I’ve been away for a couple of weeks, as I have been wont to do lately, but it was for a good reason. I’m starting something new to coincide with my newsletter.
It’s a podcast: A podcast that features me reading off these letters to you.
I may go off on mini tangents in my audio version but I’ll try my best to keep it close to the original intent of these letters.
I rarely stick to the script so we’ll see how good I am at staying on-topic but it’ll be an exciting learning process for me nonetheless.
I hope you enjoy it.
Mental Crutches
I see myself as a noob, a rookie, and I don’t hesitate to tell everyone that I am “new to this” *gestures broadly*.
I was challenged recently by a colleague (whom I admire and aspire to emulate) to consider what he sees. He sees me as an expert, not as a noob like I do.
I tell myself this mentality is a bit of Imposter Syndrome mixed with lacking life's experiences.
He said it's more like a crutch.
I am using my new-ness as a shield to defend myself from discomfort. I have value already, I'm just hiding it because I don't want to face criticism or pressure. I want the benefits of being a “noob” while still trying to offer expert advice and opinion.
He's totally right.
I'm being safe. I'm protecting myself with the facts of my environment instead of stepping up fully to the plate.
I need to be better.
The Law of Diminishing Marginal Utility
Marginal utility is the added satisfaction a consumer gets from having one more unit of a good or service. The Law of Diminishing Marginal Utility states that the amount of added satisfaction that we receive from that good or service declines as its available supply increases.
This concept is easily explained within the context of food.
Let’s imagine you have one Oreo (not sponsored, I just like them a lot).
How much joy does that one Oreo bring you?
What about having two Oreos? How much joy does that bring you?
Now, how many Oreos are too many? I guarantee there’s a specific number where things turn ugly for you.
From an economic perspective, what we want to do with this concept of Marginal Utility and the Law of Diminishing Marginal Utility is to find the perfect number of “units” of Oreos that is we’d pay the most money and makes us the most satisfied.
Obviously, this number is nearly impossible to find for ourselves, let alone for an entire populace. Additionally, pricing and satisfaction also differ dramatically between various population demographics which further complicates this attempt.
The greatest flaw of the economists, as a profession, is their inability to separate the real world from their magical world of unicorns and butterflies. This is why, even in capitalism, there are people who are abused and people who do the abuse.
Bring Me The Hines
My college mentor has imparted me with many valuable lessons and nuggets of wisdom that I endeavor to share.
Here’s one lesson that he learned during his time at UPS:
Hines Management Story
Mr. Hines, the owner of the Hines Lumber Company recently had to fill a top executive position. Two of his managers with equal experience, Bob & Rob, were considered but the choice ultimately went to Rob who’s only notable difference was that he had fewer years with the company compared to Bob. Upon learning that he didn’t get the promotion, Bob was confused and disappointed, so he went to Mr. Hines’ office to ask why he wasn't the one selected.
Instead of answering him, Mr. Hines asked Bob if any lumber had come in: Bob said he would check and a few minutes later reported that a carload had arrived that morning.
Mr. Hines then wanted to know the type of lumber: After checking again, Bob told him it was number 3 pine.
Mr. Hines then asked the man how many board feet were in the order. Again leaving the room to check, he returned shortly with the answer of 2000 board feet.
This type of questioning went on for over an hour until finally Mr. Hines had had enough and asked the man to sit in the next room, leaving the door ajar so he could still hear.
Mr. Hines then called Rob and asked him if any lumber had arrived. Rob said he would check and in a half-hour (which was longer than it took Bob to get the first answer, but shorter than all of Bob’s searching combined) he returned with the following answer:
A carload of number 3 pine had come in on track three at 6:30 A.M. and totaled 2000 board feet. The lumber was unloaded by 12:00 P.M. and stored in warehouse D. It was order number 15-03 for the Carter Construction Company and its total value was $18,750.00.
Mr. Hines thanked Rob and said he could go.
After Rob left, Mr. Hines called in Bob. Bob just shook his head in approval of the decision, thanked Mr. Hines, and left.
The lesson from this story is that leadership is made up of the following building blocks:
Exhibiting initiative and enduring tenacity.
Being thoroughly prepared, willing to go above & beyond what’s expected.
Be willing to communicate freely.
Owning your mistakes, integrity is the key to creating personal authority.
Beating the Market
If you’re an investor in the stock market, you probably have heard financial advisors, brokers, and your fellow peers talk about “beating the market”.
Maybe you’ve thought you could beat the market too. And maybe you are; if you just joined during the March 2020 dip.
But is that sustainable? Can you consistently beat the market over the long term?
The S&P Dow Jones Indices often report on how actively managed mutual funds perform compared to the S&P 500 index. The report referenced here was published in April 2020 and included data for the full year of 2019:
According to this report, supplied by stockanalysis.com, 88.99% of large-cap US funds have underperformed the S&P 500 index over ten years. Nearly 9 out of 10 active managers in these large-cap US funds, who buy and sell stocks for a living, underperform against the S&P 500.
Are you going to be able to do any better?
Spoiler: You’re not. Not unless you’re extremely lucky or extremely criminal.
But it’s a good thing to know that the S&P 500 is such a strong index. You can put your faith in that basket. Finding an ETF, like Vanguard’s VOO, that tracks the S&P 500 with very small fees, will give you moderate risk exposure in the short to mid-terms but promises pretty significant returns given longer time horizons that have historically beaten most active investors.
So, should I just invest in the S&P 500 then?
It depends. In general, yes. The S&P 500 has proven very valuable for most investors.
However, like everything, there are up and down periods that should be considered. You can’t time the market, but you can make some determinations based on the current circumstances that may lead you to a different outcome.
What are some of those determinations?
Fundamentals and Technicals: When assessing market activity, there are two types of analysis. Fundamental analysis focuses on the merits and metrics of the business/sector/asset in question. Technical analysis focuses on price action within the applicable marketplace. These two analyses can guide you towards more specific actions given your interests, inclinations, and timeframe. It’s worth knowing that technical analysis usually works better for shorter-term timeframes while fundamentals matter more over the longer term.
Dollar-Cost Averaging (DCA): Over a long period of time, DCA is a wonderful tactic that allows you to participate in the various timeframes of this quarter, this year, and this decade all at the same time. It’s a great way to play in multiple different arenas and gradually adjust to the market while avoiding overexposure by jumping in gradually instead of all at once. You’ll buy less when the price is high, but you’ll buy more when the price is low.
Stock Picking: I don’t suggest doing this with the vast majority of your investible assets, but it can be very beneficial to participate with direct ownership of various company stocks that you believe in or are excited about. Indices trim off a lot of risks, but that also means they absorb a lot of the upside. because an index is a basket of stocks, there are some businesses that will thrive and others that will flounder and they absorb each other’s gains/losses accordingly. This is GREAT for wealth preservation, but not so much for wealth creation.
This Month In News: May 2021
In a new monthly series, I wanted to share some of the biggest news stories that hit my radar and my thoughts about them.
Shootings: As of May 10th, 2021 we’ve seen nearly 200 mass shootings in America. The Second Amendment of the United States Constitution reads: "A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed."
Clearly, we need to update regulations to match the new environment we live in where mass shootings are so common that no one seems to bat an eye. Doing this will do more to honor the 2nd Amendment than what we’re currently doing as a society.
Covid-19: America appears to have put Covid-19 in the rearview mirror. Whatever remains will be treated as the new normal rather than a national crisis. There’s still a LOT we don’t know and there’s a LOT of emotion that’s playing into this global event that will remain for some time.
We will only know with hindsight how these emotions and “unknown unknowns” impacted the trending course of humanity. We could’ve done better, and we also could’ve done worse.
Israel-Palestine Conflict: To be honest, I didn’t know too much about the history of this conflict between Israel and Palestine until the 11-day skirmish caused by the forceful eviction of 6 Palestinian families from their homes.
The crisis was triggered on the 6th of May when Palestinians began protests in East Jerusalem over an anticipated decision of the Supreme Court of Israel on the eviction of the six families in Sheikh Jarrah. Under international law (UN), the area, effectively annexed by Israel, is a part of the Palestinian territories that Israel currently holds under occupation.
The UN estimated at the end of the 11 day crisis that Israel had demolished 94 buildings in Gaza, comprising 461 housing and commercial units.
Additionally, at least 254 Palestinians including 66 children were killed in Gaza while 13 people were killed, including 1 child in Israel.
The Gaza Ministry of Health reported that more than 1,900 Palestinians were injured, and as of the 12th of May, Israel reported at least 200 injured Israelis.
Humans often subjugate one another for any myriad of reasons, and then over time the balance shifts for the subjugated to become the overlords and vice versa. We’ve been doing this for all of recorded history, and I am left wondering about the future of humanity.
I realize that as a white, straight (Christian-oriented, but not devout) man; my place in this has been overly privileged from the start. I don’t know what to think about this crisis, I just know it’s sad and preventable.
Inflation/Deflation: I am inclined to believe that the concept of inflation is, and always was, transitory. Here’s a breakdown, from Barry Ritholtz, explaining what inflation actually means and why it’s not something to be too concerned about if you’re effectively long-term oriented:
“Inflation occurs when one or more factors combine to drive prices higher. Often, wage pressures raise prices for good and services, filtering into the general economy (1960s). Sometimes, the combination of a weakening dollar and rising commodity prices send input costs higher, which kicks off an inflationary spiral (1970s). Third, there are times when the cost of capital becomes so cheap it sends anything priced in dollars or debt off into an upwards spiral (2000s).”
But Inflation is not inevitable. There are numerous countervailing forces that have been at work for much of the past 50 years. The three big Deflation drivers:
1) Technology, which creates massive economies of scale, especially in digital products (e.g., Software);
2) Robotics/Automation, which efficiently create more physical goods at lower prices; and
3) Globalization and Labor Arbitrage, which sends work to lower cost regions, making goods and services less expensive.
To put this into context, Inflation is periodic, driven by specific events; while Deflation is consistent, the background state of the modern economy.
We had about a year where demand dried up and prices fell for the products and services that made up the “old normal”. People tightened their belts, had to stay home, shifted to software consumption, and left the physical world behind (except for Consumer Staples). As America finally got its act together and started making strides towards Covid-19’s resolution, we saw demand rise and supply constraints reveal themselves.
This makes PERFECT sense given the fact that demand was significantly lower only a few months prior and businesses had to liquidate their inventory and lay off workers to stay afloat. They canceled relationships with their suppliers, subcontractors, and other third-party vendors. They closed offices and changed processes to reduce costs. They even cut prices to attract the remaining and relatively limited buyers. Many of them just went flat out of business.
The economies of scale have broken. We’re now experiencing REAL costs of the things that we’ve spent decades using inefficiently.
It’s not any single policy that’s causing this transitory inflation period. It’s not the President of the United States. It’s not other countries or their populace. It’s not immigrants. It’s a million little things that brought us to where we are now, prime among them being the circumstances in which we find ourselves.
To lock this in, let’s look at this graph from Washington Post which explains why these prices and the inflation scare are flawed:
One Final Thing
Please let me know if you listened to / enjoyed the podcast.
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