Money Smarts Blog

“You can’t lose money on real estate”.

“The stock market increases over time.”

“Build a better mouse trap and the world will beat a path to your door.”

“All rich people made their money with leverage.”

“It’s more lucrative to be self-employed then an employee.”

The world is a confusing place. Apparently the last person who was felt to “understand all human knowledge” was Francis Bacon (I couldn’t find a source for this – if I have the wrong guy please correct me). During his lifetime (he died in 1626) he was able to stay current on advances of all the sciences and follow every new discovery. Since his time, the amount of knowledge in the world has exploded (apparently doubling every 16 years or so) to the point where it would be impossible for any one person to follow all the discoveries in one large field, let alone multiple (which has pushed for ever increasing specialization). This bothers people.

A few days ago I got some comments from a Rich Dad, Poor Dad follower who took exception to my Rich Dad, Poor Dad review of “the bible”. I tried to answer his question, but quickly gave up as I could tell he was stuck in that candy-sweet intellectual quagmire that is absolutism.

I did a science fair presentation when I was a kid, and my project was on insulation. I’d blown up a plastic bag, labeled it “Air” and had put it up on a board (air is a fairly decent insulator). Another kid walked by and asked how I’d filled the bag. “I blew in it” I responded, to which he sneered “then it’s not air, it’s carbon dioxide” and walked away. Clearly our young Darwin had learned that we consume oxygen when we respire and produce carbon dioxide (as a waste product). He took this as an absolute (so air must be 100% oxygen when I inhale, and 100% CO2 when I exhale) and proceeded to share his insights with those around him. The nuance to this concept is that we’re not perfectly efficient (by any means) and air is not a homogeneous gas (if you want to experience a different type of air, go to a Chili cook-off in an enclosed space). In grade 3 we learn “people breathe in oxygen and breathe out carbon dioxide”. In grade 7 we learn “people breathe in air, and breath out air with a lower proportion of oxygen and a high proportion of carbon dioxide”. Further on we learn the process in ever increasing detail including a related (and basically opposite) process in plants, how this relates to metabolism as a whole, and other biological waste products. You can go as far down this rabbit hole as you want.

I’ve always remembered this experience for two cliches. “A little knowledge is dangerous” and “blindly following information can be dangerous”.

A case could be made for any of the lead-in statements that began this post. Cases could be just as easily made against each of them. Where does this leave us? Is it impossible to know anything? How does one learn or make decisions?

My approach to acquiring new knowledge is to accept generalities for what they are, but to be open to understanding clarifications. My understanding of the stock market has evolved from “It goes up over time” to “It goes up over time, with cyclical fluctuations” to “It goes up over time, with cyclical fluctuations, but its very hard to predict where we are in a cycle”, to “It goes up over time, with cyclical fluctuations, but it’s very hard to predict where we are in a cycle, but the woman who wrote Juggling Dynamite thinks she can predict where we are in cycles, but a lot of people seem to disagree with her, so I should really look into this further before I base any important decisions on timing market fluctuations”. It’d sure be a lot easier to just live life (and invest!) according to the idea “it goes up over time”, eh?

Obviously if you accept that you never have complete knowledge on any subject (and you don’t. Accept this) you have three choices: 1) Become paralyzed and do nothing, 2) Do the best you can with the level of understanding you have and 3) Try to learn more.

Numerical analysis of stock seems quite complicated, and a good case has been made that prices already reflect this (and other valuation criteria) so I’m in position #1 with regards to this. I don’t even try to determine a “fair price” for a stock and whether or not its selling at a premium. I’d like to be able to go bargain hunting, finding undervalued stocks and buying them, then selling them once they’re over valued and laugh all the way to the bank but I don’t see how to get from where I am currently to this point (if it is even possible). I’ve therefore given up on trying to personally appraise stocks.

When I bought my condo, MANY people had a FAR greater understanding of real estate investing and the Toronto market then I did (and MANY still do). I was in position #2 when I made the purchase and still am as I make other decisions concerning it. If I had waited to achieve “perfect knowledge” I never would have bought, but if I’d bought without investigating the subject at all, I would have been putting BIG money into something I was very ignorant about (not a good scenario).

I’m quite interested in buying an apartment building at some point in the future, but am nervous about acquiring such an expensive piece of property with my current level of knowledge. Therefore I’m trying to pump Q from one million to my name for any information about his experience buying a building, talking to my real estate friend about his experience, and keeping my eyes open for good books on the subject (position #3).

Some people get stuck in position #2. Rather then trying to learn more about the subject, they attack people who disagree with them. The fallacy with this approach is that the universe doesn’t change how it operates because you won an argument (unless you believe that we have a subjective universe based on a consensus perspective, in which case this might be a good approach to life). Running around brow-beating people into agreeing with you that your approach is without flaw and guaranteed to make you rich, successful and attractive to the opposite sex isn’t productive or effective. The joke is that it makes position #3 harder to achieve as the people who might have been willing to enlighten you probably won’t want to talk to you any more.

Thank you to all my readers (and especially those who leave comments or write me e-mails). My every interaction with you puts me into position #3 and makes me a better person. Those who challenge me and get me to look at things from a new perspective (like Mike and Q’s responses to my income post that didn’t include taxes, Money Gardner and Mike’s clarifications of my living expenses in my about section, Jason’s inspiration of this post and Quietrose’s off-line challenge that I was spending more on food then I needed to): Thank you, thank you, thank you! You’re my own chorus of personal Jesus Christs!

Those poor Christians who only get one!

Telling people you want to retire soon when you’re in your early 30’s really bugs people.

I’ve been spending a fair bit of time these days getting my financial house in order and making plans for the future. One of the ideas I’m investigating is to “retire” in 3 years. The most common reaction when I’ve tried to talk to people about this is outrage (“how dare a guy in his early 30’s even THINK about retirement!!!”).

Part of this comes, I think, from our society’s protestant work ethic and the idea that its just plain wrong for someone not to want to toil for 40 hours a week to secure the necessities of life. Working hard is placed on a pedestal in Western society, with near universal contempt for those who inherit wealth and decide not to work (or that super-small, ultra-minute, potentially-imaginary subset of homeless people who just decide not to work without having an inheritance).

Another part of it probably comes from jealousy (“Why should I have to work hard when you don’t?”) and part of it comes from the expectation that you follow the proscribed path through life in a Western country (high school in your teens, university in your early 20’s, crappy jobs as you start working leading to ever higher quality/paying jobs and eventual retirement at 65). Shaving a few years off of any one of these stages is noble, but forging your own path is viewed with great suspicion.

A while ago a woman called in to Suze Orman and said that her parents had retired young (at around 40), blown through all their savings, and at 65 were basically impoverished. They then told their daughter that she had to support them in their golden years (since they’d raised her). The woman asked Suze what she owed her parents. Suze’s response, which I agree with, is that the parents behaved quite foolishly, and the daughter has ever right to tell them they have to get by on social security if they don’t want to get part-time jobs.

The unfortunate aspect of all this hostility is that I think people misunderstand what I’m after. I’m not planning to spend the next 70 years wearing a wife beater and watching Matlock (which is what, I’m lead to believe, retirement mostly entails). My goal is basically to escape wage slavery (I’m a capitalist who believes in wage slavery – go figure!) and to be able to live life on my own terms without having to feel dependent on anyone else for the necessities of life (or for a large enough pay-check to purchase the necessities of life). I hate to feel beholden to anyone (I’d make an awful trophy wife) and most 9-5 jobs and contract work makes me feel exactly this way (“if I upset this person they may fire me and make my life unpleasant”). Basically I want to have a “welfare-eque safety net” of monthly cash payments that will cover the necessities of life that I’ve provided for myself rather than relying on that provided by society.

If I get to the point that I can cover my cost-of-living from passive investments, my first action would probably be to put on a wife beater and spend the next 2 months watching every episode of every Star Trek series, in order (see, I’m not going to waste my life!!!). After that I’ll probably spend another 2 months drinking coffee and reading. Once I’m bored of that, I expect I’ll spend the rest of my life alternating between three things:

1) Working short-term, interesting work (this could be doing things like preparing tax returns, working as a barista and letting hot women pick me up, becoming a grad student again, etc) in order to purchase luxuries (travel, a nicer place to live, materials for some hobby, etc) or increase my standard of living by increasing my passive income

2) Pursuing knowledge for its own sake and enjoying the process (go get a PhD, spend 6 months in Buenos Aires learning Spanish and how to surf, etc)

& 3) Starting new businesses (probably with low capital requirements) and get them running such that they can operate with minimal over-site (such as rental properties, a franchise with a more active partner, writing a book, selling copies of software that I’ve written, etc) or selling them outright (same as any of the earlier ideas but with no ongoing commitment or royalties)

Not the worst way that I can imagine spending the rest of my life, but (almost) everyone else seems to disagree.

In case you haven’t seen the movie (or read the book) “The Secret” I’ll give you the condensed version: positive thinking improves your life, negative thinking worsens your life. For example, Bill Gates is the richest man in the world because he believed he would be (his business instincts and impeccable timing were trivial details) and everyone who has ever been the victim of a crime deserved it (for thinking negative thoughts that caused their victimization).

Yes, I agree its trash but I’m going somewhere with this.

In “The Dilbert Principle” Scott Adams’ discusses how he wrote “I am a world famous cartoonist” 5 times per day until he was a world famous cartoonist. He also played monopoly for an entire summer with a bunch of Irish kids and never won once (because the lousy potato eaters were convinced of their “Irish Luck”). He writes about an objective reality (where things happen because they happen) and a subjective reality (where things happen because we expect them to happen).

He’s a smart guy and I like him, but still kinda wonky reasoning.

Positive thinking actually works though. How it works is based on psychology rather than mysticism. We all have limited resources (time, money, energy, etc) and competing internal needs and desires. As much as economists believe we’re purely rational beings, often we make poorly considered decisions because of resource constraints (salesmen would be unnecessary in a purely rational world). Thinking about something (positive or negatively) increases its “priority” during the limited resource consideration cycle our tiny brains go through, and increase the chance that we’ll take action towards that goal.

For example, every day Mr. Adams wrote out the 5 lines. Later, when he was debating whether he should practice drawing, have a nap or take his girlfriend out for lunch 2 hours later, it was easier for him to practice drawing, because he’d recently put a priority on that activity. If you have a goal (say becoming famous or being rich) that you don’t think about very often, the chance of taking actions that will lead towards it are very small. Any action that gets you thinking about it (writing lines, talking to friends about it, dreaming about it before bed or in the shower) will increase you commitment to the goal and the chance that the next time you have a decision to make, you’ll work towards this goal (instead of a competing goals – such as watching the next episode of “Hell’s Kitchen”).

Recently I was told I’m consumed by money (ouch!). While I don’t agree with this 100%, in part I think it means I’m on the right track to sorting out my finances since I’m spending time thinking about them (to the point that other people are aware of it and thinking I’ve gone too far).