Midlife Awakening

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Archives for August 2016

Diversification is for stupid people

Society seems to be wanting to emphasize inclusion, diversity, and engagement as concepts, while seeming to ignore the need to make fast decisions that are “good enough” very quickly.  If you want to thrive, you have to take action quickly, so I will simply state:  Diversification is for stupid people.

How many times have you encountered these ideas?

  • Don’t put all your eggs in one basket
  • You cannot time the market, so spread your money around to avoid losing it all
  • Let’s get input from the whole team to help with this decision

While there is some truth in these statements and some are even  “common sense”, a contrary approach has merit that we should consider, so I will unpack each with some questions.

Don’t put all your eggs in one basket.

How many baskets can one person safely carry?  If you try to carry 3 baskets, it becomes more likely that you will drop one of those baskets and lose a lot of eggs.  If you mindfully carry one sturdy basket, the risk of losing eggs is smaller.

You cannot time the market, so spread your money around to avoid losing it all.

Is losing money in the stock market the result of investing in too few stocks, or is it the result of trying to keep track of too many stocks, and buy and sell all of those at exactly the right time?  Or is losing money caused by our human nature that encourages us to sell a stock that just lost a bunch of its value (before we lose it all)?  If we are diversified in a lot of different stocks, it will require much more work to stay on top of how those are performing.  Maybe to avoid losing money in the stock market, we need to select a smaller number of investments carefully, and not try to game the system.

Let’s get input from the whole team to help with this decision

This idea is special to me.  It is a great idea to gather input from people you trust who have different specializations and perspectives than you do. This will help you have fewer blind spots when you make decisions.  However, there is no evidence that an ever larger number of opinions will result in a better decision.  Even when gathering information from other people to get more perspective, the group you solicit input from should be quite small, and carefully selected.  The not-so-nice way to say this is that if you add 100 idiots to the discussion, you will either get a worse decision, or it will take longer to arrive at the right decision because the decision makers will need to filter out all the extraneous and useless input from the idiots.  Why not just ask a few trusted people for their input, and make a good decision quickly, without the frustration of talking to the idiots?

The goal of a business activity is to make money for the owners, and probably also to provide a useful product or service.

If you are collecting eggs to sell, you should walk the shortest/safest path to the hens and collect the eggs in a sturdy, appropriately sized basket for the task, and do not play on your smartphone while carrying the eggs, as the lack of attentiveness is probably the biggest risk to your egg profits.

If you are hoping to profit from stock market investments, you should identify the source of your risk and avoid those things first, then you should seek ways to improve your odds and making profits with the least investment of your personal time.  You are probably scattering your money in too many places that you have too little knowledge of, and you probably do not have enough time to keep track of all the daily changes to the value of your positions.  Some very successful investors focus on purchasing really good companies that they are sure will go up in value, and they hold for a long time to make profits safely, with less daily interruptions to their lives.

If you are trying to make a difficult decision, do not take a survey from a bunch of people.  Instead, pick one thoughtful, competent person from a number of disciplines or perspectives and get weigh their opinions.  With this approach, you will learn something, and you will build relationships with smart people.

Good luck in your next venture!

Money makes you more

“Money is the root of all evil”.  I doubt it.

“The love of money is the root of all evil”.  Getting closer, but it is probably OK to want, like or love money.

With all that is written about money…all the books, all the TV shows, all the mental energy thinking about needing money, and what you would do with it if you had more, do you really believe you can boil it all down to one simple statement?

Even if you can boil it down, the resulting statement is probably not going to be very specific, so let’s start with this one:

“Money makes you more like who you are.”

For all the idealists out there who do not think money matters, or should matter, consider the following questions.  If you do not think my points are valid, you should probably move on to another article to read, because you are not likely to buy into what I am saying.

  • If I am dead broke, and want to support a political candidate or issue, is anyone going to be impacted by my preference?  How about if I am rich and want to support a political candidate or issue?
  • If I do not like the uniforms that my children’s sports team are wearing, and do not have any money, all I can do is complain about the situation, or if super motivated, I could try to organize a fundraiser.  If I am rich, I can either write a check to purchase new uniforms, or I can get a few of my like-minded and well-funded friends together to pitch in a little each to get new uniforms, and write a check very quickly.
  • If I like to help other people, can I do that more effectively as a broke person, or a rich person?
  • If I know how to use and manage money, will wealth destroy me, or help me?
  • How about if I do not know how to manage money?  In that case, will sudden wealth destroy me or help me?  Here is a hint:  Look at what happens to most big jackpot lottery winners.

Here is a different question to think about:  What would most people do if they suddenly had all the money they would ever need?

My answer is that most people would do almost nothing significant or noteworthy, at least for a year or two.  It is the possibility of losing your house, affections of your wife or girlfriend, and ability to provide for your children that motivates many to get out of bed and get to work each day.  In some cases, this motivation leads to extremely successful business ventures.  If you take away the potential pain of those losses, most people will not know what to do anymore, and this creates a motivation vacuum.  To avoid the pitfalls of new wealth, it requires adjustment to the way the nouveau riche see the world, and respond.

The fact is that many lottery winners and short careered professional athletes lose all that money, and end up broke.  There are some likely explanations for this, most common-sense, but also likely to be viewed as elitist or some other “-ist” label that weak-minded people need to apply to prevent challenges to their feeble perspective of the world.  So, I will assert a few ideas, and you can decide if you buy in or not:

  • There is something that happens to a person who earns a lot of money, during the process of learning how to earn that money, that helps that person manage and maintain wealth.  In a normal scenario, it takes a lot of time and effort to become wealthy, and you have to become a wealthy person, and part of becoming that is to develop different habits and perspective.
    • If you give a teenager a house, they do not know how to maintain that house, and will either let it fall into disrepair, or get taken advantage, or in rare cases, they will see their deficiency and start to seek out the knowledge required to maintain a house.  Same thing with money.  The key difference between a house and money is that money is much more mobile and liquid than a home, so it tends to leave a careless person’s wallet very quickly.
  • Lottery winners and short-term professional athletes tend to be either less educated than other wealthy people and/or have less time invested in gaining and managing money compared to other rich people.
    • For example a business owner who find success probably spent years working 60-100 hour weeks building that business…and he or she learned a lot along the way during that time, and a smooth talker is not going to roll them out of their money as easily as a lottery winner!
  • If a person is to keep their new found wealth, they must change the way they view money, and the way they interact with the world! Failing to do this, they will tend to return to their “normal” financial status (see introducing-the-thermostat for more about this).

Most of us will not win the lottery…if for no other reason, I forget to play most of the time, and will not make a special trip because of the low chance of winning anyway!

So, for most of us who want to acquire wealth, we have to become something different in order to have a different life.  This means developing different work habits, different and more positive ideas about what to do with our time, and changing our views and relationship with money.  If you are rejecting money because you think it is evil, you are going to have a hard time creating wealth.  Money is a tool, and it does what its owner tells it to. Period.  Get right with that idea, then decide what you want.