the number one financial concern Americans have is not having enough money for retirement.

By opening an investment account, you give yourself access to the biggest moneymaking vehicle in the history of the world: the stock market.

Ladder of Personal Finance:

  • Rung 1: 401(k) match, contribute enough to get full match
  • Rung 2: Pay off your credit card and any other debt.
  • Rung 3: Open up a Roth IRA
  • Rung 4: If you have money left over, go back to your 401(k) and contribute as much as possible to it.
  • Rung 5: If you still have money left to invest, open a regular non-retirement account and put as much as possible there.

Benefits of 401(k):
Using pretax money means an instant 25 percent accelerator.

Chapter 4: Conscious Spending
Cheap vs. Frugal: Cheap people care about the cost of something. Frugal people care about the value of something.

Frugality, quite simply, is about choosing the things you love enough to spend extravagantly on and then cutting costs mercilessly on the things you don't love. The mind-set of frugal people is the key to being rich.

50% of more than one thousand millionaires surveyed have never paid more than $400 for a suit, $140 for a pair of shoes, and $235 for a wristwatch.

Instead of getting caught on a spending treadmill of new phones, new cars, new vacations, and new everything, they plan what's important to them and save on the rest.

A good rule of thumb is that fixed costs (rent, utilities, debt, etc.) should be 50-60% of your take-home pay.

A good rule of thumb is to invest 10 percent of your take-home pay (after taxes) for the long term.

Another solution is "The 60 Percent Solution" splitting your money into buckets. The largest being basic expenses (60%). The remaining split four ways: Retirement (10%), Long-term savings (10%), Short-term savings (10%), Fun money (10%).

Chapter 6: The Myth of Financial Expertise
Americas love experts....But ultimately, expertise is about results. You can have the fanciest degrees from the fanciest schools, but if you can't perform what you were hired to do, your expertise is meaningless.

More information is not always good, especially when it's not actionable and causes you to make errors in your investing. The key takeaway here is to ignore any predictions that pundits make. They simply do not know what will happen in future.

Recently, Helpburn Capital studied the performance of the S&P 500 from 1983 to 2003, during which time the annualized return of the stock market was 10.01 percent. They noted something amazing: During that twenty-year period. If you missed the best twenty days of investing (the days where the sock market gained the most points), your return would have dropped from 10.01 percent to 5.03 percent. And if you missed the best forty days of investing, your returns would equal only 1.6 percent–a pitiful payback on your money. Lesson: Do not try to time the market, invest regularly and for the long-term.

Ignore the last year or two of a fund's performance. A fund manager may be able to perform very well over the short term. But over the long term he will almost never beat the market–because of expenses, fees, and the growing mathematical difficulty of picking outperforming stocks.

Most people don't actually need a financial adviser–you can do it all on your own and come out ahead.

Many people use financial advisers as a crutch and end up paying tens of thousands of dollars over their lifetime simply because they didn't spend a few hours learning about investing. If you don't learn to manage your money in your twenties, you'll cost yourself a ton one way or another–whether you do nothing, or pay someone exorbitant feeds to "manage" your money.

Mutual funds use something called "active management." This means a portfolio manager actively tries to pick the best stocks and give you the best return. Index funds are run by "passive management." These funds work by replacing portfolio managers with computers. They simply and pick the same stocks that an index holds.

Index funds have lower fees than mutual funds because there's no expensive staff to pay. Vanguard's S&P 500 index fund, for example, has an expense ratio of 0.18 percent.

Passively managed index fund (.18% expense ratio, 8% return on investment of $100/month), after 25 years: $70,542.13
Actively managed index fund (2% expense ratio, 8% return on investment of $100/month), after 25 years: $44,649.70

*Half of actively managed funds between 1993 through 1998 failed to beat the market, and only 2% beat market from 1993 through 2003.

More than 90% of your portfolio's volatility is a result of your asset allocation (your mix of stocks and bonds, not individual stocks).

Your investment plan is more important than your actual investments. Just as the way I organized this book is more important than any given word in it.

1998: US large cap stocks +28.6%, international stocks +20%, REITs -17%
2000: US large cap stocks -9.10%, international stocks -14.7%, REITs +31.04%

If you're 25 and just starting out, your biggest danger isn't having a portfolio that's too risky. It's being lazy and overwhelmed and not doing any investing at all. That's why it's important to understand the basics but not get too wrapped up in all the variables and choices.

"I believe that 98 or 99 percent–maybe more than 99 percent–of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs." -Warren Buffet

"When you realize how few advisers have beaten the market over the last several decades, you may acquire the discipline to do something even better: become a long-term index fund investor." -Mark Hulbert

Lifecycle funds, also known as target-date funds, automatically pick a blend of investments for you based on your approximate age. The 85% percent solution, not perfect, but easy enough for anyone to get started.

If you're picking your own index funds, as a general guideline, you can create a great asset allocation using anywhere from three to seven funds. The goal isn't to be exhaustive and own every single aspect of the market. It's to create an effective asset allocation and move on with your life.

Dollar Cost Averaging: Investing regular amounts over time, rather than investing all your money into a fund at once, so you don't have to guess when the market is up or down. *Set up automatic investing at regular intervals so you don't have to think about it.

Chapter 8: Easy Maintenance
Ignore the noise: It doesn't matter what happened last year, it matters what happens in the next ten to twenty years.

Renting is actually an excellent decision in certain markets–and real estate is generally a poor financial investment.

Tax inefficient (i.e. income-generating) assets such as bonds should go into a tax advantaged account like an IRS or a 401(k). Conversely, taxable accounts should only hold tax-efficient investments like equity index funds.

Invest as much as possible into tax-deferred accounts like your 401(k) and Roth IRA. Because retirement accounts are tax advantaged, you'll enjoy significant rewards.

If you sell an investment that you've held for less than a year, you'll be subject to ordinary income tax, which is usually 25-35 percent.

If you hold your investment for more than a year, you'll only pay a capital-gains tax, which in most cases is currently 15 percent. This is a strong incentive to buy and hold for the long term.

Chapter 9: A Rich Life
Being rich is about freedom–it's about not having to think about money all the time and being able to travel and work on the things that interest me. It's about being able to use money to do whatever I want–and not having to worry about my budget, asset allocation, or how I'll ever be able to afford a house.

When you receive a raise, don't feel bad about celebrating–but do it modestly...A mere increase in your income is not a call to change your standard of living.

Big Purchases:
When it comes to saving money, big purchases are your chance to shine–and to dominate your clueless friends who are so proud of not ordering Cokes when they eat out, yet waste thousands when they buy large items like furniture, a car, or a house. When you buy something major, you can save massive amounts of money–$2000 on a car or $40,000 on a house–that will make your other attempts to save money pale in comparison.

Buying a Car:
Let me first tell you that the single most important decision associated with buying a car is not the brand or the mileage or the rims (please jump off a bridge if you buy specialty rims)...Most important factor is how long you keep the car before selling it. You could get the best deal in the world, but if you sell car after four years, you've lost money. Instead, understand how much you can afford, pick a reliable car, maintain it well, and drive it for as long as humanly possible. Yes, that means you need to drive it for more than ten years, because it's only once you finish the payments that the real savings start.

Buying a House:
Can you afford at least a 10 percent down payment for the house? If not, set a savings goal and don't even think about buying until you reach it.

I have to emphasize that buying a house is not just a natural step in getting older. Too many people assume this then get in over their heads. Buying a house changes your lifestyle forever.

If you can afford it and you're sure you'll be staying in the same area for a long time, buying a house can be a great way to make a significant purchase, build equity, and create a stable place to raise a family.

Real estate is the most overrated investment in America. It's a purchase first–a very expensive one–and an investment second.

As an investment, real estate provides mediocre returns at best. Risk: If your house is your biggest investment, how diversified is your portfolio? Poor returns: From 1890 to through 1990, the return on residential real estate was just about zero after inflation.

If someone buys a house for $250,000 and sells it for $400,000 twenty years later, they think, "Great! I made $150,000! But actually, they've forgotten to factor in important costs like property taxes, maintenance, and the opportunity cost of not having that money in the stock market.

The truth is that, over time, investing in the stock market has trumped real estate quite handily–even now–which is why renting isn't always a bad idea.

When you rent, you're not paying all those other assorted fees, which effectively frees up tons of cash that you would have been spending on a mortgage. The key is investing that extra money.

I urge you to stick by tried-and-true rules, like 20 percent down, a 30-year fixed-rate mortgage, and a total monthly payment that represents no more than 30 percent of your gross pay. If you can't do that, wait until you've saved more.

If You Can: How Millennials Can Get Rich Slowly – William J. Bernstein

If You Can: How Millennials Can Get Rich Slowly – William J. Bernstein
Date read: 7/15/17. Recommendation: 7/10.

An easy-to-read overview of the topics covered in his earlier book, The Investor's Manifesto. I prefer the depth and detail of the latter. But if you're looking for an introduction to investing in low-cost index funds and the importance of developing a financial strategy at an early age, this is a good starting place. 

See my notes below or Amazon for details and reviews.


My Notes:

Start by saving 15 percent of your salary at age 25 into a 401(k) plan, and IRA, or a taxable account (or all three). Put equal amounts of that 15 precent into just three different mutual funds:

  • A US total stock market index fund
  • An international total stock market index fund
  • A US total bond market index fund

     *Once per year you'll adjust their amounts so that they're equal again.

Rest assured that you will get Social Security; its imbalances are relatively minor and fixable, and even if nothing is done, which is highly unlikely in view of the program's popularity, you'll still get around three-quarters of your promised benefit.

Five Hurdles to Overcome:
1) People spend too much money.

2) You need adequate understanding of what finance is all about.

3) You need to learn the basics of financial and market history.

  • "History doesn't repeat itself, but it does rhyme." Fits finance to a tee.
  • Nothing more reassuring than being able to say to yourself, "I've seen this movie before and I know how it ends."

4) Overcoming yourself.

  • Human beings are simply not designed to manage long-term risks.
  • We've evolved to think about risk as a short term phenomenon.
  • Proper time horizon of assessing financial risk is several decades
  • From time to time you will lose large amounts of money in the stock market, but these are usually short-term events.

5) Recognize the monsters that populate the financial industry.

If you're starting to save at age 25 and want to retire at 65, you'll need to put away at least 15% of your salary.

A plumber making $100,000 per year was far more likely to be a millionaire than an attorney with the same income, because the latter's peer group was far harder to keep up with.

When you buy and sell stocks, the person on the other side of the trade almost certainly has a name like Goldman Sachs or Fidelity. And that's best case scenario. What's the worse case? Trading with a company insider who knows more about his employer than 99.9999% of the people on the planet.

If you want high returns, you're going to occasionally have to endure ferocious losses with equanimity, and if you want safety, you're going to have to endure low returns.

Reading Suggestion: Jack Bogle's Common Sense on Mutual Funds.

You should use your knowledge of financial history simply as an emotional stabilizer that will keep your portfolio on an even keel and prevent you from going all-in to the market when everyone is euphoric and selling you shares when the world seems to be going to hell in a hand-basket.

The real purpose of learning financial history is to give you the courage to do the selling at high prices and the buying at low ones mandated by the discipline of sticking to a fixed stock/bond allocation.

People tend to be comically overconfident: for example, about eighty percent of us believe that we are above average drivers, a logical impossibility.

We tend to extrapolate the recent past indefinitely into the future...Both long bear and bull markets also seem to take on a life of their own.

Humans are "pattern seeking primates" who perceive relationships where in fact none exist. Ninety-five percent of what happens in finance is random noise, yet investors constantly convince themselves that they see patterns in market activity.

To be avoided at all costs are: any stock broker or "full-service" brokerage firm; any newsletter; any advisor who purchases individual securities; any hedge fund.

Your biggest priority is to get yourself out of debt; until that point, the only investing you should be doing is with the minimum 401(k) or other defined contribution savings required to "max out" your employer match; beyond that, you should earmark every spare penny to eliminating your student and consumer debt.

Next, you'll need an emergency fund, enough for six months of living expenses.

Then, and only then, can you start to save seriously for retirement.

Your goal, as mentioned, is to save at least 15 percent of your salary in some combination of 401(k)/IRA/taxable savings. But in reality, the best strategy is to save as much as you can, and don't stop doing so until the day you die.

The optimal strategy for most young people is thus to first max out their 401(k) match, then contribute the maximum to a Roth IRA, then save in a taxable account on top of that.

Once a year you should rebalance your accounts back to equal status.

The Investor's Manifesto – William J. Bernstein

The Investor's Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between – William J. Bernstein
Date Read: 7/5/17. Recommendation: 8/10.

Champions an investment strategy focused on low-cost index funds that track the market, rather than attempting to guess on individual stocks. This is a must-read when it comes to investing. And it's not a massive encyclopedia. Bernstein offers a more rational approach to investing by detailing historic returns of various asset classes, the importance of diversification, and why you must play the long game if you have any hopes of coming out ahead. 

See my notes below or Amazon for details and reviews.


My Notes:

"In the past, stocks have had high returns because they have been really risky. But stocks are now so expensive that there are only two possibilities: either they are going to fall dramatically in price and then have higher returns after that (in which case investors are stupid for paying such high prices now), or there will be no big fall in price and little risk, but returns hereafter will be permanently low (in which case investors are smart). So which is it?

Diversification among different kinds of stock asset classes works well over the years and decades, but often quite poorly over weeks and months.

Investment wisdom, however, begins with the realization that long-term returns are the only ones that matter. Investors who can earn 8 percent annualized return will multiply their wealth tenfold over the course of 30 years.

Using historical returns to estimate future ones is an extremely dangerous exercise.

In the past, investors could expect only low returns when investing in safe assets; today this rule applies with a vengeance to Treasury bills, which currently have a near-zero yield.

Investors earn higher returns only by bearing risks–by seeking out risk premiums.

A house is most certainly not an investment, for one simple reason: You have to live somewhere, and you are either going to have to pay for it or rent it. Always remember, investment is the deferral of present consumption for future consumption, and if anything qualifies as present consumption, it is a residence. Further, if you pay for one in cash, then you are spending capital you could otherwise invest in something else.

How much does the price of a home rise over time? The best data on house prices suggest that, after taking inflation into account, the answer is slim to none.

Real house prices in the United States did not rise at all between 1890 and 1990.

If you own the house outright, you are tying up a large amount of capital you could profitably invest elsewhere, and the imputed rent, or use of the house, is your reward for doing so. On the other hand, if you have the ability to pay for a house outright but choose instead to rent, your unspent capital can earn a return in other assets, such as stocks and bonds.

The opposite reasoning applies if you cannot afford to purchase the house outright, but instead require a mortgage. By choosing to rent instead of own, you substitute rent payments for mortgage payments. True mortgage payments, at least early on, are largely deductible, but the advantage is more than offset by the catastrophic risk of default and repossession you take on with a mortgage.

Home ownership is not an investment; it is exactly the opposite, a consumption item. After taking into consideration maintenance costs and taxes, you are often better off renting.

A good rule of thumb is never, ever pay more than 15 years fair rental value for any residence. This computes out to a 6.7% (1/15th) gross rental dividend, or 3.7% after taxes, insurance, and maintenance.

Imputed rent does have one real advantage over the return from stocks and bonds, which is that it is tax-free.

The figure I keep in mind when house shopping is 150: the number of months in 12.5 years. After hearing a realtor's spiel, I will ask, "So, what would this house reasonably rent for?" If the number seems right, multiply it by 150; this will give you an excellent idea of the home's fair market value, above which you are better off renting.

On average the three small categories (growth, mid, value) had higher returns than the three large categories. This is not surprising; after all, small companies have more room to grow than large ones. Further, small stocks are certainly riskier than large ones, as well, since they have less diversified product lines and less access to capital and are more prone to failure.

How do value ("bad") companies tend to outperform growth ("good") companies in the stock exchange, when they manifestly do not in the consumer marketplace? Very simply, because they have to...In order to attract buyers for its far riskier stock, Ford must offer investors a higher expected return than Toyota.

"Efficient Market Hypothesis" (EMH), developed by Eugene Fama, which states, more or less, that all known information about a security has already been factored into its price.* This has two implications for investors: First, stock picking is futile, to say nothing of expensive, and second, stock prices move only in response to new information–that is, surprises. Since surprises are by definition unexpected, stocks, and the stock market overall, move in a purely random pattern.

*There are actually three forms of the EMH: the strong form, which posits that all information, public and private, has already been impounded into price; and the weak form, which posits only that past price action does not predict future price moves.

The implications of the EMH for the investor could not be clearer: Do not try to time the market, and do not try to pick stocks or fund managers.

In the long run, the advantages of the indexed and passive approaches over traditional active stock-picking are nearly insurmountable.

The investor cannot learn enough about the history of stock and bond returns. These are primarily useful as a measure of risk; they are far less reliable as a predictor of future returns.

Four essential preliminaries before making asset allocation decisions: Save as much as you can, make sure you have enough liquid taxable assets for emergencies, diversify widely, and do so with passive or index funds.

The consequences of oversaving pale next to those of undersaving.

Yes, picking a small number of stocks increases your chances of getting rich, but as we just learned, it also increases your chances of getting poor. By buying and holding the entire market through a passively managed or indexed mutual fund, you guarantee that you will own all of the winning companies and thus get all of the market return. True, you will own all of the losers as well, but that is not as important: the most that can vanish with any one stock is 100 percent of its purchase value, whereas the winners can easily make 1,000 percent, and exceptionally 10,00 percent, inside of a decade or two.

Asset allocation process, investor makes two important decisions:
1) The overall allocations to stocks and bonds.
2) The allocation among stock asset classes.

The rosiest scenario for the young investor is a long, brutal bear market. For the retiree, it most definitely is not.

The best time to buy stocks is often when the economic clouds are the blackest, and the worst times to buy are when the sky is the bluest.

The anticipation is better than the pleasure. Researchers have found that the nuclei accumbens respond much more to the prospect of reward than to the reward itself.

Caring, emotionally intelligent people often make the worst investors, as they become too overwhelmed by the feelings of others to think rationally about the investment process.

Advantages of mutual funds:
-Wide diversification
-Transparency of expenses
-Professional management (brokers = used car salesmen, fund managers = advanced degree)
-Protection (Investment Company Act of 1940)
-Ease of execution

The ownership structure of any financial services company ultimately determines just how well it serves its shareholders in the long run. Do not invest with any mutual fund family that is owned by a publicly traded parent company.

In the best of all possible worlds, the fund company has no publicly or privately owned shares and is instead held directly by the mutual fund shareholders. Only one fund company does this: the Vanguard Group.

Each dollar you do not save at 25 will mean two inflation adjusted dollars that you will need to save if you start at age 35, four if you begin at 45, and eight if you start at 55. In practice, if you lack substantial savings at 45, you are in serious trouble. Since a 25-year-old should be saving at least 10 percent of his or her salary, this means that a 45-year-old will need to save nearly half of his or her salary.

The possible adverse consequences of under-consuming in your youth or middle age pale in comparison to the risks of not saving enough for old age.

Retirement: My rule of thumb is that if you spend 2 percent of your nest egg per year, adjusted upward for the cost of living, you are as secure as possible at 3 percent, you are probably safe; at 4 percent, you are taking real risks.

For example, if, in addition to Social Security and pensions, you spend $50,000 per year in living expenses, that means you will need $2.5 million to be perfectly safe, and $1.67 million to be fairly secure.

The best annuity deal available: deferring Social Security until age 70. Waiting until 70 increases by almost one-third the monthly payment you would get starting at age 66...This calculates out to a guaranteed real return from waiting of 8 percent per year.

Dollar cost averaging (DCA): fixed dollar amount is periodically invested in stocks and bonds...Forces investors to invest equal amounts periodically. Lowers the average price paid for their purchases and increases overall returns.

Month 1: $100 purchase at $15/share = 6.67 shares bought.
Month 2: $100 purchase at $5/share = 20 shares bought.
Month 3: $100 purchase at $10/share = 10 shares bought.
*DCA = $8.18/share

Value averaging technique: based on targets.
Month 1: US Total Stock ($100), International ($100)
Month 2: US Total Stock ($200), International ($200)
Month 3: US Total Stock ($300), International ($300)
Month 4: US Total Stock ($400), International ($400)

If US Large Cap fund started Month 3 with $300 in assets, and then fell 10 percent in value over the next 30 days to $270, our saver would have to add $130, not $100, to top it off to $400 at the start of Month 4. Conversely, if international stocks rose by 10 percent to $330 in value, then only $70 must be added.

From time to time, the markets can go stark raving mad...Your primary defense against being swept up in the madness of such periods is a command of the history of the financial markets and the resulting ability to say, "I've been here before, and I know how the story ends."

Never forget that at the level of individual securities, the markets are brutally efficient. Whenever you buy or sell an individual stock or bond, you are likely trading with someone who is smarter and better informed than you are, and who is working harder at it.

The portfolio's the thing; do not pay too much attention to its best and worst performing asset classes.

Investors tend to be too susceptible to the emotional impact of the news and to the fear and greed of their neighbors. The better you can tune out this emotional noise, the wealthier you will be.

Human beings are pattern-seeking primates. Most of what goes on in the financial markets, by contrast, is random noise. Avoid imagining patterns; there usually are none.

Avoid fund companies that are owned by publicly traded parent firms.

You should live as modestly as you can and save as much as you can for as long as you can. Saving too much is not nearly as harmful as saving too little.

Consider tilting toward small and value stocks, since they will likely have higher expected returns than the overall market. Precisely how much you do so depends on the nature of your employment and your tolerance for temporarily underperforming the market for up to several years.