2024-10-15 06:28:00
After college, my wife (who was then my girlfriend) and I got an apartment in the Seattle suburbs. It was amazing – a perfect location, a beautiful apartment, even had a view of the lake. The economy was such a wreck at the time that we paid almost nothing for it.
A few months ago I reminisced to my wife about how awesome that time was. We were 23, gainfully employed, living in our version of the Taj Mahal. This was before kids, so we slept in until 10am on the weekends, went for a walk, had brunch, took a nap, and went out for dinner. That was our life. For years.
“That was peak living, as good as it gets,” I told her.
“What are you talking about?” she said. “You were more anxious, scared, and probably depressed then than you’ve ever been.”
Of course, she was right.
If I think deeper than the initial knee-jerk memory, I remember being miserable. I was overwhelmed with career anxieties, terrified that I wouldn’t make it, worried I was about to be fired. For good reason: I was bad at my job. I was insecure. I was nervous about relationships being fragile.
In my head, today, I look back and think, “I must have been so happy then. Those were my best years.” But in reality, at the time, I was thinking, “I can’t wait for these years to end.”
There’s a Russian saying about nostalgia: “The past is more unpredictable than the future.” It’s so common for people’s memories about a time to become disconnected from how they actually felt at the time.
I have a theory for why this happens: When studying history, you know how the story ends, which makes it impossible to imagine what people were thinking or feeling in the past.
When thinking about our own lives, we don’t remember how we actually felt in the past; We remember how we think we should have felt, given what we know today.
I remember myself as being happier than I was because today, looking back, I know that most of the things I was worried about never happened. I didn’t get laid off, the career turned out fine, the relationships endured. I slayed some demons. Even the things that were hard and didn’t end up like I wanted, I got over.
I know that now.
But I didn’t know that at the time.
So when I look back, I see a kid who had nothing to worry about. Even if, at the time, all I did was worry.
It’s hard to remember how you felt when you know how the story ends.
I was recently asked at a conference how investors should feel about the stock market given that it’s basically gone straight up over the last 15 years.
My first thought was: you’re right. If you started investing 15 years ago and checked your account for the first time, you would gasp. You’ve made a fortune.
Then I thought, wait a minute. Straight up for the last 15 years? To echo my wife: What are you talking about?
Are we going to pretend like the 22% crash in the summer of 2011 never happened?
Are we supposed to forget that stocks plunged more than 20% in 2016, and again in 2018?
Are we – hello? – now pretending that the worst economic calamity since the Great Depression didn’t happen in 2020?
That Europe’s banking system nearly collapsed?
That wages were stagnant?
That America’s national debt was downgraded?
Are we now forgetting that at virtually every moment of the last 15 years, smart people argued that the market was overvalued, recession was near, hyperinflation was around the corner, the country was bankrupt, the numbers were manipulated, the dollar was worthless, on and on?
I think we forget these things because we now know how the story ends: the stock market went up a lot. If you held on tight, none of those past events mattered. So it’s easy to discount – even ignore – how they felt at the time. You think back and say, “That was so easy, money was free, the market went straight up.” Even if few people actually felt that way during the last 15 years.
So much of what matters in investing – this is true for a lot of things in life – is how you manage the psychology of uncertainty. The problem with looking back with hindsight is that nothing is uncertain. You think no one had anything to worry about, because most of what they were worrying about eventually came to pass.
“You should have been happy and calm, given where things ended up,” you say to your past self. But your past self had no idea where things would end up. Uncertainty dictates nearly everything in the current moment, but looking back we pretend it never existed.
My wife and I recently bought a new house. Like most of the country, it cost – let me put this mildly – a shitload more than it would have a few years ago.
We started talking about how cheap homes were in 2009. In our region they literally cost four to five times more today than they did then – plus, interest rates were low in 2009, and there was an endless supply of homes on the market to choose from. We said something to the effect of, “People were so lucky back then.”
Then we caught ourselves, shaking off delusion, and thinking, “Wait, do we really have nostalgia for the economy of 2009?” That was literally the worst economy in 80 years. All anyone talked about was how terrible everything was. Homes were cheap because unemployment was 10% and the stock market was down 50%.
Looking back, we know 2009 was not only the bottom but the beginning of a new boom (albeit with volatility). But we didn’t know that back then, and it gave us plenty to worry about that’s easy to forget today. What felt like risks then now look like opportunities. What felt like dangers then now look like adventures.
In a similar way, Americans are still nostalgic about life in the 1950s. White picket fences, middle-class prosperity, happy families, a booming economy. There was also the ever-present risk of nuclear annihilation. Today, we know the missile was never launched. But the 5th-grader doing nuclear attack drills by ducking under her school desk? She had no idea, and had plenty to worry about that is impossible to contextualize today, since we know how the story ends. So of course she wasn’t as happy as we think she should have been.
I subscribe to a few Instagram accounts devoted to 1990s nostalgia. I was a kid then, so I’m a sucker for this stuff. The comments on those posts inevitably say some version of, “Those were the best years. The late ‘90s and early 2000s was the best time to be alive.” Maybe it was pretty good. But we also had: A bad recession in 2001, a contested presidential election, 9-11 – which utterly reshaped culture – two wars, a slow economic recovery, on and on. It’s easy to forget all of those because we know the economy recovered, the wars ended, and there wasn’t another major terrorist attack. Everything looks certain in hindsight, but at the time uncertainty ruled the day.
Of course, things could have turned out differently. And for many people – those who were laid off, or did lose their home, or did die in war – the happy nostalgia of remembering what life was like before might well be valid.
But as Thomas Jefferson said, “How much pain have cost us the evils which have never happened.”
Part of the reason nostalgia exists is because, knowing what we do today, we often look back at the past and say, “you really didn’t have much to worry about.” You adapted and moved on. Isn’t that an important lesson as we look ahead?
Understanding why economic nostalgia is so powerful – why it’s almost impossible to remember how uncertain things were in the past when you know how the story ends – helps explain what I think is the most important lesson in economic history, that’s true for most people most of the time:
The past wasn’t as good as you remember. The present isn’t as bad as you think. The future will be better than you anticipate.
2024-09-24 04:51:00
The ultimate success metric is whether you get what you want out of life. But that’s harder than it sounds because it’s easy to try to copy someone who wants something you don’t.
I’ve seen this play out twice: An incredibly talented young writer with a big blog following joins a major media company where they quickly fizzled into irrelevance.
It was the same story each time: When the writer was young and independent they could write with their own voice, their own style, their own flair. They could run with their own intuition.
They were artists, which was what made them great.
Then they joined a big media company, which said, “That’s not how we do things here. Here’s our style book, you must follow it to a T. And meet Gordon, he’s your new editor. He will tell you what to write and when to write it. Good day, sir.”
They became employees, which was their downfall.
And these were very successful media companies. They knew what kind of writing worked and what their readers wanted. But of course it didn’t work out. What was right for the company was wrong for the writer. A talented person can quickly become mediocre when you force them to be someone they aren’t.
Even if you’re not an entrepreneur, there’s so much to learn from that.
It’s so common to on one hand recognize how much variety there is among people – different personalities, backgrounds, goals, skills – but on the other hand ask, “What’s the best way to do this thing?” as if there can be one universal answer for vastly different people.
One area this impacts people is with money, where more damage is caused not by dumb financial plans but by reasonable ones that just aren’t right for you.
How you invest might cause me to lose sleep, and how I invest might prevent you from looking at yourself in the mirror tomorrow. Isn’t that OK? Isn’t it far better to just accept that we’re different rather than arguing over which one of us is right or wrong? And wouldn’t it be dangerous if you became persuaded to invest like me even if it’s wrong for your personality and skill set?
Or take how we spend money. You like this, I like that. Who cares? It gets dangerous when you assume that if someone else is spending their money differently they either must be doing it better than you or doing it wrong. And that’s actually very common, because it’s easy to interpret someone spending money differently than you as an attack on what you’ve chosen to spend money on.
It’s possible to be humble and learn from other people while also recognizing that the best strategy for you is the one closest aligned with your unique personality and skills.
A few things happen when you do.
You do your best work and have the most fun when you’re not burdened by fear that someone else thinks you’re doing it wrong.
You measure how you’re doing against your personal benchmarks, which can both push you to your potential and prevent you from chasing someone else’s.
You have a much better shot of getting what you want out of life. Which, again, is all that really matters.
2024-09-19 01:52:00
Ryan McFarland came from a long line of motorsports junkies given that his grandfather had been a race car engineer and his father ran a motorbike store. As a result, it shouldn’t come as a surprise that McFarland grew up riding dirt bikes and stockcars, or that he eventually went into the family business as well. It also shouldn’t come as a surprise that he was eager to pass on the McFarland “love of wheels” to his own son.
As any parent knows, getting a young child to ride a bike is a significant challenge. McFarland’s experience was no different. So, like many of us, he purchased an endless number of things to help his son get riding — toddler tricycles, trainer bikes, and even a training wheel equipped motorcycle.
Nothing worked. More importantly, each failed to teach his son the most important part of riding a bike — learning how to balance.
Think about it. While training wheels or a tricycle might stabilize a rider, neither allow a kid to equalize their weight on a bike.
The reason?
The extra wheels do all the balancing. They simply serve as a crutch.
So what did McFarland do?
He decided to engineer a very different type of bike, but rather than adding something to the bike, he chose to take something away — in this case the pedals.
The result was the Strider Bike, which enabled kids to focus exclusively on their balance and has since become one of the best-selling bikes of all-time, as well as a godsend for parents everywhere.
Within a few days, McFarland’s son was riding the Strider Bike. Within a couple weeks, he was riding a real bike. Within a few years, his company had sold millions of bikes. In short, McFarland had solved a significant challenge with a simple (and far less expensive) solution.
This story is far from the only case where the best solution came from using less of something rather than more. In fact, I have dealt with this dynamic personally over the past two years.
See, I grew up with eczema as a child, which I thankfully outgrew when I was about eight years old. Unfortunately, it reappeared in patches back in early 2021, so I went to see numerous doctors, dermatologists, and allergists. Each recommended a new cream, pill, and eventually a shot, which led to very mixed results. Finally it dawned on me to ask an allergist for a patch test, which is essentially a way to test to see if you are allergic to any specific chemicals that are commonly found in various soaps, shampoos, creams, and countless other products. I took the test and found out I was very allergic to two of the 150 things they tested for, one of which is prevalent in something called Aquaphor, which is a Vaseline-like ointment that we had been using on my both of my sons’ skin.
Care to guess when we had started using it?
You guessed it, early 2021. Precisely the same time that I started having a recurrence of my eczema.
So, what did we do?
We removed Aquaphor from daily use in our house, I stopped taking the various medications I was using, and my skin problems have slowly improved.
Whether it applies to training wheels or skin medication, this begs the question — why are we so inclined to add things rather than take them away when searching for solutions?
The answer is simple — human nature and incentives.
The fact is, people are biased towards solving problems through addition rather than subtraction.
The reason?
Because adding something makes you feel like you are advancing, while taking something away makes you feel like you are retreating. Couple this with the fact that most companies are incentivized to sell us endless “solutions”, and it should come as no surprise that the desire take something away is practically non-existent.
We see this dynamic across all parts of the economy, and society at large.
In healthcare, nearly every condition people face is addressed by adding something. Have a skin issue? Try this cream. Having trouble sleeping? Take this pill. Can’t lose weight? Take this new injectable called Ozempic (ironically a drug that aims to *take away *our appetites). Casey Means wrote extensively about this in her new book — Good Energy — that is now #1 on the Amazon charts. In short, she makes the case that instead of jumping immediately to medications that almost always have side effects, we should instead start by identifying what is causing the problem and trying to eliminate it. For example, if you have a skin issue, start by cutting out soaps with countless active ingredients. Can’t sleep? Cut back the amount of alcohol you drink and/or TV you watch before bed. Dealing with a stomach or weight issue? Try reducing the amount of processed food and sugar you eat.
In software, this concept of favoring less over more is known as the “Mythical Man Month” (or more simply, “Brooks’ Law”), which was discussed at length on a recent podcast Patrick O’Shaughnessy did with Bret Taylor (Co-Founder of Sierra, former Co-CEO of Salesforce, and a current board member at Open AI). Taylor pointed out that,
“If you want to make a software project take longer, add more people to it. This is based on the premise that when you are developing a complex system, smaller teams who complete each others’ sentences, each own part of the system, truly understand it, and work in unison create a magical, yet fragile, dynamic. This is the case because adding more people means more bureaucracy, which risks disempowering some of your best people and slowing things down. Just look at Healthcare.gov as a perfect example.”
Retail is another obvious example. Look no further than Starbucks’ recent troubles. One of the main culprits? The decision to add countless options to their mobile app. In short, by designing its app to enable customers to hyper-customize their favorite drinks (according to one report there are over 170,000 ways to customize a Starbucks order), it led to orders like the one below:
Instead of increasing revenues and customer retention, this hyper customization led to poor customer service, employee turnover, longer wait times, and often incorrect drink orders. Eventually, it even led to Starbucks firing its CEO and replacing him with Brian Niccol, who made a name for himself running a company that has nearly perfected the concept of “taking things away” — Chipotle.
In short, by having far fewer options and ingredients, Chipotle created a juggernaut in the fast casual category by maximizing efficiency, throughput, and quality, which is a very different business model than a company like McDonalds, which has an endless number of options on its menu and is constantly adding new ones.
As a result, last year Chipotle’s restaurants collectively generated more than $10 billion in annual revenues and close to $2 billion in annual operating profits (up from $900 million and $250 million respectively fifteen years ago). This model has resulted in a stock that has compounded at more than 25% annually over the past decade-and-a-half, which means that $1,000 invested in 2009 would be worth more than $40,000 today.
Unfortunately, too many investors manage their portfolios like McDonalds or Starbucks instead of Chipotle. In an attempt to improve or upgrade them, they almost always look to layer on new investments, commitments, asset classes, and securities, often shooting well past an appropriate level of complexity:
Worried about a market crash? Layer on expensive hedges.
Concerned about volatility? Buy complicated options.
Want to generate higher returns in a low interest rate environment? Add leverage.
Trying to keep up with other investors? Chase a hot buyout or venture capital fund.
The trouble is that when they do this, the more vulnerable their portfolios become. It causes them to lose track of what they own, reduces their portfolio’s liquidity and transparency, and forces them to pay higher fees in the process. It also often leads to investors being forced to make decisions they swore they never would, typically at the worst possible moments.
We saw this first hand in the lead up to, and during, the Covid crazed market of 2020-2021. “One man band” venture capitalists were able to raise money with ease, firms like Tiger Global sprayed money in every direction with little diligence, term sheets from unknown investors landed on general partners’ desks, “extension funds” were waved into portfolios without even the slightest objection from limited partners, leverage was easy to come by, and investors happily traded daily liquidity for decade liquidity. Yet this is just the tip of the iceberg, as there were countless other examples of investments and structures being added to portfolios in pursuit of higher returns.
However, in 2022 and 2023, this dynamic changed materially as “one man VCs” started to disappear, the Tigers of the world were humbled and retrenched, those blind term sheets stopped coming, extension funds were tabled, limited partners starting guarding liquidity with their lives, and investors more broadly started pulling in the reins as they attempted to determine what lay ahead.
So, experiences like this beg a few questions:
Is increased complexity the path to better performance, or would investors be better off if they simply removed a few things?
Should investors hold one hundred 1% positions in their portfolio (i.e., be overly diversified), or should they concentrate their bets in their highest conviction positions, watch them closely, and add to them when they get dislocated?
Should investors deploy capital at a torrid pace during bull markets, or would they benefit from slowing down a bit?
The answer in each case is very likely an emphatic “yes” to the latter.
In fact, this probably goes for most things in life.
Think about it this way. What would happen if you reduced the number of things you focus on in your daily life by 20%? How about 30%?? Say 50%???
What are the chances you wouldn’t miss the things you cut out?
Would you possibly become more focused on the things you decided to keep?
Would you end up being a happier person? A better colleague? Parent? Spouse?
My guess is the answer would be a “yes” across the board here too.
But you might say, my life or portfolio is already SO complicated, how can I possibly uncomplicate it?
My response?
Just because things have gotten complicated doesn’t mean you can’t reverse it. Afterall, if Elon Musk can do it with his Raptor rocket engines, you can too.
In this day and age the case can be made that we live in an era of too much. Too much information, too much stuff, too many choices, and too many distractions. As a result, there is a good chance that the path to happier lives, and yes, better portfolio performance, might start by taking things away.
2024-09-02 22:11:00
I recently sat down with legendary investor Howard Marks, co-founder of Oaktree Capital Management.
We talked about investing, debt, endurance, and what really makes a difference in lifetime investment results.
2024-08-30 04:55:00
President James Garfield died because the best doctors in the country didn’t believe in germs, probing Garfield’s bullet wound after an assassination attempt with ungloved, unwashed fingers that almost certainly contributed to his fatal infection.
It sounds crazy – 1881 wasn’t that long ago – but historian Candice Millard writes in her book Destiny of the Republic how controversial germ theory was to 19th-century doctors:
They found the notion of “invisible germs” to be ridiculous, and they refused to even consider the idea that they could be the cause of so much disease and death.
Even the editor of the highly respected Medical Record found more to fear than to admire in [antiseptic pioneer] Lister’s theory. “Judging the future by the past,” he wrote, “we are likely to be as much ridiculed in the next century for our blind belief in the power of unseen germs as our forefathers were for their faith in the influence of spirits.”
Not only did many American doctors not believe in germs, they took pride in the particular brand of filth that defined their profession.
They spoke fondly of the “good old surgical stink” that pervaded their hospitals and operating rooms, and they resisted making too many concessions even to basic hygiene … They believed that the thicker the layers of dried blood and pus, black and crumbling as they bent over their patients, the greater the tribute to their years of experience … They preferred, moreover, to rely on their own methods of treatment, which not infrequently involved applying a hot poultice of cow manure to an open wound.
Even a child reading this today recognizes how insane this is. And it’s hardly an isolated example. Doctors used to prescribe chloroform for asthma and cigarettes for hay fever. They injected cow’s milk into the veins of tuberculosis patients, hoping the fat would transform into white blood cells.
Mercifully, we’ve moved on. We believe new crazy stuff, but not that crazy stuff. Everyone learned, those learnings were universally accepted and passed down the generations who are now better off because of it. Reading about medicine from 100 years ago makes you feel utterly disconnected from today’s world, like you’re reading about a different topic altogether.
But take something like money.
These lines were written 130 years ago by author William Dawson:
It would seem that the anxieties of getting money only beget the more torturing anxiety of how to keep it.
More lives have been spoiled by competence than by poverty; indeed, I doubt whether poverty has any effect at all upon a strong character, except as a stimulus to exertion.
The thing that is least perceived about wealth is that all pleasure in money ends at the point where economy becomes unnecessary. The man who can buy anything he covets values nothing that he buys.
Or this, written by Earnest Hemingway in 1936:
He remembered poor Scott Fitzgerald and his romantic awe of [the rich] … He thought they were a special glamorous race and when he found they weren’t it wrecked him as much as any other thing that wrecked him.
Or this, written by a lawyer in 1934, taking account of the bubble preceding the Great Depression:
In normal times the average professional man makes just a living and lives up to the limit of his income because he must dress well, etc. In times of depression he not only fails to make a living but has no surplus capital to buy bargains in stocks and real estate. I see now how very important it is for the professional man to build up a surplus in normal times. Without it he is at the mercy of the economic winds.
Or this, describing the 1920s Florida real estate:
From 1919 to 1929, both forms of personal debt—mortgages and installment credit—soared. The volume of home mortgages more than tripled, and the amount of outstanding installment debt more than doubled.
Or this account of Seneca, who lived 2,000 years ago:
Enemies accused him of preying on affluent elderly people in the hope of being remembered in their wills, and of “sucking the provinces dry” by lending money at a steep rate of interest to those in the distant parts of the empire.
It’s all so relatable. Like nothing has changed. We’ve always been asking the same questions, dealing with the same problems, and falling for the same false solutions. We probably always will.
Reading old finance articles makes you feel like the ancient past was no different than today – the opposite feeling you get reading old medical commentary.
Of course there are things we knew about medicine 200 years ago that were true and things we believed about money 100 years ago that were false. But in degree there is no comparison – there’s no financial equivalent of everyone denying germs only to eventually agree that it’s so obviously true it’s not worth debating.
In some fields our knowledge is seamlessly passed down across generations. In others, it’s fleeting. To paraphrase investor Jim Grant: Knowledge in some fields is cumulative. In other fields it’s cyclical (at best).
There are occasional periods when society learns that debt can be dangerous, greed backfires, and more money won’t solve all your problems. But it quickly forgets and moves on. Again and again. Generation after generation.
I think there are a few reasons this happens, and what it means we have to accept.
Some fields have quantifiable truths, while others are guided by vague beliefs and individual circumstances. Physicist Richard Feynman said, “Imagine how much harder physics would be if electrons had feelings.” Well, people do. So any topic guided by behavior – money, philosophy, relationships, etc. – can’t be solved with a formula like physics and math.
Neil deGrasse Tyson says, “The good thing about science is that it’s true whether or not you believe in it.” You can disagree and say science is the practice of continuous exploration and changing your mind, but in general he’s right. Germ theory is true and we know it’s true. But what about the proper level of savings and spending to live a good life? Or how much risk to take? Or the right investing strategy given today’s economy? Those kinds of questions do not lend themselves to scientific answers. They’re subjective, nuanced, and impacted by how the economy changes over time. So often there simply isn’t relevant information to pass down to the next generations. Even when firm financial rules exist, some truths have to be experienced firsthand to be understood.
Cyclical knowledge, and the inability to fully learn from others’ past experiences, means you have to accept a level of volatility and fragility not found in other fields. I can imagine a world in 50 years where things like cancer and heart disease are either non-existent or effectively controlled. I cannot ever imagine a world where economic volatility is tamed and people stop making financial decisions they eventually regret – no matter how much history of past mistakes we have to study.
