Investing Lessons from a Poker Player

Investing Lessons from a Poker Player

Larry Swedroe, Director of Research, 5/25/2018 As expert poker player Annie Duke explains in her book, “Thinking in Bets,” one of the more common mistakes amateurs make is the tendency to equate the quality of a decision with the quality of its outcome. Poker players call this trait “resulting.” In my own book, “Investment Mistakes Even Smart Investors Make and How to Avoid Them,” I describe this mistake as confusing before-the-fact strategy with after-the-fact outcome. In either case, it is often caused by hindsight bias: the tendency, after an outcome is known, to see it as virtually inevitable. Duke explains: “When we say ‘I should have known that would happen,’ or, ‘I should have seen it coming,’ we are succumbing to hindsight bias.” She adds that we tend to link results with decisions even though it is easy to point out indisputable examples where the relationship between decisions and results isn’t so perfectly correlated. For example, she writes, “No sober person thinks getting home safely after driving drunk reflects a good decision or good driving ability.” The lesson, as Duke explains, is that we aren’t wrong just because things didn’t work out, and we aren’t right just because they turned out well. Don’t Judge Performance By Results “Fooled by Randomness” author Nassim Nicholas Taleb put it this way: “One cannot judge a performance in any given field by the results, but by the costs of the alternative (i.e., if history played out in a different way). Such substitute courses of events are called alternative histories. Clearly the quality of a decision cannot be solely judged based on its outcome,...
The Financial Perils of Old Age

The Financial Perils of Old Age

By Larry Swedroe, Director of Research In planning for retirement, most people—and their advisors—consider issues such as: How much savings will be needed to maintain a desired lifestyle (in other words, what’s your “number”?) Current assets and what rate of return will be needed to achieve the stated retirement goal What allocation to risky assets, such as equities, is required to achieve the needed rate of return What lifestyle adjustments can be made if risks appear? While addressing these issues is important and necessary, the all-too-common unwillingness of the elderly to even discuss the possibility of losing their independence, and the awkwardness of the subject for other family members, unfortunately can lead to a lack of planning for the financial burdens that long-term care can impose. That brings to mind the adage that the failure to plan is to plan to fail. And failing to plan simply ignores the fact that, according to the National Family Caregiver Alliance, the probability of an individual over 65 (there are 35 million Americans in this category and the figure will double over the next 25 years) becoming cognitively impaired or unable to complete at least two “activities of daily living” (which include dressing, bathing and eating) is almost 70%. Alzheimer’s Increasingly Common Raising the importance of the issue is that, today, one in nine people 65 or older has Alzheimer’s, while nearly one in three of those 85 or older (the fastest-growing part of the U.S. population, with 4 million people in this group currently and almost 20 million people expected to be there in 2050) has the disease (with women having...
Is a Million Bucks Enough to Retire?

Is a Million Bucks Enough to Retire?

By Tim Maurer “Wow, those guys must be millionaires!” I can recall uttering those words as a child, driving by the nicest house in our neighborhood—you know, the one with four garages filled with cars from Europe. The innocent presumption, of course, was that our neighbor’s visible affluence was an expression of apparent financial independence, and that $1 million would certainly be enough to qualify as “enough.” Now, as an adult—and especially as a financial planner—I’m more aware of a few million-dollar realities: 1.  Visible affluence doesn’t necessarily equate to actual wealth. Thomas Stanley and William Danko, in their fascinating behavioral finance book, The Millionaire Next Door, surprised many of us with their research suggesting that visible affluence may actually be a sign of lesser net worth, with the average American millionaire exhibiting surprisingly few outward displays of wealth. Big hat, no cattle. 2. A million dollars ain’t what it used to be. In 1984, a million bucks would have felt like about $2.4 million in today’s dollars. But while it’s quite possible that our neighbors were genuinely wealthy—financially independent, even—I doubt they had just barely crossed the seven-digit threshold, comfortably maintaining their apparent standard of living. To do so comfortably would likely take more than a million, even in the ’80s. 3.  Wealth is one of the most relative, misused terms in the world.  Relatively speaking, if you’re reading this article, you’re already among the world’s most wealthy, simply because you have a device capable of reading it. Most of the world’s inhabitants don’t have a car, much less two. But even among those blessed to have enough money to require help managing it, I have clients who...
The Scarcity Fallacy: Is Less Really More?

The Scarcity Fallacy: Is Less Really More?

By Tim Maurer Having the privilege of walking through life with people vocationally, aiding in the acquisition, maintenance and dispossession of earthly resources as a financial advisor, I’m burdened with a heightened sense of the battling spirits of scarcity and abundance. The dehumanizing poverty that torments the Majority World screams that resources—here and now—are scarce. Remembering when I handed a bowl of vitamin-charged oatmeal to a boy who lives and breathes in La Chureca, the Nicaraguan squatter town subsisting off of Managua’s trash, I occasionally twinge at my willingness to pay $5 for a cup of premium Central American coffee. That expenditure could buy a week’s worth of mush, keeping children of the dump alive. How could I not consume less? And share more? Living with less has practical benefits, too. There’s less to clutter, less to maintain, less to depreciate, less to heat and cool, less to insure, less to worry about, less to carry. Less to burden. There are two whopping problems, however, with the scarcity doctrine and the pursuit of less: First, like anorexia, a deep scarcity conviction cannot be satisfied. One’s possessions can always be leaner. One can always have less. While the addiction of the day certainly leans toward the acquisition of more, we can also fall unhealthily in love with having less. Interestingly, though, many of the people addicted to accumulation do so because they too are stricken by a belief in scarcity. The outgrowth of their worldview is to horde instead of dispossess, but the root is the same. The biggest problem with the scarcity mindset, however, is that it is based in falsehood. While certainly...
Don’t Exclude Emerging Markets

Don’t Exclude Emerging Markets

By Larry Swedroe Thirty years ago, emerging markets made up only about 1% of world equity market capitalization, and just 18% of global GDP. As such, the ability to invest in emerging markets was limited—the few funds available were high-cost, actively managed funds. Today the world looks very different. Emerging markets represent about 13% of global equity capitalization, and more than half of global GDP. In addition, the cost of obtaining exposure to emerging markets has decreased considerably. The expense ratio of Vanguard’s Emerging Markets Stock Index Fund Admiral Shares (VEMAX), for example, is just 0.14%. Two Common Mistakes        Yet despite emerging market stocks representing about one-eighth of global equity market capitalization, the vast majority of investors has much smaller allocations to them, dramatically underweighting the asset class. This underweighting often is a result of two mistakes. The first, and most prominent, is the well-known home country bias, which causes investors all around the globe to confuse familiar investments with safe investments. Unfortunately, it cannot be that every developed country is safer than the others. Compounding the problem, investors tend to believe not only that their home country a safer place to invest, but also that it will produce higher returns, defying the basic financial concept that risk and expected return are related. The second mistake is that investors are subject to recency bias—allowing more recent returns to dominate their decision-making. From 2008 through 2017, the S&P 500 Index returned 8.5% per year, providing a total return of 126%. During the same period, the MSCI Emerging Markets Index returned just 2.0% a year, providing a total return of 22%....
Page 1 of 212